G20 derails Kenya’s push for China debt relief deal

Kenya’s efforts to secure debt relief from China have stalled after Beijing raised concerns about its membership of the group of 20 major economies or G20 that has attached tough conditions for freezing loan repayments by poor nations.

Treasury Cabinet Secretary Ukur Yatani said the talks for debt relief to free up funds to fight the Covid-19 pandemic have delayed on China’s request to strike a deal with Kenya once the G20 debt relief lapses.

The Chinese reckon they are part of the G20 initiative and would not want to be seen doing separate deals with individual countries such as Kenya, which had Chinese loans worth Sh693 billion in December.

The G20 in April agreed to suspend payment obligations on bilateral debt owed by their least developed counterparts through the end of the year.

Tanzania, Uganda, and Burundi are among the countries that have asked for G20 debt relief.

Kenya initially turned down the G20 initiative, saying the terms of the deal were too restrictive and it also fretted on the impact that debt relief might have on Kenya’s credit rating.

Nairobi was, for instance, concerned that terms of the deal limiting countries’ access to international capital markets during the standstill could hinder Kenya’s ability to finance its deficit later in the year.

This prompted Kenya to instead engage creditor countries including China individually with the goal of securing moratoriums on debt service payments lasting around a year with little conditions.

But the country has made a U-turn and is now seeking the G20 offer amid delays in closing a deal with Beijing.

“We are still weighing the G-20 offer of the debt relief. Additionally we are directly engaging individual bilateral partners, including China for a debt moratorium,” Mr Yatani said in an interview with the Business Daily.

G20 debt relief has the potential to save Kenya Sh85 billion ($802.6 million) in debt servicing this year. The G20 initiative only covers official bilateral debt, though it calls for the voluntary participation of private lenders on comparable terms.

Mr Yatani argued that Kenya can only be part of the G20 initiative if private lenders like the Eurobond type are part of the debt relief efforts.

Eurobond terms indicate that non-payment of Kenya’s external debt, including seeking moratoriums, would be considered as defaulting, which could trigger a demand for the country to pay the entire Eurobonds worth $6.1 billion (Sh652.7 billion).

A third of Kenya’s Sh3.2 trillion external debt is owed to private creditors including holders of the country’s Eurobonds.

China is Kenya’s largest bilateral lender at Sh691 billion as at last December with more than half of loans attached to the construction of the standard gauge railway (SGR).

This year alone, the Treasury is seeking Sh95 billion in interest and principal instalments to pay off loans from the Chinese government, Chinese Exim Bank and the China Development Bank.

Kenya has turned to China over the past few years for funds, technology and equipment to develop its infrastructure, including the SGR.

The railway opened in 2017 links Mombasa to Nairobi and is the country’s biggest infrastructure project since independence.

Critics accuse President Uhuru Kenyatta’s government of saddling future generations with unbearable debt burdens by borrowing more funds from China.

The government says borrowing to build the infrastructure will spur economic development.

Kenya’s debt to China stood at Sh80.9 billion in 2014, the first year of Mr Kenyatta’s presidency, before ballooning to Sh693 billion in December, representing a 766 percent growth.

China has, however, sought to allay fears that its infrastructure projects overload some countries with debt.

The Covid-19 pandemic has caused the government’s budget deficit to swell to 8.2 percent of GDP in the financial year to the end of June, from an initial forecast of under seven percent, mainly due to reduced tax collection and foregone revenue in the form of VAT and income tax cuts.

But the deficit is projected to narrow to 7.3 percent - equivalent to Sh823.2 billion - in the 2020/21 fiscal year and to 4.2 percent of GDP by 2023/24, Treasury data indicates.

Moody’s downgraded Kenya’s outlook to negative from stable on May 7, citing the shock caused by the Covid-19 pandemic to its tourism industry and farm exports.