CRA seeks cap on foreign debt in single currency to shield economy

The Commission on Revenue Allocation (CRA) has urged Parliament to take action against Kenya’s growing reliance on the US dollar in external borrowing, warning that it exposes the country to financial instability.

The agency is pushing for legislation that would cap the proportion of foreign debt held in any single currency to protect the country from excessive debt servicing costs.

Presenting its case to the National Assembly’s Liaison Committee on the 2025 Medium-Term Debt Management Strategy, CRA highlighted how fluctuations in the value of the Kenyan shilling have increased the cost of repaying dollar-denominated loans.

“The high composition of external debt in the US dollar increases the cost of external debt servicing in the event of high depreciation of the shilling against the dollar,” CRA said in its submission.

“Parliament, therefore, needs to legislate an upper ceiling within which external debt composition in any currency should not surpass.”

The impact of currency depreciation was most evident in 2023 when the shilling weakened by 21 percent against the dollar.

This pushed the local currency value of external debt up by Sh1.42 trillion to Sh6.09 trillion, while the dollar-denominated value rose by $1.04 billion to $38.92 billion.

A reversal in 2024 saw the shilling strengthen by 21 percent, reducing the external debt’s local currency value by Sh1 trillion to Sh5.06 trillion, even though the total dollar-denominated debt slightly increased to $39.11 billion.

This shift improved Kenya’s debt sustainability indicators, bringing the debt-to-GDP ratio down from 72 percent in June 2023 to 65.7 percent in June 2024.

As of June 2024, Treasury data showed that Kenya’s external debt stood at Sh5.17 trillion ($39.93 billion), with the US dollar accounting for 62.1 percent.

Other currencies in the debt portfolio included the euro at 25.5 percent, the Chinese yuan at 5.5 percent, the Japanese yen at 4.2 percent, and the British pound at 2.6 percent.

The CRA noted that over the past decade, the proportion of Kenya’s external debt in US dollars has surged from 42.8 percent in 2014 to the current 62.1 percent.

This shift has been attributed to increased borrowing from institutions such as the International Monetary Fund (IMF) and the World Bank, which primarily lend in dollars, as well as multiple Eurobond issuances.

Meanwhile, euro-denominated debt has declined from 28.5 percent in 2014, while yen-denominated debt has dropped from 11.5 percent to 4.2 percent.

The proportion of yuan-denominated debt has risen slightly from 4.7 percent to 5.5 per cent due to infrastructure loans from China.

With concerns over exchange rate risks, CRA believes that limiting the portion of foreign debt held in a single currency will provide economic stability and make repayments more manageable.

The proposal is now awaiting deliberation in Parliament.