Notwithstanding China’s frequent denial of pushing developing Afro-Asian countries into debt trap, Kenya is the new entrant in the list of defaulting countries. The Chinese banks fined Kenya Ksh1.312 billion ($10.8 million) in the year ended June for loan defaults. Kenya defaulted on repayment of the Chinese loans taken to build the standard gauge railway (SGR). The deal to fund the first phase of the SGR, Kenya’s single-largest infrastructure project by cost since independence, saw China overtake Japan as Kenya’s largest bilateral lender. But the initial jubilation has turned instability
The default came in a year when Kenya had asked for an extension of the debt repayment moratorium from bilateral lenders, including China, by another six months. But the lenders, especially Exim Bank of China, did not entertain Kenya’s application for a debt repayment holiday, causing a standoff that delayed disbursements to projects funded by Chinese loans.
Kenyan President Uhuru Kenyatta in 2017 officially launched the Chinese-built $3.8 billion SGR project and made an inaugural trip on the 472-kilometer (293-mile) railway line.
Since 2014, Kenya has been taking huge loans from China to fund its infrastructure projects such as roads, clean power generation plants, and its biggest project, the Standard Gauge Railway. Kenya’s external debt reached $36.4 billion in June 2022, according to data from the Central Bank of Kenya.
China, which accounted for about one-third of Kenya’s 2021-22 external debt service costs, is the nation’s biggest foreign creditor after the World Bank. Kenya spent a total of Ksh117.7 billion ($972.7 million) on Chinese debt in the period, of which about Ksh24.7 billion ($204.1 million) is in interest payments and almost Ksh93 billion ($768.5 million) in redemptions. Kenya’s Treasury projects debt repayments to Exim Bank of China will raise to $800 million in the next financial year, a 126.61 % surge from the revised $351.7 million budgeted for 2022.
Due to economic slowdown caused by the Covid-19 lockdowns and disruptions Kenya faced a deteriorating cash-flow situation, marked by falling revenues, which worsened its repayment capability and accumulated debt service obligations. The default also highlights the country’s struggle to generate enough revenues from the passenger and cargo services. It is not enough to meet the operation costs, which stood at Ksh18.5 billion ($152.8 million) in the year to June against sales of Ksh15 billion ($123.9 million). China is known for funding economically unfeasible mega projects in developing countries which eventually land them up in a debt trap.
The surge in liabilities left Kenya at high risk of debt distress, according to the International Monetary Fund (IMF). The cost of servicing public debt is poised to jump by a third to a record Ksh1.39 trillion ($11.4 billion) in the fiscal year through June 2023, more than half of projected State revenue. Kenya spent almost 57 % of tax income in the past financial year on repaying loans, according to the Treasury, underlining the effects of the mounting public debt on State finances.
The loan default underscores Kenya’s financial distress in the face of fast-maturing debts that have eaten deep into tax collections and squeezed funds for development projects. Taxpayers in Kenya have been forced to pay back the huge loans owed to China from their pockets as the revenue currently being generated by the SGR falls short of meeting the annual operational costs and also paying back the loans.
While China is a G20 member and a signatory to the debt relief deal it did not extend the debt repayment period despite desperate request from Kenya. Rather it continued with the debt repayment schedule, a large proportion of which has been made on a commercial basis by government agencies, quasi-public corporations and by state-owned banks such as China Development Bank and Exim Bank of China. The terms of China’s loan deals with developing countries are unusually secretive and require borrowers to priorities repayment to Chinese state-owned banks ahead of other creditors.
SGR is the largest capital-intensive infrastructure project ever constructed in the country, but despite this extraordinary expenditure of public funds, the project has been bogged down with controversy and secrecy from its inception. Since information about the project’s financing, tendering process and construction has not been released to the public till date. It is still mired in suspicion.
Now, Kenyans are worried that Mombasa Port was at risk of seizure by China if Kenya could not pay its debts and recent leaks show that any Kenyan asset can be seized.