Kenyan Shilling continues to gain Ground Against the US Dollar

By Victor MUJIDU

The successful issuance of a US$1.5 billion Eurobond on February 13 gave the investors’ confidence that Kenya would be capable of honoring its upcoming US$2.0 billion Eurobond principal payment.

Kenya successfully issued a new Eurobond worth $1.5 billion (Sh238 billion) to buy back the inaugural one due on June 24.

Due to increased budgetary constraints and the need to protect the domestic economy against the crowding-out effects of domestic borrowing, Kenya has increasingly embraced Eurobond issuance since 2014.

Kenya borrowed short-term high-interest loans in the past when the economy was rebased in 2014 and the country was reclassified as a lower middle-income country (LMIC), up from the previous category of a least developed country (LDC).

However, these short-term loans have been unsustainable, but the current government has promised to settle all debts.

The retirement of the 2014 Eurobond has haunted Kenya’s fiscal plan, forcing the East African economic powerhouse to seek various loan facilities from both multilateral and commercial lenders.

Top of all is the $1.5 billion (Sh240.7 billion) to be disbursed by the World Bank between March and April.

The amount is part of a $4.5 billion (Sh722.3 billion) commitment made by the global lender in November last year.

The lender announced that, over the next three fiscal years (FY24–FY26), the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD) would provide $3 billion and $1.5 billion, respectively.

In the last few weeks, the Kenyan shilling has continued to gain ground against the dollar, selling at Ksh142.00 against the dollar; from a low of Kes165.54 at the start of the year.

However, the BMI report notes that despite the appreciation of the shilling as a result of the bond issuance, it will resume its depreciatory trend amid a current account deficit.

Eurobond Proceeds and Repayment Concerns

Prudent public debt management requires that the public debt proceeds be invested in projects with a higher economic rate of return than the cost of the public debt.

This guarantees the country’s ability to repay the public debt when it is due. Consequently, of great concern is Kenya’s use of her Eurobond proceeds.

Considering that the maturity profile of Eurobonds is relatively short, the way the Eurobond proceeds are used in Kenya means that the debt cannot repay itself and is, therefore, unsustainable in the long term.

The Risks and Best Practices for Accountability, Transparency Standards, and Practices on Eurobond

Borrowing and management

The major risks in Eurobond borrowing include exchange risks, debt servicing burdens, and misuse of Eurobond proceeds.

Exchange Risks: Borrowing in a foreign currency comes with exchange risks, and the extent to which

Debt, which is denominated in foreign currency, is usually considered a determinant of output, capital flows, and exchange rate.

High Interest Rate Risk: Sovereign bond yields are significantly influenced by global volatility, commodity prices, and global liquidity-all factors that are out of the control of the sub-Saharan economies in question.

The legal risks associated with Eurobond usually come in cases of default. Sovereign bonds are public contracts closely linked to the functioning of the state. They typically lack an express choice-of-law provision and are often deemed to be subject to the sovereign bond holder’s law.

The risk of excessive debt accumulation: The increase in borrowing by the government through Eurobonds and other bilateral lending arrangements is likely to expose the country to debt distress.

Risk of Misuse of Proceeds: Since funds from Eurobond are not subject to any checks and balances by the creditors and come in the form of ‘general budget support,’ there is usually a danger of misuse of funds, especially because both Parliament and citizens have no effective mechanisms for monitoring and evaluating the use of these funds.

Shilling gains ground against the dollar

The continuous rally of the Kenya shilling over the last week has signaled a significant tide turn for the currency, which was expected to shed more value this year after the shilling hit an all-time high of over 160 against the US dollar.

A trajectory that now seems to change with the inflow of dollar-denominated support from the International Monetary Fund (IMF), which disbursed USD 684 million on January 18, followed by another disbursement from the Trade Development Bank on January 24 to the tune of USD 385 million.

The Africa Development Banks are set to further increase dollar liquidity in the country with an additional disbursement of USD 88 million.

Expect a depreciation of the shilling

Despite the appreciation as a result of the bond issuance, the shilling will resume its depreciatory trend amid a current account deficit. According to experts, the depreciation will be to a lesser extent.

According to the Sanlam Investment Outlook for 2024, the availability of forex is also expected to pose a challenge this year going forward.

Other factors that will play center stage in 2024 include geopolitics, elections, and fiscal and monetary policy reforms.

Globally, analysts expect economic conditions to improve as global monetary policy becomes more accommodating.

2024 GDP growth

Kenya’s economic performance strengthened in 2023 despite continued challenges, with real GDP growth accelerating from 4.8 percent in 2022 to an estimated 5 percent in 2023. This is a result of improved growth performance, which is attributed to a strong rebound in the agriculture sector in 2023.

The recovery of agriculture has led to improvements in food supply, and coupled with monetary policy tightening, it has helped reduce inflationary pressures.

According to the report, debt-related vulnerabilities persist, and rising debt costs constrain the government’s ability to address development challenges.

The country is, however, making progress and has reduced the primary deficit from 1.6 percent of GDP in FY2021/22 to 0.8 percent of GDP in FY2022/23, while the overall deficit decreased from 6.2 percent to 5.6 percent during the same period and is expected to reduce further to 5.4 percent in FY2023/24.

2024 Average Inflation

The annual inflation rate in Kenya eased to 6.3 percent in February 2024, the lowest since March 2022, down from 6.9 percent a month earlier and below market forecasts of 6.9 percent. It stands within the central bank’s preferred range of 2.5 percent to 7.5 percent.

This was mainly driven by increases in the prices of transport, housing, water, electricity, gas, and other fuels, as well as food and non-alcoholic beverages. On a month-on-month basis, inflation was at 0.1 percent, compared with 0.4 percent in January.