Kenya's foreign exchange (FX) reserves dipped sharply by $226 million (Sh26.8 billion) after the National Treasury paid China loans borrowed to construct the Standard Gauge Railway (SGR).
Data from the Central Bank of Kenya (CBK) shows that FX reserves declined to $7.73 billion (Sh918.8 billion) by end of Friday from $7.95 billion (Sh942.9 billion) the previous Friday.
The dollars were enough to pay for the country's imports for 4.46 months, which is below the East African Community region's convergence criteria of 4.5 months of import cover.
On Friday, July 21, the National Treasury was to pay instalments for two loans for the Mombasa-Nairobi leg of the SGR and another for the Nairobi-Naivasha phase of the modern railway amounting to close to Sh30 billion.
The repayment has left a huge hole in the country's reserve of hard currencies, leaving it in a precarious position in terms of meeting its external needs at a time when Kenya is grappling with a dollar shortage.
However, the 4.46 months of import cover met "CBK's statutory requirement to endeavour to maintain at least four months of import cover," said the financial regulator in its Weekly Bulletin.
The reserves are likely to have improved after the Executive Board of the International Monetary Fund approved the disbursement of some $235.6m (Sh28b) to Kenya as part of a programme aimed at helping the country address its debt vulnerabilities.
The SGR is one of the many infrastructural projects that President Uhuru Kenyatta's administration has constructed using debt, which stood at Sh8.56 trillion at the end of May, CBK data shows.
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Speaking during this year's Madaraka Day celebrations at Uhuru Gardens in Nairobi, President Kenyatta hit out at those who have criticised his borrowing 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 $5.09b (Sh600b) for the construction of the two phases of the SGR.
The two loans for the Mombasa-Nairobi phase of the SGR which stood at $1.6b (Sh188.6b) and $2b (Sh235.8b) respectively were signed in May 2014 and had a grace period of seven and five years respectively. The Nairobi-Naivasha loan of $1.5b (Sh176.8b) 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.
The two loans for the Mombasa-Nairobi phase, the $1.6b and $2b, 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 $1.6b 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 $2b 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.
The country's heavy debt burden has spilt over onto the campaign arena, with Kenya Kwanza's Presidential candidate, Dr William Ruto, saying that should he be elected the country's fifth head of state he will not restructure debt.
Instead, Dr Ruto told Reuters, the news agency, that he would publish government contracts with China and deport Chinese nationals working illegally if he is elected on August 9.
Chinese loans, including the SGR have been plagued with opaqueness, with the civil society, fanning all manner of speculations including that the port of Mombasa has been used as collateral for the SGR.
Ruto's main challenger, former Prime Minister Raila Odinga, has however promised to restructure debt should he become president.
Official forex reserves have continued to drop, despite a steady inflow of diaspora remittances from Kenyans living and working abroad.
This has been aggravated by a sharp rise in the cost of inputs in the global market, following the Russo-Ukraine war and increased outflows by foreign investors at the Nairobi Securities Exchange.
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.