The International Monetary Fund cautioned Kenya over the dangers of converting U.S. dollar-denominated loans to new loans priced in Chinese yuan.
In October, Kenya announced that it plans to convert the remaining $3.5 billion of debt owed to the China Exim Bank from higher-interest-rate dollar-based loans to more affordable yuan-based loans.
While the Treasury claimed that the switch will result in $215 million of savings, that may not be the case, warned the IMF in an email exchange with Bloomberg. “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 said.
The risk that they’re referring to is whether the yuan appreciates, which, if it did, would wipe out those presumed savings and could potentially even increase Kenya’s debt servicing costs.
WHY IS THIS IMPORTANT? What’s curious about the IMF’s warning is that it comes just one week after Kenyan President William Ruto’s top economic advisor, David Ndii, told Business Daily that part of the reason they made the switch from dollar to yuan-denominated loans was to satisfy a request from the IMF itself.
Apparently, the IMF was concerned that Kenya was using IMF funds to repay Chinese loans, according to Ndii. If that’s the case, then it’s a bit confusing that the IMF would turn around so quickly to tell Bloomberg about the risks of such a move.
