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 cost of borrowing money is primarily represented by the interest payments. These payments are made by the borrower in addition to the loan’s principal.
In the fiscal year that ends in June 2024, the Treasury projects that interest payments will soar to Sh918.9 billion, up 33.7% from Sh687.3 billion, primarily as a result of the weakening of the shilling.
The weakening Kenya shilling and high-interest rates in the domestic market, according to the Treasury’s draft 2023 Budget Review and Outlook Paper (BROP), are to blame for the increased interest payments.
The total budget has increased to Sh3.91 trillion despite the Controller of Budget Margaret Nyakang’o’s warning of risks due to an increase in interest payments of Sh143 billion in the current fiscal year and unspent items from the prior fiscal year.
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, and Dr. Nyakang’o has warned of impending budgetary pressure as a result.
The shilling has lost 19.3 percent of its value against the dollar since it began the year at 123.42 and was trading for 147.26 versus the dollar on Monday.
“Against the dollar and the euro, the Kenyan shilling has fallen 19.3% and 19.1%, respectively. As the Shilling depreciates against the major currencies, debt payment costs are rising, according to Stellar Swakei, senior research associate at Standard Investment Bank.
She mentioned that by June 2023, external debt had risen by almost Sh649.6 billion and the value of the shilling had fallen by 13.9% since the year’s beginning. Undoubtedly, she added, interest costs must rise.
Over the past ten years, interest rates have risen as a result of the Kenyatta administration’s increased reliance on pricey commercial loans to fund large-scale infrastructure like roads, trains, and ports. The Treasury has increased the country’s budget for the fiscal year 2023–2024 to Sh3.91 trillion, which will result in an increase in interest payments due to rising interest rates on domestic debt. To reflect higher borrowing rates from local investors, domestic interest has increased by Sh18.1 billion to Sh646.4 billion.
The increase in interest payments, a regular expense funded by taxes, puts more pressure on President William Ruto’s administration, which has already been obliged to enact several tax measures to reduce the budget deficit.
In her most recent analysis of the national government’s spending for the fiscal year 2022–2024, Dr. Nyakang’o stated that “the country has a significant amount of public debt denominated in foreign currencies, which makes it vulnerable to currency fluctuations and exchange rate risks.”
“The amount needed to repay loans would need to increase due to the ongoing depreciation of the Kenyan Shilling. This will reduce the government’s financial flexibility and prevent other crucial policies and initiatives from being implemented, necessitating budget modifications, she continued.
According to Churchill Ogutu, an economist with the Mauritius-based IC Group, the rise in foreign interest payments must have been caused by both the effect of the depreciation of the shilling and the anticipated growth in foreign loan uptake in the current fiscal year.
According to Mr. Ogutu, “I have also seen there is a significant increase in the amount of external debt to be sourced during this financial year, which, also, partly has led to an increase in foreign interest.” As the nation went on a borrowing binge to fund massive projects like the standard gauge railway (SGR), interest payments have increased eight times from Sh121.3 billion since June 2013.
Foreign interest payments saw the biggest increase, at 2,355 percent from Sh272.5 to Sh11.1 billion in fiscal year 2012/13. The amount of net foreign borrowing for the current fiscal year has been increased by 241%, from Sh131.5 billion to Sh448.7 billion. According to the Treasury, which insists that the majority of the loans will be on a concessional basis, this will help keep interest rates for the private sector low.
As a result of tightened liquidity on the global financial market, Kenya is anticipated to make a lump-sum payment of $2 billion (Sh294.5 billion) for a maturing Eurobond in June of the current fiscal year.
