Kenya will repay China close to Sh30 billion this month for the three loans borrowed to construct the Standard Gauge Railway (SGR).
Data from the National Treasury shows that Kenya will pay instalments for two loans for the Mombasa-Nairobi leg of the SGR and another for the Nairobi-Naivasha phase of the modern railway.
The repayment is likely to leave a huge hole in the country’s foreign exchange (forex) reserves, which by Friday stood at $7.98 billion (Sh940 billion), or enough to cover the country’s imports for 4.74 months, data from the Central Bank of Kenya (CBK) shows.
It also comes at a time when the huge debt burden has been turned into campaign fodder a month to the General Election.
This is even as the country continues to grapple with a dollar shortage that has been aggravated by a sharp rise in the cost of inputs in the global market, following the Russia-Ukraine war and increased outflows by foreign investors at the Nairobi Securities Exchange.
Official forex reserves have continued to drop, despite a steady inflow of diaspora remittances from Kenyans living and working abroad.
It has been even tougher for forex dealers — commercial banks and forex bureaus — with their net foreign assets, the difference in a country’s external assets and liabilities, remaining negative since May 2020.
The SGR is one of the many infrastructural projects that President Uhuru Kenyatta’s administration has constructed using debt, which stood at Sh8.47 trillion at the end of April.
Speaking during this year’s Madaraka Day celebrations at Uhuru Gardens in Nairobi, President Kenyatta hit out at those who have criticised his borrowing frenzy for the last 10 years.
Instead, he defended his administration for achieving a lot “using other people’s money”.
“The only time that debt is a burden to a nation is if the nation is led by a cabal of looters. But in the hands of a visionary administration, debt is a catalyst for rapid development,” he said.
All three loans for the SGR were procured from China Exim Bank and denominated in dollars. In total, Kenya borrowed close to $5.09 billion (Sh600 billion) for the construction of the two phases of the SGR.
The two loans for the Mombasa-Nairobi phase of the SGR which stood at $1.6 billion (Sh188.6 billion) and $2 billion (Sh235.8 billion) respectively were signed in May 2014 and had a grace period of seven and five years respectively. The Nairobi-Naivasha loan of $1.5 billion (Sh176.8 billion) had a grace period of five years, having been signed in December 2015.
All these are to be repaid semi-annually on January 21 and July 21, with the interest rate calculated above the six-month London Interbank Offered Rate (Libor) rate. Libor is the benchmark interest rate at which major global banks lend to one another in the international inter-bank market for short-term loans.
Currently, the six-month Libor rate for dollars, which will come to an end next year, is estimated at 2.88 per cent. The $2 billion loan was to be repaid at an interest rate of 3.6 per cent above the six-month Libor, which puts its interest rate at 6.4 per cent.
The two loans for the Mombasa-Nairobi phase, the $1.6 billion and $2 billion, are to be repaid in 13 and 10 years respectively while that for the Nairobi-Naivasha phase of the SGR was to be repaid in 15 years.
Repayment of its principal was to start in January 2021, while that of the $1.6 billion was to start in July of the same year. On July 21, 2019, two years after the Mombasa-Nairobi SGR began operations, Kenya began repaying the principal for the $2 billion for the same leg of the 472.3-kilometre modern railway.
“Concerned about debt distress, Kenyan officials have expressed interest in restructuring the SGR loans,” according to a new working paper by scholars from Johns Hopkins University.
In the 2021-22 financial year, Treasury restructured Chinese loans worth Sh28 billion, in what was aimed at giving Kenya some breathing space.
This followed the adverse effects of the Covid-19 pandemic that disrupted international travel and global supply chains, thus reducing tourism and export earnings.
China is the largest bilateral lender to Kenya, with an outstanding debt stock of $6,835.3 million (Sh817 billion) by end of March this year, according to data from Treasury.
In the current financial year, Kenya is expected to repay China close to Sh107.9 billion, with a big chunk of the repayment being for the three SGR loans.
Treasury in April 2022 projected that Exim Bank will be paid Sh24 billion, a figure that is likely to rise due to the weakening of the Shilling against the dollar.
With reduced earnings from tourism and exports, the country has relied a lot on diaspora remittances and debt inflows from multilateral institutions such as the World Bank and the International Monetary Fund (IMF) to replenish its forex reserves.
Kenya is expecting $244 million (Sh28.8 billion) from the IMF this month as part of a Sh275.9 billion arrangement it has with the Washington-based institution.
This disbursement, which has been delayed because the IMF’s executive board is yet to meet, will help Kenya refinance some of the Chinese loans.
In the financial year ending June 2021, Treasury refinanced Chinese loans valued at Sh17.5 billion.
Most of the loans from Exim Bank of China are repaid twice a year, on January 21 and July 21.