The International Monetary Fund (IMF) has just issued a warning about exchange rate risks for Kenya and Ethiopia after the two countries implemented a partial swap of loans from the US dollar to the yuan (CNY).
The move is said to be aimed at reducing financial costs, but the IMF believes that such swaps could create new weaknesses in the national debt structure.
On October 7, 2025, Kenya completed converting loans for the 646.15 billion Kenyan shilling (equivalent to about 4.2 billion USD) standard railway project from USD to CNY.
Finance Minister John Mbadi said that this move helps Kenya save about 180 million USD/year by reducing interest rates in USD.
This conversion also helps Kenya diversify its foreign debt portfolio, reduce dependence on the USD and limit the impact of international interest rate fluctuations.
Two weeks later, Ethiopia began negotiations with China to convert a portion of the debt worth 695.23 billion Kenyan shilling (equivalent to about 4.5 billion USD) to the people's yuan. Addis Ababa expects this to reduce financial costs and further tighten trade relations with Beijing.
In a statement to Bloomberg on November 11, 2025, an IMF spokesperson said that foreign currency exchange is a proactive approach to debt management, but stressed that its effectiveness depends on the structure and ability to control exchange rate risks.
Such deals could help reduce costs, but could also pose monetary risks if not designed in a long-term strategy, the IMF representative said.
The IMF recommends that countries should integrate currency swapping activities into medium-term debt management and reserve strategies to ensure a balance between costs and risks.
Kenyan's move comes as Western creditors - including the IMF and the World Bank (WB) - have expressed concern that the country is using US dollar-denominated preferential loans to repay China's debt rather than investing in domestic projects.
Kenyan President William Ruto's economic adviser, David Ndii, revealed that multilateral financial institutions had questioned why they should continue to support Kenyan while much of the money was flowing into Chinas debt payments.
This pressure, according to Mr. Ndii, is one of the factors that made Kenya decide to restructure debt and switch to yuan.
By March 2025, Kenyan's total foreign debt will be about 32 billion USD, of which 4.2 billion USD is China's debt. Payments to Exim Bank of China account for about 1/4 of the total cost of foreign debt repayment.
By transferring a part of the loan to the yuan, Kenya has reduced annual interest rates and extended repayment terms, thereby freeing up more resources for priority domestic sectors.
In fact, the Kenyan shilling in 2025 will remain a rare stabilization against the USD, thanks to strong foreign exchange reserves, abundant exchange rates and a tight monetary policy. However, this stability, according to the IMF, could weaken the ability to operate monetary policy and control inflation if bound by complex swap agreements.
