Kenya has been forced to raise the budget for servicing bilateral loans to China by 36 percent on the back of rising interest rates and the sliding value of the shilling, shining a spotlight on the terms of the credit Nairobi signed with Beijing.
Treasury Cabinet Secretary Njuguna Ndung’u is seeking approval from lawmakers to raise the estimated repayments towards loans contracted from China to Sh152.39 billion from Sh112.39 billion in the initial budget in June.
The Treasury has attributed the jump of Sh40 billion or 35.59 percent to rising interest rates in the global environment at a time the shilling is also shedding its value due to what the Central Bank of Kenya links to years of overvaluation to the tune of 25 percent.
The revised numbers contained in the Supplementary Budget tabled in the House in late October, show that interest repayments to the Exim Bank of China this financial year ending June 2024 has more than doubled in space of months.
Exim Bank of China-funded about 90 percent of Sh566.12 billion Kenya spent on building the nearly 700 kilometres of the Standard Gauge Railway (SGR) from the port city of Mombasa to Suswa near Naivasha — nearly 100km northwest of Nairobi.
The SGR funding was in addition to other loans Kenya took to construct some of its roads and other infrastructure.
“[The increase in repayments to Exim Bank of China is due to] exchange rate depreciation and interest rate revision on floating rate,” Dr Haron Sirima, the director-general for the Public Debt Management Office at the Treasury, told the Business Daily.
“Note that China is the leading bilateral creditor. Most Exim Bank loans get fully paid this FY[financial year ending June 2024].”
The SGR loans are denominated in US dollars and two have floating interest rates, set at either 3.6 or three percent above the London Interbank Offered Rate (Libor) average.
The average 12-month US dollar Libor stood at a record of 5.85 percent in June 2023, when it was last published, marking its end as a global benchmark, a sharp climb from 0.2 percent lows in November 2019.
The rise in interest rates across the world — technically known as global monetary tightening— since early last year has increased the burden of servicing loans to Exim Bank of China.
This has been compounded by a 20 percent fall in the value of the shilling against the globally-bullish dollar year-to-date.
The revised Treasury estimates show interest repayments to the Exim Bank of China have surged to Sh51.94 billion for the current year from Sh22.95 billion originally budgeted, a 126.33 percent bump.
The redemption amount, on the other hand, has bumped 12.35 percent, or Sh10.99 billion, in the revised budget to Sh99.96 billion.
This means servicing of debt contracted from the Chinese State-owned lender is projected to rocket 35.71 percent to Sh151.91 billion from Sh111.93 billion in the budget approved in June.
The Treasury lists further principal repayments of Sh486.91 million to China, a 5.46 percent rise over Sh461.71 million earlier budgeted.
Kenya under the administration of former President Uhuru Kenyatta largely took loans from China to build roads, bridges, power plants and the SGR in a bid to spur economic activities and create jobs.
That borrowing binge started around 2014 after Kenya became a lower-middle income economy, limiting her access to highly concessional loans from development lenders such as the World Bank Group.
The Treasury report shows China’s total debt stock has, however, been declining in the post-Covid era largely on account of reduced new borrowing and repayments of principal amounts.
Kenya owed China $6.27 billion at the end of the last financial year in June, the smallest volume since $6.01 billion in March 2019 after peaking in June 2021 at $7.06 billion.
The drop is in line with Beijing’s cautious approach to lending to Kenya and Africa in the post-Covid era amid warnings that key economies on the continent were facing a multitude of debt tripwires in the wake of a protracted global economic turmoil and could default on payments.
That slowdown in investment in Africa’s infrastructural projects came after a few countries like Angola and Ethiopia struggled to honour obligations, while Zambia defaulted.