NAIROBI, Feb 12 (Reuters) -

Kenya was forced to offer a double-digit interest rate on new government bond on Monday so it could to push back until 2031 a $2 billion payment crunch that had been looming in June.

The sale of the $1.5 billion, 7-year bond concluded a frantic debt liability exercise but came at a price, with investors getting a 10.375% yield.

That compared to the 6.875% on the bonds they were replacing and was by some margin the highest rate offered at any sovereign debt sale so far this year.

The banks running the book said the juicy interest rate had meant demand stood at more than $3.6 billion at one point and pushed the final rate down from an originally-floated 11%.

"In theory no sovereign should issue at these levels and given that they have access to concessional lending (from multilateral development banks) really they should be using that," Viktor Szabo, an emerging markets portfolio manager at abrdn said.

"But they had a $2 billion bond maturity in June so they kind of had to. It was probably too big a hole to fill with the multilateral funding."

Kenya's public debt is estimated to have reached 73% of GDP by end-2023, the International Monetary Fund said last month, with debt service consuming about 55% of revenues.

African counterparts Ivory Coast and Benin have also successfully issued new international market bonds this year.

The 10-year, June-maturing bond Kenya is swapping was trading with a yield of 8.95% on Monday, while another 2032 bond was trading at 10.25%, according to Tradeweb data.

The prospects of Kenya successfully resolving the maturing dollar bond has boosted sentiment in the currency market and the shilling currency has posted gains against the dollar since last week.

The news of its return to the market follows the conclusion of an enhanced funding deal with the International Monetary Fund last month.

John Espinosa, Head of EMD at asset manager Nuveen, said the bond buyback had avoided a near-term problem.

Over the medium-term, however, "challenges remain around debt sustainability" he added, explaining that fiscal reforms and interest rates high enough to keep the exchange rate and current account in check were both "vital".

(Reporting by Duncan Miriri and Marc Jones; Additional reporting by Rachel Savage in Johannesburg Editing by George Obulutsa, Ros Russell and Toby Chopra)