by Amina Faki
Kenya has been cautioned to limit its dependence on external borrowing as it might negatively impact the economy.
Cytonn Investments says the increase in foreign commercial bank’s loans is likely to negatively affect the economy as the foreign financing from commercial banks is relatively expensive, compared to International Development Association (IDA)’s concessional financing, which leads to an increase in Kenya’s public debt service.
This was their observation after the Central Bank of Kenya (CBK), released the Quarterly Economic Review for the third quarter of the fiscal year 2016/17, which revealed that the contribution of foreign commercial banks to Kenya’s external debt rose by 26.2 percent in total external debt, to 2.1 trillion shillings recorded in the third quarter of the Fiscal year 2016/17 from 1.7 trillion shillings recorded in the third quarter of the Fiscal year 2015/16.
“We note the 26.2 percent increase in Kenya’s total external debt, and in our view, international markets borrowings should be handled with caution since too much borrowing or reliance on global markets opens up the country to international economic trends which could negatively affect the economy. It is imperative that we be cautious on external borrowing if we are to achieve long term economic stability,” noted the Cytonn Report.
Kenya’s Public and Publicly Guaranteed External Debt (Kshs Bn) ~ Cytonn Investments
The increase in the national foreign debt has simultaneously heightened foreign commercial banks’ loans to Kenya increased by 65.0 percent y/y to 594.1 billion shillings at the end of March 2017, compared to 360.2 billion shillings at the end of March 2016.
According to the report the increase in external debt was driven by:
The 101.6 billion shillings loans advanced to Kenya by China to facilitate the completion of the Mombasa-Nairobi Standard Gauge Railway, and start the second phase of the SGR to Naivasha,
The commercial loans from the syndicated loan and the Preferential Trade Area and African Export Import Bank of 83.0 billion shillings and K46.7 billion shillings respectively
The depreciation of the Kenyan Shilling against major currencies in Kenya’s external debt basket (the US dollar, the Sterling Pound, Japanese Yen, the Euro and the Chinese Yuan) compared to the previous quarter led to the buildup in external debt in local currency terms.