Less than a month after Kenya ditched the dollar to repay its Standard Gauge Railway (SGR) loan using the Chinese yuan in a bid to cut costs, neighbouring Ethiopia has followed suit and entered discussions with Chinese authorities over a similar arrangement.
Ethiopia is in early-stage discussions with Chinese authorities to convert part of its Ksh695.23 billion (USD5.38 billion) debt into yuan-denominated loans, a move aimed at reducing financing costs and strengthening bilateral trade, according to Bloomberg.
According to the Governor of the National Bank of Ethiopia, Eyob Tekalign, discussions took place last month in Beijing with the Export-Import Bank of China and the People’s Bank of China.
“China is a key partner for us, with rising trade and investment flows. It is sensible to explore a currency swap, including partial debt conversion. We have formally requested this and are progressing the discussions,” Takalign told reporters in Washington on the sidelines of the IMF and World Bank engagements.
Already, the Eastern Africa nation defaulted on external obligations in 2023 and is negotiating the restructuring of approximately USD15 billion (Ksh1.94 trillion) of debt.
IMF on Debt Currency Swaps
The ditching of the dollar to the Yuan has already resulted to different debates on what economic and multilateral impacts it would have with the West and East.
IMF Africa Director Abebe Selassie pointed out that such arrangements could deliver significant savings for nations with substantial Chinese debt.
“Over the course of the loan amortisation, these swaps could provide nontrivial fiscal relief for Ethiopia and others considering similar agreements,” he said.
Kenya Ditches Dollar
On October 7, the Kenyan government, through the Treasury, on Tuesday completed the conversion of the Ksh646.15 billion (USD5 billion loan) owed to China from dollars to the Yuan to save on interest payments, according to CS John Mbadi.
The conversion, which allows the higher Dollar-based interest rates on the two tranches of the loan to drop, will save Kenya about Ksh27.78 billion (USD215 million) a year, according to Reuters.
According to the Treasury, the decision to switch the currency of the loan to the Yuan will help reduce the pressure Kenya has been facing in honouring its debt obligations.
Kenya entered into the USD 5 billion (Ksh646.2 billion) agreement with China to fund and construct the Standard Gauge Railway (SGR), one of the largest Chinese-backed infrastructure projects on the continent, in 2013.
