Kenya’s National Treasury is considering implementing currency swaps and resuming bond switch to manage the mounting public debt and ease the government’s repayment pressure exacerbated by demand for pay increments by civil servants, amid faltering domestic revenue collections.
The Director-General of the Public Debt Management Office Raphael Owino says that the swaps are “the best option.” “We have a range of other options for liability management and perhaps swaps are the best option rather than hedging,” Mr Owino said, adding that bond switch is another option under consideration in the current (fiscal year.
“Bond switch is something that we can do. There was one done in Kenya sometime back and so this financial year it is something we could consider, depending on high maturities,” he said.
Foreign exchange swap is a financial transaction where two counterparties exchange specific amounts of two different currencies at the start and repay at a future date according to a predetermined rule reflecting both interest payments and repayment of the principal.
Kenya’s public debt stood at Ksh10.56 trillion ($81.67 billion) as at June 2024, comprising Ksh5.41 trillion ($41.84 billion) and Ksh5.15 trillion ($39.83 billion) worth of domestic and external debt respectively, according to CBK data.
Foreign debt is largely denominated in the US dollar and the euro, at 67.9 percent and 21.4 percent respectively, implying that the depreciation of the shilling against these foreign currencies increases the debt repayment burden for the government.
A weak shilling added Ksh809 billion ($6.26 billion) to the public debt stock in the 12 months to June 30, 2023, with the local unit depreciating by more than 20 percent against both the US dollar and the euro in the same period, according to a report by the Parliamentary Budget Office. The two currencies constitute 89.3 percent of Kenya’s external debt.
Central banks usually use foreign exchange swaps for hedging and asset-liability management, to affect domestic liquidity, manage their foreign exchange reserves, and stimulate domestic financial markets.
Mr Owino, a former economist at the Central Bank of Kenya, was appointed the new debt boss in July to replace Dr Haron Sirima who left the unit after serving for five years.
He said the government would consider bond switch in its debt liability management plan for the 2024/2025 fiscal year, depending on high maturities. In a bond switch the government replaces existing shorter duration treasury bills and bonds with long-duration papers.
The Treasury avoided this option during the 2023/2024 fiscal year, owing to rising interest rates on treasury bills and bonds, as investors demanded compensation for lending to a government facing cashflow constraints, amid investor preference for short-term debt to avoid duration risks.
The latest bond switch, which the National Treasury implemented in December 2022, fell below expectations after the ordinary bondholders declined to put all their Ksh87.8 billion ($679 million) investments in T-bills in a long-term (six-year) infrastructure bond.
The government only received Ksh52.9 billion ($409.12 million) bids, of which it accepted Ksh49.11 billion ($379.81 million).
The average interest rates on the 91-day, 182-day and 364-day T-bills stood at 15.68 percent, 16.5 percent and 16.72 percent respectively, during the week ended October 3.
The average interest rates on the 91-day, 182-day and 364-day bills stood at 15.98 percent, 15.96 percent and 16.1 percent, respectively in the week ended December 28, 2023, according to CBK data.
The Kenyan shilling remained stable against major international and regional currencies during the week ending October 3, exchanging at Sh129.19 to the dollar, while foreign exchange reserves remained at $ 8.18 billion, equivalent to 4.2 months of imports.
