Kenya’s plan to switch debt payments to China from US dollars to yuan is a ‘win-win’
The move could set a new precedent, reducing Nairobi’s reliance on US currency while meeting Beijing’s goal of increased trade deals in yuan
In late August, Kenya’s Treasury announced that talks with the Export-Import Bank of China were at an advanced stage to extend maturities and swap dollar-denominated debt into yuan to ease pressure on its foreign reserves.
If successful, it would see interest rates on the loans secured for the Standard Gauge Railway (SGR) halve from 6.37 per cent under existing dollar-denominated loan terms.
According to Kenyan Treasury Minister John Mbadi, the interest rate on the loans would drop from more than 6 per cent in US dollars to about 3 per cent in yuan due to the difference between the secured overnight financing rate (4.6 per cent) and yuan rates.
The deal is expected to help reduce the US$1 billion Kenya spends annually on servicing its debt to China, creating greater flexibility within its national budget.
Nairobi has in the recent past come under severe financial pressure, especially following the cancellation of the 2024 Finance Bill, which stalled plans to introduce new taxes after widespread protests.
The International Monetary Fund (IMF) classified Kenya at a high risk of debt distress and suspended the final review of its programme with the country, a move that left the government without access to a final loan disbursement of nearly US$850 million.
Sub-Saharan Africa geoeconomic analyst Aly-Khan Satchu said the debt swap would be a “win-win” for both Kenya and China. For Kenya, Satchu said it “diversifies the borrowing currency basket side of the balance sheet”. He said for China, it increased the penetration of the yuan in the global marketplace in a measured manner.
“It’s a no-brainer,” Satchu added.
According to Mark Bohlund, a senior credit research analyst at REDD Intelligence, it remains to be seen if the Kenyan government’s requests to extend the repayment of Chinese loans will be more successful than previous efforts.
Bohlund said Kenya’s financing needs in the 25/26 fiscal year had risen due to delays in IMF and World Bank funds, prompting the government to redirect the proceeds from the US$1.5 billion eurobond sale in February from their planned use of prepaying syndicated loans arranged by Trade and Development Bank, currently costing 12–13 per cent, to finance the budget deficit.
He said that barring the to be determined loans, the biggest external debt repayment due in the 25/26 financial year was the KES96 billion (US$741 million) due to China Exim Bank, with another KES34 billion due in interest.
“The continued divergence between the Shanghai interbank rate and libor and other US dollar-centred interest rates makes it attractive for the Kenyan government to shift the SGR loans and other debt owed to Chinese creditors into yuan,” Bohlund said.
David Omojomolo, Africa Economist at Capital Economics, a London-based macroeconomic research consultancy, said other heavily China-exposed borrowers like Angola would be watching closely.
“The US will be watching too, having warned against deeper Chinese-Brics financial integration,” Omojomolo said.
Ultimately though, he said these liability management exercises did not change Kenya’s fundamental challenge.
“Without IMF support and meaningful fiscal consolidation, the country’s debt trajectory remains unsustainable,” Omojomolo added. “Kenya may muddle through in the short-term but its ability to service its obligations will remain strained, leaving sovereign default risks elevated.”
This move aligns with China’s broader strategy to internationalise its currency and challenge the dominance of the US dollar. It has signed currency swap agreements with countries such as Nigeria and South Africa.
The continent is also witnessing more yuan-based deals, such as a recent 2.1 billion yuan loan between China Development Bank and the Development Bank of Southern Africa.
Furthermore, both the African Export-Import Bank (Afreximbank) and South Africa’s Standard Bank have joined the Cross-border Interbank Payment System, China’s alternative to the Swift international payment network, to facilitate direct yuan interbank payments in China-Africa trade.