The Covid-19 pandemic and uncertainties over the global economy have triggered a reshuffle in Kenya’s debt mix, with China’s portion lagging behind that of multilateral institutions like the World Bank and the International Monetary Fund (IMF).
A high risk of distress in several African countries such as Kenya has spooked China, which lends to countries through its China Exim Bank.
However, the multilateral institutions, all of them based in Washington, USA, have come to the rescue of African economies which are grappling with shocks related to the Russia-Ukraine war and the hike of interest rates by central banks in advanced economies.
The multilateral institutions have forked out billions of ‘rescue loans’ to Kenya, pushing their share of debt by more than a third to $17.9 billion (Sh2.25 trillion) last December from $13.7 billion (Sh1.72 trillion) in the same month in 2020.
The World Bank is the country’s leading multilateral lender, having extended to Kenya a total of $11.3 billion (Sh1.4 trillion) by last December.
This is an increase from Sh1.2 trillion in December 2020, nine months after the country recorded its first case of coronavirus, which battered its stock market as foreign investors fled to the safety of US Treasury bonds.
The World Bank, which hitherto gave project loans mostly to help with the alleviation of poverty and reducing inequality, has been extending credit directly to the Treasury for budgetary support through the Development Policy Operation (DPO).
In March, the bank approved a $750 million (Sh94.3 billion) DPO that is expected to strengthen fiscal sustainability through reforms that contribute to greater transparency and the fight against corruption.
This was the second DPO in a two-part series of development operations initiated in 2020 to provide low-cost budget financing along with support to key policy and institutional reforms, said the World Bank in a statement.
“The World Bank is doing what it’s set up to do: wait with a ‘rungu’ (baton) at the other end,” said Wahoro Ndoho, an economist and past director-general of Public Debt Management for the Treasury.
"It is the same thing with the IMF, which was invited by the Kenyan government to help it deal with a dollar shortage crisis as foreign exchange reserves have dwindled even as the country finds it difficult to raise money in the international financial market."
As the financial crisis deepened, global rating agency Fitch in mid-December 2020 downgraded Kenya’s credit rating to ‘B’ from ‘B+’ pointing to increased risks of default occasioned by tighter liquidity in light of elevated repayments.
Then there is the IMF which has also cranked up its lending to Kenya, although that has mostly been tied up to the latter improving its finances by cutting non-essential spending and corruption and increasing tax revenues.
IMF’s share of loans has risen from around $1 billion (Sh125.7 billion) in December 2020 to $2.9 billion (Sh366.5 billion) in December last year.
Dr Oscar Otele, a lecturer at the University of Nairobi and a researcher on China-Africa relations, reckons that Beijing is not only recalibrating its affairs with the continent, but it is also trying to come to terms with its own challenges that were aggravated by the pandemic.
“If you see that through the Covid-induced circumstances, that affected the Chinese economy the economy actually contracted,” said Dr Otele, adding that as a result of the crippling effects of the outbreak, Beijing has adopted a cautious strategy.
China’s orientation in Africa, he said, has been shifting away from the financing of mega infrastructural projects to new challenges.
“Infrastructural projects used to take a lot of money,” said Dr Otele.
Chinese President Xi Jinping reinforced that caution in a video speech at the triennial Forum of China-Africa Cooperation held in Senegal in November 2021.
Over the next three years, the Chinese president said, the country would cut the headline amount of money it supplies to Africa by a third to $40 billion.
Chinese lending, he implied, would be redirected away from large infrastructure towards a new emphasis on SMEs, green projects and private investment flows.
For the first time, China did not advance money to Angola, perhaps China’s biggest debtor in Africa, in 2021 and 2022, pointing to a trend of falling Chinese lending to Africa in the recent past, according to a report by Green Finance and Development Centre, which is part of the Fanhai International School of Finance at Fudan University in Shanghai.
Chinese lending to sub-Saharan Africa dropped by 54 per cent last year, the report noted.
The standard gauge railway (SGR), Kenya’s largest project that was financed by the China Exim Bank, took over Sh600 billion. The modern railway runs from the port city of Mombasa through Nairobi to Naivasha.
The planned extension of the SGR from Mombasa to Malaba, the border town with Uganda, has never taken off, amidst speculation that China has refused to finance it.
Chinese loans to Kenya dropped for the first time in 15 years as Beijing adopts a more cautious approach to lending in Africa where some nations have reached the limit of their borrowing capacity and the prospect of default looms.
Nairobi has been a major beneficiary of China’s loans for the development of mega infrastructure such as roads and the modern railway over the last decade, making Beijing the largest bilateral creditor since 2015.
The increase in Chinese lending to Kenya came at a time when the country had difficulty accessing cheap loans from the World Bank after it graduated into a low-middle income country in 2015 after it rebased its economy.
However, China's recent decision to scale back suggests it might have difficulties recovering the billions it has been extending to African countries.
“China now realises how weak it is that it can’t impose its will on anyone abroad, including debt repayments,” said Ndoho.