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The new Kenyan government has signalled it plans to renegotiate repayment of Chinese loans used to finance the Mombasa-Nairobi railway. Photo: Xinhua

In an about-face, Kenya’s new government signals intent to renegotiate Chinese loans

  • Kenya’s new president, William Ruto, had said during his campaign that he would not go ‘anywhere near restructuring debt’
  • But his transport secretary nominee says that current repayment terms are not favourable and the country is ‘choked by loans’
Kenya’s new administration has signalled that it plans to renegotiate Chinese loans for the debt the country took on to build a major railway and seeks to extend the repayment period to up to 50 years.

If so, this would be a reversal from a stance that Kenya’s new president, William Ruto, took during his campaign this summer, saying the country had the capacity to handle its debt situation and that his administration would not go “anywhere near restructuring debt”.

Kipchumba Murkomen is Kenyan President William Ruto’s nominee for transport secretary. Photo: AFP

Still, on Wednesday during his confirmation hearing, Transport Secretary-designate Kipchumba Murkomen told lawmakers that while Kenya, which is staring at a debt crisis, had not defaulted on its loans, the current repayment terms were not favourable and the country was “choked by loans”.

Kenya is at high risk of debt distress and cutting the debt burden is part of a 38-month programme supported by the International Monetary Fund. The situation has been worsened by the effects of the coronavirus pandemic and the depreciation of the Kenya shilling.
Murkomen said Kenya would seek an extension of the repayment period especially for the loans to build the Standard Gauge Railway, which runs from the coastal port city of Mombasa to the capital Nairobi with an addition to Naivasha, a town in the Central Rift Valley.


Kenya opens massive US$1.5 billion railway project funded and built by China

Kenya opens massive US$1.5 billion railway project funded and built by China
The project was financed and built by China as part of its Belt and Road Initiative and is operated by the state-owned China Road and Bridge Corporation.

Murkomen said the country was disposed to continue paying the loans but “we should be willing, led by the president, to renegotiate the loan period if we manage to move the loan period even to 50 years”.

The previous administration of Uhuru Kenyatta made “a strategic decision” in 2014 “to invest in the infrastructure and the government of Kenya pays within 15 to 20 years”, said Murkomen, who was nominated after Ruto took office last month.

“Now we are choked with loans because we are paying US$80 million per year to the lenders for the SGR.”

Even in 50 years, [the Standard Gauge Railway] will never break even
Kipchumba Murkomen, Kenyan transport secretary nominee

The Kenyatta administration is accused of excessive borrowing to finance mega projects including highways, ports and airports. Kenya’s debt stood at US$70.8 billion in June, equivalent to two-thirds of Kenya’s gross domestic product, according to the National Treasury. China accounts for one-third of Kenya’s external debt.

Kenya’s treasury projects the country will spend about US$800 million in the next financial year on debt repayments to the Export-Import Bank of China, up from US$351.7 million budgeted for this year. Redemptions to Exim will increase to US$605.16 million next year, from US$174.98 million this year.

The Chinese embassy in Nairobi did not immediately respond to requests for comment on the debt and railway issues.

Can Kenya keep importers happy and repay loans on China-funded railway?

In 2014, Kenya took two loans worth US$3.2 billion – one commercial and the other concessional, each for US$1.6 billion – from Exim to build the Mombasa-Nairobi phase of the Standard Gauge Railway.

The 20-year commercial loan came at an interest rate of 360 basis points (or 3.6 per cent) above Libor – the London Interbank Offered Rate – plus other fees.

The concessional loan has a grace period of seven years with a 20-year repayment plan at 2 per cent annually, plus fees.

The loan, though, did not take into account the depreciation of the Kenyan shilling. In 2014, the exchange rate was about 90 shillings per US dollar. The exchange rate now is 121 shillings to the dollar – meaning Kenya is spending about a third more to pay off its debts which, like most China loans, is US-denominated.

Kenya has also borrowed US$1.5 billion from China to extend the railway from Nairobi to Naivasha. However, that extension has another problem: the plan was to extend the line further to Malaba on the border with Uganda, but Beijing has called for a feasibility study before it will release any funds.

Kenya’s outgoing president Uhuru Kenyatta (left) hands President William Ruto a sword during the swearing-in ceremony in Nairobi on September 13. Photo: SOPA Images via ZUMA Press Wire/dpa

Murkomen said the Kenyatta administration erred by taking short-term debt to fund long-term projects; the railway, for example, has yet to turn a profit. “It becomes impossible to be able to pay that loan from revenue that comes from the railways,” he said. “Even in 50 years, it will never break even.”

Kenyatta had tried to guarantee the railway some revenue by requiring importers to transport their cargo via the trains. When President Ruto assumed power in September, he removed that requirement – and the railway now must compete with truckers for customers.

At the same time, the Nairobi and Naivasha container terminals lacked last-mile connectivity, forcing importers to pay more to move their cargo.

A report by Oxford Economics Africa found that “rescheduling of project loan terms may be politically painful, but a default would be far worse for Kenya”.

Additionally, during the campaign, Ruto had vowed to make public all government contracts with China. He also threatened to deport foreign nationals, including Chinese, who were working in the country illegally.

Kenya on edge as presidential election outcome sparks protests

“If the latter statements were to materialise, then Kenya will be taking steps to sour the strategically important relationship – China is the nation’s largest foreign creditor,” Shani Smit, an economist at Oxford Economics Africa, said.

“A souring relationship with China would mean that Kenya will need to step up its game in terms of structural reforms, especially since the nation will have to secure Western funding to plug the potential financing gap left by the Asian giant. Restructuring project loans will also be more challenging if Kenya’s relationship with China is being compromised.”