Is Dollar Debt More Affordable? A Case Study of Kenya

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Page: 37-45

Jackson Barngetuny (School of Business, University of Eastern Africa, Baraton, Kenya)

This journal article, focusing on Kenya’s debt management strategies, explores the affordability and risks of borrowing in U.S. dollars versus Kenyan Shillings. Using a mixed-methods approach, the study blends quantitative analysis of debt servicing costs from 2000 to 2023 with qualitative insights into the broader financial implications of currency fluctuations. The findings reveal that although dollar-denominated debt initially offers lower interest rates, it becomes more costly over time due to the volatility of the Kenyan Shilling. As the local currency depreciates, the cost of servicing dollar debt rises, increasing the financial burden on the government. While borrowing in dollars opens access to larger international capital markets and more favorable terms, it exposes Kenya to significant risks, particularly in light of global interest rate shifts and exchange rate movements. To mitigate these challenges, the study suggests that Kenya adopt a diversified debt portfolio, combining both foreign and local currency debt, and consider hedging strategies to shield against currency risks. The study emphasizes the need for a balanced approach to debt management, ensuring Kenya’s long-term fiscal health while accounting for the potential dangers of foreign currency borrowing.