According to a recent Treasury report, the nation would spend Ksh301,513,774,986 in total to purchase a $2 billion international sovereign bond. This results in a conversion rate of 150.76.
According to information from the Central Bank of Kenya, the shilling was trading at an average of 140.2 against the dollar. The shilling has been breaking records every day and has since crossed the 140-mark.
The Treasury estimated the cost of redeeming the first Eurobond at Sh241.75 billion in March, or Ksh120.87 at the time. In his budget speech on Thursday of last week, Treasury Cabinet Secretary Njuguna Ndung’u provided this exchange rate.
Kenya made its debut on the global capital market in 2014 and raised $2.75 billion in total. The bond was raised in two $2 billion tranches and a $750 million tap sale. Since then, the nation has made repeated trips back to the international capital market, raising the value of its international sovereign bond to Ksh939.6 billion by the end of March.
The adoption of the government-to-government agreement for oil imports, which was intended to provide a longer-term supply plan of gasoline and reduce the monthly need for the dollar in the country, had been predicted by President Ruto to strengthen the shilling.
According to the agreement, oil marketers would pay for fuel in local currency instead of dollars, which would relieve monthly pressure on the demand for dollars, which has been in limited supply. This was mentioned by President Ruto.
“Additionally, it will release pressure on dollars. In fact, you will observe…the exchange rate decreasing in a quite amazing fashion over the course of the following month or two,” according to Dr. Ruto.
“In fact, in my opinion, the exchange rate will drop below Ksh120 in the upcoming several months. You never know, Maybe Ksh115.” continued Dr. Ruto.
However, the shilling has been in free fall, losing close to 13.5% of its value since the start of the year as the nation struggles with a dollar shortage that has been made worse by the rise in interest rates by central banks in advanced economies.
The managing director of Orion Advisory Services Limited, Sunil Sanger, believes that the government-to-government agreement only served to provide the forex market breathing room by postponing the payment of imports.
“Unfortunately, the FX inflow side of the issue has not been sufficiently addressed. We will continue to see the shilling decline until there is concrete action on that front,” according to Mr. Sanger.
The primary worry for Dr. Kamau Thugge, the new CBK Governor, in working closely with the Treasury is the maturity of the first Eurobond in June 2024.
To ensure that the bond is paid on schedule, “the CBK and National Treasury will have to work closely together,” Dr. Thugge stated.
If the international capital market does not permit the re-issuance of a new bond for liability management purposes, accumulation of the necessary foreign exchange will be crucial for Kenya to be able to pay for the bond.
At Ksh1.046 billion ($7.459 billion) as of June 15, the country had enough foreign exchange reserves to satisfy its import requirements for 4.11 months. The increase in the nation’s foreign currency reserves is the result of a Ksh140.2 billion ($1 billion) World Bank grant to help budgetary reduction.
As part of its 38-month plan with the international lender, which also aims to help the country’s efforts at fiscal reform, Kenya also anticipates more inflows from the IMF next month. Increasing revenue and decreasing spending are the goals of fiscal consolidation.
Last week, during the budget speech, the CS announced its interest in hiring a lead manager to advise the government on liability management strategies leading up to the resolution of the Eurobond 2024.
