CRA wants Parliament to introduce limits on dollar-denominated borrowing
With concerns over exchange rate risks, CRA believes that placing a cap on foreign debt held in a single currency will enhance fiscal stability and reduce debt repayment costs.
The Commission on Revenue Allocation (CRA) has urged Parliament to introduce a cap on the proportion of Kenya’s external debt that can be held in a single currency.
CRA says this will help shield the country from excessive debt service costs caused by currency depreciation, especially given the dominance of the US dollar in Kenya’s foreign borrowing.
More To Read
- Kenyans in diaspora sent home Sh5.8 billion less in February on strong shilling
- Remittances by Kenyans in diaspora reduce by Sh2.3 billion in January as US remains largest source
- Analysis: Kenyan shilling marks first year-on-year gain in four years in 2024
- From Gen Z protests to shilling's performance: What shaped Kenya in 2024
In a presentation to the National Assembly’s Liaison Committee on the 2025 Medium-Term Debt Management Strategy, CRA noted that overreliance on the US dollar for external borrowing has left the country vulnerable to currency fluctuations, making debt repayment more expensive when the shilling weakens.
“The high composition of external debt in the US dollar increases the cost of external debt servicing in the event of high depreciation of the shilling against the dollar,” CRA said in its submission.
“Parliament, therefore, needs to legislate an upper ceiling within which external debt composition in any currency should not surpass.”
The impact of currency fluctuations was particularly evident in 2023 when the shilling depreciated against the dollar by 21 per cent. The depreciation increased the shilling value of external debt by Sh1.42 trillion, pushing it to Sh6.09 trillion, while the dollar-denominated value rose by $1.04 billion to $38.92 billion.
Stronger shilling
A reversal in 2024 saw the shilling appreciate by 21 per cent, reducing the local currency equivalent of the external debt by Sh1 trillion to Sh5.06 trillion, despite the dollar value rising to $39.11 billion.
The stronger shilling improved Kenya’s debt sustainability indicators, with the debt-to-GDP ratio declining from 72 per cent in June 2023 to 65.7 per cent in June 2024.
Data from the National Treasury shows that as of June 2024, Kenya’s external debt stood at Sh5.17 trillion ($39.93 billion), with the US dollar accounting for 62.1 per cent of the total foreign debt stock. The euro followed at 25.5 per cent, while the Chinese yuan, Japanese yen, and British pound accounted for 5.5 per cent, 4.2 per cent, and 2.6 per cent, respectively.
The dollar’s dominance in Kenya’s debt portfolio has grown significantly over the past decade, rising from 42.8 per cent in 2014.
The shift has been attributed to increased borrowing from the International Monetary Fund (IMF) and the World Bank, which lend in dollars, as well as multiple Eurobond issuances.
In contrast, the proportion of euro-denominated debt has declined from 28.5 per cent in 2014, while yen-denominated debt has shrunk from 11.5 per cent to 4.2 per cent.
However, the share of yuan-denominated debt has increased slightly from 4.7 per cent to 5.5 per cent, largely due to loans from China for infrastructure projects such as the standard gauge railway and road construction.
With concerns over exchange rate risks, CRA believes that placing a cap on foreign debt held in a single currency will enhance fiscal stability and reduce debt repayment costs.
The recommendation now awaits legislative deliberation in Parliament.
Top Stories Today
