New Sh70bn Syndicated loan Eases Kenya’s Forex Woes

The Sh70.4 billion ($500 million) syndicated loan Kenya secured from a consortium of international lenders has effectively rolled over external debt repayments of a similar margin that are due this month, relieving the Central Bank of Kenya (CBK) from taking a hit on its forex reserves.

The Treasury is getting the loan from US lender Citi Group, Standard Chartered Bank of the UK, the Africa Export-Import Bank (Afrexim Bank) and South African lenders Standard Bank and Rand Merchant Bank (RMB). The loan is meant to fund development projects approved in the just-ended financial year. The lenders said the facility is in two tranches of three and five years but did not specify the respective amounts allocated to each tranche, or the interest terms of the loan.

These proceeds from external loans are usually sold to the CBK in exchange for shillings to allow for the deployment of the funds in the local economy and are thus an important source of forex for the monetary regulator. The earmarking of the proceeds for the 2022/23 budget suggests that the funds will be used to settle part of the government’s outstanding bills, which stood at Sh537.2 billion as of the end of March 2023.

“The proceeds from the facility will be used by the National Treasury to finance the development projects as per the development budget approved by the Kenyan Parliament for the Fiscal Year 2022/2023,” the lenders said. At the same time, the CBK is obliged to supply the Treasury with dollars for foreign loan payments and other government external payments, meaning that the country’s reserves take a hit whenever there are elevated payments due to creditors.

The present forex reserves of $7.48 billion (Sh1.05 trillion) are hovering just above the required four months of import cover (at 4.12 months), meaning that the debt repayments would have most likely pushed the cover below the threshold if there was no forthcoming dollar injection. This month, the Treasury faces external debt service worth Sh63.5 billion ($451.3 million), the bulk of which covers biannual repayments for the standard gauge railway loans procured from China in 2014, as per a World Bank analysis of Kenya’s external debt obligations.

China tops the bill at $356.4 million (Sh50.1 billion) in interest and principal repayments, followed by a semi-annual interest repayment of $31.5 million (Sh4.4 billion) on the $1 billion Eurobond the country floated in mid-2021.

Other payments include $20 million (Sh2.8 billion) to the Eastern & Southern African Trade & Development Bank, $18.7 million (Sh2.6 billion) to France and $10.2 million (Sh1.4 billion) due to the International Development Association, the World Bank’s concessional lending arm.

High-interest rates globally have made it difficult for Kenya to access dollar loans in recent months aside from concessional lending by the World Bank and the IMF, making it harder to roll over maturing debt.

The new syndicated loan has for instance been in the works since at least March, when Citi, Standard Chartered, RMB and Standard Bank were mandated to seek $600 million for the State.

The fact that the State fell short of its initial target of $600 million even after bringing on board a fifth arranger points to the difficult external debt market, from which the government expects to raise a net Sh199 billion in the current fiscal year, while also funding the rollover of the maturing Sh281 billion Eurobond.