Kenya’s debt interest payment on loans rise to a record Sh231.6bn on the weakening shilling against the dollar.
Even as a weak shilling causes the Treasury to inflate the size of the budget, adding to the pressure on the Kenya Kwanza administration’s ability to control spending, interest payments on loans tapped by the State are expected to soar by a record Sh231.6 billion.
The interest payments are essentially the cost of borrowing money, paid in addition to the principal amount borrowed.
The Treasury anticipates a steep increase in interest payments to Sh918.9 billion for the fiscal year ending in June 2024, up 33.7% from Sh687.3 billion, primarily as a result of the weakening of the shilling.
“The increased interest payments are due to the weakening of the Kenya shilling and elevated interest rates in the domestic environment,” the Treasury said in its draft 2023 Budget Review and Outlook Paper (BROP).
The budget has increased to Sh3.91 trillion due to unspent items from the previous fiscal year and a rise in interest payments of Sh143 billion, which has caused the Controller of Budget Margaret Nyakang’o to issue a risk warning.
Because a sizable portion of Kenya’s debt is denominated in foreign currency, the local currency’s depreciation increases the cost of servicing external debt.
The shilling has lost 19.3 percent of its value against the dollar since the beginning of the year when it was trading at 123.42 against the current 147.26 versus the dollar.
“The Kenya shilling has lost 19.3 percent and 19.1 percent against the dollar and euro respectively. Debt servicing costs continue to increase as the Shilling weakens against the hard currencies,” said Stellar Swakei, senior research associate at Standard Investment Bank.
She noted that by June 2023 external debt had increased by approximately Sh649.6 billion in tandem with a 13.9 percent depreciation of the shilling since the year began.
“Definitely, interest expenses have to increase,” she said.
Interest rate payments have been rising over the past 10 years as the administration of retired President Uhuru Kenyatta came to rely on costly commercial loans to finance mega projects such as roads, railways, and ports.
Rising interest rates on domestic debt will also contribute to the increase in interest payments, with the Treasury pushing the size of the country’s budget for the financial year 2023/24 to Sh3.91 trillion.
A big proportion of the jump in interest payments is on foreign loans which have been increased by Sh125.6 billion Sh272.5 billion, piling pressure on the country’s dwindling reserve of foreign currencies.
In the Budget estimates, the Treasury had projected to pay Sh146.9 billion on foreign interest.
Domestic interest has been increased by Sh18.1 billion to Sh646.4 billion, pointing to increased borrowing costs by the government from local investors.