The International Monetary Fund (IMF) has cautioned Kenya to weigh potential exchange-rate risks following its decision to convert US$3.5 billion of loans from China into yuan, even as it welcomed the country’s efforts to manage its mounting debt burden.
- •The recent move to redenominate three railway construction loans from China Exim Bank, originally issued in dollars, marked the first large-scale currency conversion of its kind in Africa.
- •The switch, which lowered interest rates and extended maturities, is expected to save the government about US$215 million annually, according to the Treasury Cabinet Secretary John Mbadi.
- •However, an IMF official has said the currency swap could expose the country to cross-currency risks if the yuan strengthens against the U.S. dollar or the Kenyan shilling.
“I think Kenya is in the vanguard here, and we see it as part of an active liability management exercise that countries should be exploring to see if they can get any benefit from the cost of debt servicing,” said the IMF African Department Director Abebe Aemro Selassie.
“As always, it's important to weigh this against any cross-currency risks and other challenges or the main source of export revenue that countries have, the currency in which that's denominated,” he added.
Most of Kenya’s export earnings, from tea, coffee, horticulture, and remittances, are dollar-denominated, meaning the government could face higher repayment costs should exchange rates move unfavorably.
The Bretton-Woods Institution concluded that while the approach could ease immediate fiscal pressure, it demands careful assessment of long-term exposure. The method has been tried by Egypt, Nigeria, and Argentina to reduce debt-servicing costs and dwindling dollar reserves.
Meanwhile, talks between Kenya and the IMF on a new multi-year support programme are still underway after the expiry of the previous facility in April. A staff mission visited Nairobi recently for initial discussions but no agreement has been reached, as both sides assess feasible reform commitments over the next two years.
Beyond debt redenomination, Kenya has also turned to securitisation of revenue and other innovative financing methods to fund infrastructure projects including the extension of its standard gauge railway. The IMF has urged transparency in such arrangements, warning that off-balance-sheet financing and public-private partnerships can obscure fiscal risks if not subject to full parliamentary oversight.
“We always encourage, as first order priority transparency. So, beyond kind of just looking at the mechanics of how this is going to generate resources,” Abebe said.
Kenya’s debt stock has surpassed KSh 12 trillion, rising 11.7% year-on-year to reach 67.3% of GDP, driven by a KSh 1.06 trillion jump in local borrowing as the Treasury pivoted toward the domestic market to cut costs and reduce exposure to volatile foreign currencies.
The share of dollar-denominated external debt fell sharply from 62% to 52%, marking a strategic diversification that the IMF has called an “active liability management” effort. Borrowing costs have eased, with the 91-day T-bill rate dropping below 8%, and rating agencies have responded positively, citing reduced foreign exchange risk.
