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’
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”.
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”.
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.”
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.
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.
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.
“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.”