The International Monetary Fund has cautioned Kenya and Ethiopia over the rising financial risks tied to their recent decisions to convert portions of their Chinese loans from US dollars into Chinese yuan, warning that the strategy—while lowering immediate borrowing costs—may expose both economies to new layers of currency volatility.

Kenya completed the shift on October 7, converting its Ksh646.15 billion Standard Gauge Railway loan into yuan. Treasury Cabinet Secretary John Mbadi said the move would save the government about Ksh27.78 billion annually, thanks to lower CNY-denominated interest rates and extended repayment terms.

Ethiopia followed two weeks later, entering talks with Beijing to convert part of its Ksh695.23 billion debt into yuan as it battles a severe foreign-exchange crunch and a protracted restructuring process under the G20 Common Framework.

---

IMF Cautions on Currency Risk

In a November 11 statement to Bloomberg, an IMF spokesperson said the Fund sees currency swaps as “proactive debt management tools,” but added that their benefits depend heavily on structure and execution.

“While these transactions may lower costs, they can also introduce currency risks,” the spokesperson said. “Countries should approach such operations within medium-term debt and reserve management strategies, ensuring an appropriate balance between cost and risk.”

For Kenya and Ethiopia, the Fund’s warning highlights a growing concern: yuan-denominated debt may ease near-term pressure but could magnify exposures if the shilling or birr weakens against the yuan—a currency managed by the People’s Bank of China and less predictable than the dollar.

---

Western Lenders Raise Questions

Kenya’s move comes as multilateral lenders increasingly press Nairobi over its handling of Chinese debt. President William Ruto’s economic adviser, David Ndii, said the World Bank and IMF questioned why their concessional loans were being used to settle Chinese obligations rather than fund domestic priorities.

“They asked why they ought to help us while other lenders were taking out the money,” Ndii said, adding that Western pressure played a role in Kenya’s decision to restructure the SGR loans.

The conversion relieves some of Kenya’s fiscal stress. External debt stood at Ksh5 trillion in March, with China accounting for more than Ksh646 billion. Payments to the Export-Import Bank of China represented roughly a quarter of external debt servicing costs this year.

---

Cost Relief, New Vulnerabilities

By swapping into yuan, Kenya lowered its annual interest bill and diversified its currency exposure, reducing reliance on the US dollar. Ethiopia hopes to achieve similar savings as it negotiates a broader restructuring that includes large state-owned enterprise debts and infrastructure loans.

But the IMF warns that the benefits could reverse quickly if global financial conditions shift. The Kenyan shilling has remained unusually stable in 2025—supported by strong remittances, improving reserves and tighter monetary policy—but the Fund notes that such stability may complicate policy transmission and mask underlying pressures.

Unlike the dollar, yuan-denominated debt requires countries to adjust their reserve portfolios or rely on China for liquidity lines, potentially increasing dependence on Beijing’s financial system.

---

A Broader Shift in Africa–China Finance

The pivot by Kenya and Ethiopia is part of a wider trend across emerging markets as borrowers seek to hedge against US rate cycles and reduce dollar-linked repayment burdens. For Beijing, expanding yuan-based lending deepens its financial footprint in Africa and advances its ambition to internationalize the currency.

For the IMF, the concern is not the yuan itself—but the speed and scale of exposure among countries already facing high debt distress.

“The issue is risk concentration and reserve adequacy,” said a senior African debt analyst who tracks multilateral negotiations. “You’re swapping one dependency for another.”

---

Whether the strategy pays off will depend on how the yuan trades over the next several years and on each country’s ability to maintain macroeconomic stability. A stronger yuan would raise repayment costs, while local currency weakness could erode expected savings.

For now, both governments view the swaps as a pragmatic response to tightening external conditions. The IMF’s warning signals that the global repercussions—and the geopolitical implications—are only beginning to unfold.