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Pressure on taxpayers as SGR loan falls due

SGR
Kenya is gearing up for bigger loan repayments to China as a five-year grace period that Beijing extended to Nairobi for the standard gauge railway (SGR) funds ends. 

Kenya is gearing up for bigger loan repayments to China as a five-year grace period that Beijing extended to Nairobi for the standard gauge railway (SGR) funds ends.

Repayment of the principal loan extended to Kenya for the first phase of the railway project kicks off next month, according to an agreement signed with the Exim Bank of China on May 11, 2014.

This is expected to add to the growing load that the Treasury has to bear considering that it is already servicing interest charges on the loan.

Treasury Secretary Henry Rotich however claimed Wednesday that the repayment of the principal loan for the SGR would commence in January next year.

“I am not aware of any SGR principal payment falling next month. What I know is that it starts in January 2020,” Mr Rotich wrote in a response to queries by the Business Daily.

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“It all depends on when the loan became effective and note that the payments are semi-annual,” he added.

Kenya signed a deal for a $3.233 billion loan (Sh324.01 billion) from China’s Exim Bank, comprised of $1.633 billion commercial loan and $1.6 billion concessional one to build a 385km modern railway between Mombasa and Nairobi.

The loan, whose interest is 3.6 percentage points above the six months average of London Inter Bank Offered Rate (Libor) which serves as an international benchmark, is to be repaid in 15 years with a grace period of five years.

Treasury data tabled in the National Assembly in May last year had shown that principal payments to Exim Bank of China — the main SGR financier — would shoot up to nearly Sh34.8 billion in the financial year 2019/20 from Sh6.07 billion in the last fiscal year, and Sh8.39 billion in 2018-19.

The Sh26 billion increase in the Exim bank principal loan repayments is the clearest indicator that the huge task ahead for the government even as its scramble for raise the revenue it needs to finance key projects, including Agenda Four, as well as its day-to-day operations.

Escrow account

The Exim bank had agreed with the Kenyan government to set up an escrow account that will tap the cash collected from the operations of the railway line to help in repaying the loan.

The two escrow accounts were set up with substantial control of the Exim bank especially at default or when railway revenues fail to meet the loan obligations threshold.

While the revenue account would be in Kenya shillings, the repayment one would be in US dollars. Any costs associated with the running of the accounts would be borne by Kenya Railways.

Early this year, Kenya Railways increased cargo freight charges to collect more revenues, which will be critical in repaying the Chinese lender.

The close to 80 percent increase in cost caused an uproar from manufacturers who felt that the SGR would increase their cost of doing business.

The cost of transporting a 20-foot container from Mombasa to Nairobi was increased to $500 (Sh51,275) from Sh35,000 -- a 46.5 per cent rise -- while hauling the larger 40-foot container was priced at Sh$700 (Sh71,785), from the earlier Sh40,000, reflecting a 79.9 per cent increase.

Sh10.9 billion

The SGR has so far made Sh10.9 billion from cargo and passenger business since it started operating, according to the Kenya National Bureau of Statistics’ economic indicators report released in December 2018.

The government remains upbeat over increased use of the SGR with cargo volumes growing thrice since 2017 and passenger volumes rising close to 50 percent according to the latest Economic Survey 2019 released last week.

“Rail freight traffic more than tripled from 1.147 million tonnes in 2017 to 3.544 million tonnes in 2018, mainly due to introduction of freight transportation services on the Standard Gauge Railway (SGR).

Consequently, revenue from railway freight increased from Sh3 billion in 2017 to Sh9.8 billion in 2018.

Similarly, railway passenger journeys increased by 45 percent from 3.096 million in 2017 to 4.489 million in 2018 while earnings from passenger traffic stream more than doubled to Sh1.7 billion,” says the survey.

President Uhuru Kenyatta’s administration has largely contracted debt from China since 2014 to finance key infrastructure projects including roads, bridges, power plants and the SGR.

The shift was prompted by Kenya’s elevation to a lower middle income economy, which locked her out of highly-concessional loans from development lenders such the World Bank Group.

Kenya was elevated after it rebased its economy.

China’s influence on the country’s infrastructure development started in earnest with construction of the Thika Superhighway between January 2009 and November 2012 at a cost of nearly Sh32 billion during the last term of President Mwai Kibaki.

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