Kenya debt to China hits Sh650b as SGR takes up more funds

China’s debt ballooned to Sh650 billion in 12 months to June 2019 after the country raked up more loans from Beijing to fund the Standard Gauge Railway (SGR).

Kenya chalked up an extra Sh97 billion from the Asian nation during this period. The loans included Sh44.7 billion for the second phase of the SGR from Nairobi to Naivasha and a Sh35.2 billion instalment for the first phase of the railway from Mombasa to Nairobi.

This saw China’s stock of debt climb up from Sh553 billion as of June 2018, even as the world’s second-largest economy cemented its position as Kenya’s leading bilateral lender.

Japan, whose debt stock increased by Sh49 billion to reach Sh132.2 billion, remains a distant second.

Japan -- currently hosting African Heads of States, including Kenya’s President Uhuru Kenyatta for the seventh Tokyo International Conference on African Development – TICAD VII -- has been scheming for a way to bounce back since Chinatrounced it as Kenya’s leading bilateral lender.

Japan’s selling point has been “high quality” infrastructure, which it hopes will sway African countries back into its fold. China’s deep pockets that have seen it finance major infrastructural projects, such as Kenya’s SGR, have ensured that Africa remains in Beijing’s tight grip.

China also surpassed the World Bank in 2017 to become Kenya’s leading creditor, after the country inked a Sh327 billion SGR project from Mombasa to Nairobi.

During this period, the World Bank’s debt increased by nearly a similar value to China’s to hit Sh607.2 billion. This is after the global lender approved a $750 million (Sh75 billion) loan to Kenya for budget support towards the end of the 2018/19 financial year.

Meanwhile, Kenya’s stock of expensive loans rose to 36 per cent of the total debt, from 24 per cent in June 2016. However, the fraction of cheap loans from multilateral institutions such as the World Bank declined from 45 per cent three years ago to 30 per cent.

Commercial loans crossed the trillion-mark after the country successfully issued its third Eurobond, a dollar-denominated sovereign bond, from which it raised Sh210 billion. Part of the money was used to refinance another maturing Eurobond while the rest was to be used for budgetary support.

Still sustainable

The net effect of Kenya’s increased appetite for commercial loans has been a spike in interest payments, due to the harsh terms of these loans including shorter repayment period, high-interest rates, and little or no grace period.

However, Treasury has moved to allay any fears over the increasing debt, insisting that the country’s debt is still sustainable. This is despite the International Monetary Fund(IMF) noting that the country’s risk of defaulting on debtrepayment had increased from low to moderate, citing a higher level of debt and reliance on non-concessional borrowing.

“Kenya continues to meet its debt service obligations promptly with no accumulation of debt arrears,” suspended Treasury CS Henry Rotich said in his 2019/2020 Budget speech in Parliament.

“Public debt is within sustainable levels and the debt burden is projected to decline over the medium-term as we implement a fiscal consolidation plan.”

Fiscal consolidation includes a raft of austerity measures aimed at cutting expenditure and increasing taxes to reduce the debtappetite.

However, the government had difficulty sticking to its own austerity plan, borrowing an additional Sh114 billion in the last financial year.

Treasury borrowed Sh770 billion in the 2018/19 financial year that ended in June against an initial target of Sh635.5 billion, or 6.3 per cent of the GDP, as increased wages and interest on loans forced the country back into the debt market.

As such as the country’s fiscal deficit - the difference between revenues and expenditure - increased to 7.4 per cent of GDP, with Kenya’s stock of public and publicly guaranteed debtsurging to Sh5.81 trillion.