Kenya finds itself in a concerning scenario with its external borrowing, as a weak shilling has resulted in the country paying a staggering Sh833.85 million in commitment fees on unused loans in the first half of the current financial year (ending December 2023). This is on track to surpass the Sh1.35 billion paid for the entirety of the previous year, raising serious public policy concerns. The situation is even more alarming when compared to the Sh680.3 million paid on untapped loans during the same period last year. This sharp rise in fees for unutilised credit lines begs the question: is the country biting more than it can chew?

A key driver behind this surge in commitment fees is the weakening of the Kenyan shilling. A weaker currency increases the cost of servicing external debt denominated in foreign currencies, as more local currency is required to pay off the same amount of debt. This not only adds to the financial burden on the government but also underscores the need for prudent fiscal management and effective currency risk management strategies. The government should explore renegotiating loan agreements for more flexibility in accessing funds. This would allow them to draw on credit only when necessary, minimising the burden of commitment fees on unused lines. Additionally, prioritising domestic borrowing over external loans, especially during the times of a weak shilling, could be a more cost-effective approach. Domestic borrowing often comes with lower interest rates and eliminates the risk of currency fluctuations.

Despite this, borrowing itself needs scrutiny. A more rigorous project appraisal process is crucial to ensure loans are secured only for projects with a demonstrably high return on investment. This would justify the associated costs and ensure Kenya gets the maximum benefit from borrowed funds. Finally, increased transparency in debt management is essential. Regularly publishing clear reports on loan terms, justifications, and how borrowed funds are being used would foster public trust and enable informed discussions on Kenya’s debt management strategies. While the questions raised about Kenya’s borrowing strategies and transparency are crucial, the issue goes beyond national policy alone. Critics argue there’s an inherent imbalance in the system itself. The continued existence of commitment fees, especially when only demanded by developing nations, raises a red flag. This practice fuels suspicion that international lenders might be structuring a system that disadvantages developing economies, potentially hindering their ability to climb out of debt and achieve financial stability.

The rising commitment fees underscore the importance of sound fiscal policies and effective debt management strategies. The government must prioritise measures to strengthen the shilling and reduce reliance on external borrowing to mitigate the impact of these fees. Additionally, there is a need for greater transparency and accountability in loan agreements to ensure that the terms are favourable and sustainable for the borrower’s long-term financial health. The escalating commitment fees on untapped external loans reflect the broader economic challenges facing Kenya and the system at large. Addressing these challenges will require a multi-faceted approach that includes prudent fiscal management, effective currency risk management, and a commitment to transparency and accountability in financial dealings. Failure to address these issues could have serious long-term implications for Kenya’s financial stability and economic growth.