Debt repayment of Sh50.9 billion ($409.9 million) for the Standard Gauge Railway (SGR) in mid-January coincided with the beginning of a major drop in Kenya’s foreign exchange reserves.
An external debt repayment tracker by the World Bank shows that Kenya paid interests and principal of Sh15.4 billion ($124.4 million) and Sh35.4 billion ($285.4 million) respectively in January, a period when most of the payments for the SGR fall due.
Disclosure by the National Treasury shows that SGR loans are repaid to the Exim Bank of China, a State-backed lender that funded the modern railway, in semi-annual instalments on January 21 and July 21.
Loans for the first phase of the SGR from Mombasa to Nairobi were given in two tranches.
The first tranche for the first phase was Sh259.7 billion ($2.003 billion), repayable in semi-annual instalments commencing July 21, 2019, and ending January 21, 2029.
There was a second tranche of Sh207.4 billion ($1.6 billion) that is also to be repaid semi-annually starting July 21, 2021, and ending on January 21, 2034.
The third loan for the construction of the second phase of the SGR from Nairobi to Naivasha is Sh192.2 billion ($1,482,745,029.43) that was to be repaid in 30 instalments from January 21, 2021, to July 21, 2035.
The data shows that at the time the SGR repayments were to be made, the country’s stock of dollars and other foreign assets—dropped sharply from $7.38 billion (enough to cover 4.13 months of import) on January 19 to $7 billion (enough to cover just 3.92 months of imports) on January 26.
“Based on the World Bank data, which is quite granular, it is evident that external debt servicing costs to China were outsized in January and that explains the drop in FX in mid that month,” said Churchill Ogutu, an economist at Mauritius-based IC Group.
The Treasury and the Controller of Budget did not respond to our questions on the SGR loan repayment.
Since then, the country’s forex has been on a free-fall touching a low of $6.57 billion (3.67 months of import cover) as of March 9 as the country grapples with a biting dollar shortage owing to the rise in the cost of critical raw materials such as fuel and dismal export earnings.
China is Kenya’s largest bilateral lender, having extended to the country a total of Sh847.5 billion by end of December last year, with a big chunk of this being loans for the SGR, which runs from Mombasa through Nairobi to Naivasha.
In total, Kenya borrowed Sh656.1 billion ($5.1 billion) in three tranches for the construction of the two phases of the SGR, with the repayments being made twice a year on January 21 and July 21.
The World Bank data shows that another peak of debt repayment to China will be in July when the National Treasury is expected to settle close to Sh46 billion (Sh356.4 million).
High debt service costs are one of the reasons that have contributed to the drop in the country’s stock of dollars, with global rating agencies Moody’s and S&P reviewing Kenya’s outlook to negative, signalling a possibility of lowering in the next 12 months should the country’s external position not improve.
“The negative outlook reflects heightened risks to Kenya’s debt servicing capacity due to constrained international market access and undersubscribed domestic issuances,” said S&P Global rating.
Wahoro Ndoho, chief executive of Euclid Capital and former director of public debt management, agreed that as Kenya’s largest bilateral lender, debt repayments to China can leave a big hole in its stock of hard currencies.
“The killer though is the upcoming Eurobond maturities. As bullet payments they are heavy,” said Ndoho.
By end of June 2024, Kenya is expected to make a bullet payment of $2 billion (Sh245 billion) for a maturing Eurobond amid tightening liquidity in the global financial market.
The dollar shortage is also set to worsen as listed multinationals and firms with significant foreign shareholding start dividend payments to their foreign shareholders.
The government uses the forex reserves for repayment of external loans as well as importing critical goods such as drugs and fertilizer from the global market.
Since July, forex reserves have been below the desired 4.5 months of import cushion recommended by the seven-nation East African Community (EAC) trading bloc.
