Kenya’s recent decision to repay its Standard Gauge Railway (SGR) loan using Chinese yuan instead of the traditional US dollar has sparked a warning from the International Monetary Fund (IMF) over potential currency risks.
According to the IMF, switching currencies can be a proactive approach to debt management, but countries must ensure that the benefits from such moves do not create new vulnerabilities.
“While these transactions may lower costs, they can also introduce currency risks depending on their structure,” a spokesperson at the Washington D.C.-based lender told Bloomberg.
“The IMF encourages countries to consider such operations within comprehensive medium-term debt and reserve management strategies to ensure an appropriate balance between cost and risk,” the spokesperson added.
According to Treasury Cabinet Secretary John Mbadi, the government completed the conversion of the Ksh646.15 billion (USD 5 billion) SGR loan owed to China from dollars to yuan on October 7.
The currency conversion allows the higher dollar-based interest rates on the two tranches of the loan to drop, saving Kenya about Ksh27.78 billion (USD 215 million) annually, according to sources at the Treasury.
Additionally, Treasury officials said that the move will reduce the pressure Kenya has faced in meeting its debt obligations while also lowering financing costs.
Two weeks later, on October 21, neighbouring Ethiopia followed Kenya’s example, entering discussions with Chinese authorities to convert part of its USD 5.38 billion (Ksh695.23 billion) debt into yuan-denominated loans in a move aimed at reducing financing costs and strengthening bilateral trade.
Ndii, IMF Positions
In turn of events, Kenya’s shift to the yuan was partly influenced by pressure from powerful Western lenders, including the World Bank and IMF, according to President William Ruto’s economic adviser, David Ndii.
Ndii revealed that multilateral lenders were concerned that Nairobi was using their dollar loans to pay China instead of funding domestic infrastructure and budget priorities.
“The Western lenders questioned why they ought to help us while other lenders were taking out the money,” Ndii explained.
Adding that: “For this reason, they exert pressure on nations to restructure their debts so that the funds they invest remain in the nation rather than being used to pay off other lenders.”
