IMF Sounds Caution as Kenya Turns to Yuan to Cut Dollar Debt
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The International Monetary Fund (IMF) has raised concerns over the growing trend among African countries, including Kenya and Ethiopia, of swapping dollar loans from China into yuan to tame debt costs.
While it aims to reduce borrowing expenses, the IMF warns that it could create new financial risks tied to currency mismatches, liquidity, and long-term dependency on China’s financial system.
In an emailed response to queries, a spokesperson for the IMF said: “While these transactions may lower costs, they can also introduce currency risks depending on their structure,”
“The IMF encourages countries to consider such operations within comprehensive medium-term debt and reserve management strategies to ensure an appropriate balance between cost and risk.”
Kenya became the first African country to complete such a conversion in October 2025, after turning $3.5 billion in dollar loans from China’s Export-Import Bank into yuan equivalents.
The loans were originally used to finance the Standard Gauge Railway (SGR) linking Mombasa to Nairobi and Naivasha.
Previously, the dollar loans carried floating rates above 6%, pegged to the Secured Overnight Financing Rate (SOFR) plus a 2% margin. By switching to yuan, Kenya negotiated a fixed 3% interest rate, payable semi-annually.
The adjustment is expected to save the country around $215 million annually in interest, offering temporary relief at a time when public debt has surpassed 70% of GDP.
However, the IMF’s caution highlights the vulnerabilities of switching currencies to tame debt costs. While the yuan swap may ease fiscal pressure, it also exposes Kenya to exchange rate risks.
If the Chinese yuan appreciates against the Kenyan shilling, repayment costs in local currency terms would rise, potentially eroding the anticipated savings.
Likewise, a global financial shock, such as a U.S. interest rate hike, could indirectly strengthen the dollar and weaken emerging market currencies, further complicating repayment dynamics.
Ethiopia is also negotiating a similar restructuring of $5.38 billion in Chinese dollar loans under the G20 Common Framework.
Talks with the Export-Import Bank of China and the People’s Bank of China aim to cut interest rates from 7.25% to 3%.
The move could ease pressure on Ethiopia’s strained finances after its 2023 Eurobond default and amid efforts to restructure more than $15 billion in external debt.
Still, the IMF warns Kenya and Ethiopia that while such transactions may provide breathing room, they could complicate negotiations with Eurobond holders, who often demand equal treatment in debt restructuring.
For Ethiopia, this has already slowed discussions with private creditors, raising concerns that prioritizing yuan obligations could delay broader fiscal recovery.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.
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