Kenya is in talks with China to halve the interest on the standard gauge railway (SGR) loan to three percent through converting dollar-denominated debt used to build the modern rail to yuan and ease the financing burden.
The negotiations, which are at an advanced stage, are aimed at helping reduce the Sh130 billion that Kenya spends annually on servicing its debt to China.
Kenya expects interest rates on the more than Sh500 billion SGR loan to fall to about three percent from 6.37 percent under the current dollar-denominated debt terms.
Treasury Cabinet Secretary John Mbadi said the talks with Beijing are part of the policy shift to diversify the currency composition of foreign debt.
“When the loan is in US dollars, then it is SOFR [Secured Overnight Financing Rate] plus a mark-up, but a renminbi is a fixed rate, which is almost half the rate if we were to apply US dollars. So there is a huge savings there,” Mr Mbadi told the Business Daily on the phone.
“Currently in US dollars, it [interest rate] comes to more than 6.0 percent because it is SOFR at about 4.6 percent plus two percent, but with renminbi it is about 3.0 percent.”
Kenya, which the International Monetary Fund (IMF) classifies at high risk of debt distress, has been taking steps to tackle its loans since public finances came under severe pressure in 2024, when anti-government protests forced President William Ruto’s administration to withdraw the Finance Bill with Sh345 billion in new taxes.
The SGR loans, secured under the previous administration of Uhuru Kenyatta, were dollar-denominated and with two floating interest rates which were reportedly set at 3.6 or 3.0 percent above the average London Interbank Offered Rate (Libor) — a global benchmark retired in June 2023 and replaced by SOFR.
SOFR, a measure of the cost of borrowing cash overnight collateralised by Treasury securities, is a global benchmark used by global lenders to influence loan costs.
The benchmark interest rate stood at 4.37 percent on Thursday from 5.4 percent last year and 1.71 percent in January 2020 when Kenya started repaying the SGR loans.
Churchill Ogutu, a Nairobi-based economist for IC Group, said Kenya is most likely looking to switch from commercial to concessional loan terms as an end-game in the ongoing engagement with China.
That will also mean extending the maturities of the SGR loans, discussions which Mr Mbadi said were currently not on the table but did not rule out that possibility in future.
“Unlike the debt servicing of the USD [US dollar]-denominated debt which is in variable rate (SOFR plus premium), the government would want to switch to a fixed interest rate payment. I think this is what is giving authorities the confidence that the debt service costs ‘will halve’ under a Yuan-denominated currency,” Mr Ogutu said.
“Broadly, the government is trying to diversify away from USD-denominated foreign debt. But given the widespread USD usage as a reserve currency, it is likely there will be some underlying currency swap to enable the eventual debt servicing of the outsized Yuan-denominated debts.”
Servicing of the SGR loans, which is done in January and July, is one of the biggest burdens on taxpayers, with repayments to China accounting for more than three-quarters of the annual spend on bilateral debt repayments.
The Treasury has a budget for Sh129.90 billion towards repayment of loans contracted from China this financial year ending June 2026, comprising Sh95.64 billion in principal and Sh34.26 billion in interest costs. A large share of these repayments are for the SGR debt.
This is largely unchanged from Sh129.35 billion in the year that ended in June, made up of Sh88.61 billion in redemption and Sh40.74 billion for interest expenses.
The ongoing talks with China will affect the interest costs.
Kenya constructed nearly 700 kilometres of the SGR line between Mombasa and Suswa near Naivasha under the previous administration, with Exim Bank of China funding about 90 percent of the estimated initial cost of $3.75 billion (about Sh484.87 billion under prevailing exchange rate), excluding interest cost.
This saw China become Kenya’s biggest bilateral lender.
The modern railway line was initially planned to run up to the Ugandan border at Malaba town, but terminated at the sleepy Suswa area after China demanded that Kampala commit to construct its section before funding for the third phase could be released.
The Ruto administration has since opened talks with Chinese authorities to secure funds for the extension of that railway line to the border with Uganda.
Freight services were the main economic justification for the SGR project, whose funding for the first phase was secured in May 2014.
The SGR line has, however, struggled to hit targeted cargo volumes, with importers balking at the tariffs to transport goods from the Port of Mombasa to the Inland Container Depot (ICD) in Nairobi and Suswa for consignment largely destined for western Kenya and neighbouring countries like Uganda and Rwanda.
“Although the repayment of the SGR loans has been onerous, there should have been far greater concern about the railway’s inflated construction costs and its consistent failure to generate revenue despite government intervention to mandate cargo traffic,” Fergus Kell, a research fellow at London-based Chatham House, wrote in a past note.
“This is a legacy of poor Kenyan decision making and a planning process driven more by short-term electioneering than strategic need. Chinese lending was one component of a surge in borrowing under the Kenyatta administration.”
