Treasury to favour Euro-denominated loans

The National Treasury says it will now favour taking out Euro-denominated loans over credit extended in US dollar terms as it seeks to minimize Kenya’s foreign exchange exposure.

The proposal which is part of the planning ministry’s medium term debt management program is geared at cutting risks by pursuing a currency mix on its external borrowing portfolio.

“In order to mitigate current currency fluctuations, a currency mix would be preferred. Taking a shilling denominated debt would be preferred where possible but we have opted for alternatives and are aggressively pursuing Euro-denominated loans,” National Treasury Cabinet Secretary Ukur Yatani told the National Assembly Finance Committee on Tuesday.

According to data from the National Treasury annual Medium Term Debt Management Strategy (MTDS), 69.1 per cent of Kenya’s external debt was denominated in dollar terms as of the end of 2019.

The remainder of Kenya’s external debt is designated in euros at 18 per cent, the Chinese Yuan at 5.5 per cent, the Japanese Yen at 5.5 per cent and the British Pound at 2.6 per cent.

The recent weakening of the shilling against the US dollar has elevated Kenya’s foreign exchange risks as it now forced to fork out more for debt redemption on account of a weakened local currency.

The shilling has for instance shed 8.7 per cent of its value against the US dollar in the year to date.

In essence, a dollar owned by Kenya at the end of 2019 (Sh101.36) would today require a higher 8.7 per cent in repayments at Ksh.110.18. When expanded, the hit of the US dollar on the shilling has raised Kenya’s USD debt payments by billions of shillings.

The Euro on the other hand is viewed as a largely stable currency with minimal volatility in comparison to the US dollar.

Nevertheless, the Kenya shilling has still shed 15.9 per cent of its value against the Euro from the start of 2020.

Kenya’s current stock of debt stands at Ksh.7.12 trillion as of September 20, 2020 with Ksh.3.7 trillion representing externa debt.

Using the 2020 MTDS, Ksh.2.6 trillion of the external debt or about $23.6 billion is credit outstanding in dollar terms.