In this article:

1. How Dollar Loans Got Very Expensive

2. Treasury To The Rescue

3. The Mechanics of The Deal

4. Kenya's Play

5. China's Win

6. Risks And Concerns

7. Final Thoughts

When Kenya borrowed roughly US$5 billion to build the Standard Gauge Railway (SGR), every repayment had to be made in U.S. dollars.

So, every few months when a repayment was due, Central Bank had to:

• Go to its reserves,

• Convert shillings into dollars (usually by buying them from the market),

• And wire those dollars to China.

As U.S. interest rates rose and the dollar gained strength, this process kept getting harder and more expensive.

Faced with ballooning costs, Treasury had to act.

But, let's start from the beginning…

HOW DOLLAR LOANS GOT VERY EXPENSIVE

The Federal Reserve (the U.S. central bank) stepped in to slow things down and stop prices from climbing too fast.

So, starting in March 2022, the Fed began raising interest rates sharply, from near 0% to over 5% within about a year.

As the rates increased, the dollar strengthened globally.

That meant:

• It took more shillings to buy the same number of dollars.

• The interest rate tied to those dollar loans also went up (since many are floating-rate loans pegged to LIBOR or SOFR).

The SGR is one of Kenya’s largest infrastructure projects, which meant Kenya was carrying:

• a big loan that had to be repaid in foreign currency,

• taken to build a critical national asset,

• with interest rates that rose and fell depending on the U.S. dollar.

• exposing it to both interest-rate risk and currency risk.

In plain terms, this meant that if the Kenyan shilling weakens or USD rates rise, servicing costs increased dramatically.

Faced with these risks, Kenya’s Treasury took action.

TREASURY TO THE RESCUE

In August 2025, the Treasury (led by Cabinet Secretary John Mbadi) publicly confirmed it was in talks with China to convert the dollar-denominated SGR loan into Chinese yuan (CNY or RMB).

China, seeing a chance to promote the yuan internationally, a key strategic goal for Beijing, agreed.

On 7 October 2025, Treasury announced the conversion was complete.

The reason for the savings is simple:

• Yuan loans have lower interest rates (around 3% vs. ~6%+ in USD), and

• Kenya no longer needs to keep buying expensive U.S. dollars from the market to make repayments.

That’s real cash flow relief.

It means less pressure on the shilling, and less drain on dollar reserves.

But the cash saved on interest is only part of the story, Kenya has a trick up its sleeve. 

The yuan is China’ currency.

And since Kenya buys a lot from China (e.g. electronics, clothes, machinery) it’s easier to use yuan from those deals to pay the debt, rather than converting shillings to dollars first.

It's like paying your supplier directly with the cash you earn from your shop, skipping the bank's exchange fees.

This currency conversion deal, the first of its kind in Africa, was so effective that it didn’t take long for others to follow.

THE MECHANICS OF THE DEAL

Debt restructuring at the national level demands a blend of:

• Diplomacy (China has to agree),

• Financial engineering (the Treasury and Central Bank handle the mechanics), and

• Accounting (Kenya’s debt profile shifts away from the dollar).

Here’s how the process happens, step-by-step:

STEP 1: New contract

A new loan agreement (or an amendment) is drawn up between Kenya and the China Exim Bank.

It specifies:

• The remaining balance of the loan (say, US$3.5 billion)

• The conversion rate at the time (e.g. the USD/CNY rate when the agreement is signed)

• The new currency of denomination (yuan)

• The new interest rate (likely lower than before)

STEP 2: Records

The balance is now treated as a yuan-denominated loan.

So Kenya’s debt ledger (and its repayment schedule) now lists amounts in yuan, not dollars.

STEP 3: Payments

Future repayments will be made in yuan.

That means when Kenya pays China, it must source the currency, either:

• From its foreign exchange reserves (if it already holds yuan),

• By converting shillings directly to yuan through the banking system, or

• Through trade, for example, using yuan earned from imports or transactions with Chinese firms.

KENYA'S PLAY

How Kenya Gains

1. Immediate financial relief:

The switch is expected to save roughly $215 million a year, freeing up money that can now now go toward development projects rather than debt repayments.

2. Lower borrowing costs: 

By shifting from floating U.S. dollar loans to fixed yuan loans, Kenya locks in cheaper rates and gains more predictable repayment terms.

3. Less currency exposure: 

Paying in yuan protects Kenya from dollar–shilling swings, helping to ease pressure on forex reserves and keep the currency more stable.

4. Smarter debt management: 

The move marks a shift from passive borrowing to active financial management, restructuring existing debt and spreading repayment risks across currencies.

5. Restored Market confidence: 

It signals to investors and lenders that Kenya is managing its debt more strategically and thinking long-term about stability.

6. Closer China ties: 

It also brings Kenya deeper into China’s financial ecosystem, not just as a borrower, but as part of a growing yuan trade network.

CHINA'S WIN

How China Benefits

1. Expanding the yuan’s reach: 

Every deal like this helps Beijing push the yuan toward becoming a global currency for trade and reserves.

2. Geopolitical leverage: 

China’s influence in Africa is enhanced when its financial systems and currency is embedded more deeply into regional economies.

3. Soft-power diplomacy: 

By offering flexible repayment options, China presents itself as a pragmatic, cooperative lender, a contrast to Western lending institutions.

4. Proof of concept: 

Kenya’s success provides a case study other countries can copy as proof that yuan-denominated arrangements can work in large-scale infrastructure financing.

RISKS AND CONCERNS

Major concerns raised include:

1. Currency risk (yuan vs shilling): 

While the deal reduces dependency on USD, Kenya will now have obligations in yuan. If the yuan strengthens significantly relative to the Kenyan shilling (or if Kenya’s export receipts in yuan are limited), servicing could become costly.

2. Foreign-exchange sourcing: 

Kenya will need to ensure it can acquire enough yuan (or have yuan earnings) to meet the repayments without disrupting its FX reserves or import cover.

3. Hidden terms: 

The detailed terms of the new yuan-denominated loans (maturities, grace periods, spread) were not fully disclosed publicly.

For example, in the announcement, Mbadi did not reveal new interest-rate margins or maturity details.

4. Precedent & market signals: 

While this is hailed as “first of its kind in Africa” for sovereign Chinese loan conversion to yuan, it could set expectations among other indebted countries, and create complexities in the global debt-market and China-Africa lending frameworks.

5. Overall debt burden remains high: 

The conversion addresses a part of Kenya’s external debt challenge, but Kenya remains at elevated risk of debt distress according to IMF and other analysts.

The move doesn’t erase the underlying exposure, structural financial issues, or need for revenue growth.

FINAL THOUGHTS

This deal shows the world that the country is taking control of how it manages its debt, moving away from expensive, unpredictable dollar loans toward a structure that offers more stability.

But it’s not a silver bullet.

The broader debt burden remains large, and the conversion introduces its own currency and sourcing challenges. 

The devil will be in the details of execution, whether Kenya can:

• ensure sufficient yuan flows,

• avoid unintended risks,

• and translate the savings into broader economic benefits.

Still, although the numbers remain the same, the meaning of those numbers just changed.

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