As Kenya faces the daunting task of settling an outstanding Eurobond debt of Sh160 billion, the Treasury has highlighted the potential risks associated with its repayment strategies.
One option considered is tapping into local foreign exchange reserves or issuing a dollar-denominated domestic bond. However, the Treasury warns that these measures could exacerbate dollar shortages and lead to further depreciation of the Kenya shilling.
The shilling has already seen significant losses against the dollar, primarily due to poor export earnings, increased import costs resulting from the Ukraine conflict, and interest rate hikes in developed countries.
Aggressive use of Kenya's dollar reserves to repay the Eurobond could reignite the dollar scarcity crisis experienced in 2022, when traders struggled to access essential imports.
Kenya currently has $7.13 billion in foreign currency reserves, providing import cover for 3.81 months. Last year, dollar shortages disrupted the importation of critical inputs like fuel, fertilizers, and cooking oil.
In addition to dollar shortages, the Treasury also raises concerns about increased debt. The government intends to use a combination of existing funds, financing from development partners, and potentially domestic bonds to settle the remaining balance of the Eurobond.
Borrowing in domestic debt markets could further impact dollar liquidity, while issuing dollar-denominated domestic bonds could potentially tap into the large deposits held by Kenyans but may also affect foreign exchange reserves.
The success of the Eurobond buyback and new bond issuance will be crucial in determining how Kenya manages its outstanding debt. If the buyback tender offer receives insufficient interest, Kenya may be forced to draw down on its own reserves, putting pressure on the exchange rate.