Despite recent claims of a Chinese state-linked hacking team carrying out systematic cyber-attacks on Kenyan government institutions being denounced by Kenya’s Ministry of Interior as ‘sponsored propaganda’, Kenya’s debt burden to China is under scrutiny once again as the alleged attacks were reportedly driven by a desire to assess the status of repayments.
It is true that lending by China surged in the early years of the Uhuru Kenyatta administration from 2013-2022 – while current president William Ruto was serving as deputy – dominated by $5.3 billion in three loans from China EXIM Bank for the construction of a standard gauge railway (SGR) project connecting the port of Mombasa with the capital Nairobi.
The fear among Kenyan media and the public has been that the strategic Mombasa Port was posted as collateral for these loans, feeding accusations of China indulging in ‘debt-trap diplomacy’ both in Kenya and across the continent – and the hacking reports risk re-igniting this controversy around Chinese lending.
The reports have also surfaced just as the Kenyan government attempts to push through unpopular austerity measures to manage a mounting debt repayment crisis. Although Chinese lending is substantial, it is far from the whole story.
China’s loans are only one problem
At $6.3 billion as of March 2023 according to Treasury figures, Chinese loans account for roughly 64 per cent of Kenya’s current stock of bilateral external debt and only 17 per cent of total external public debt. Multilateral borrowing is almost double the bilateral total, with the World Bank being Kenya’s largest single external creditor.
Chatham House research on debt distress in Africa and Chinese lending highlights a case study of Kenya showing debt-trap claims largely rely on a misinterpretation of the loan structure and terms, which do not sign away a right to seize Mombasa Port in the event of default.
The contribution of commercial external lending to Kenya’s debt problem also must not be overlooked, particularly as the Ruto administration’s current scramble for liquidity is overwhelmingly focused on a $2 billion Eurobond maturing in June 2024.
This looming repayment has been a decisive factor since 2020 in pushing IMF-World Bank modelling for Kenya above the threshold for being classed at high risk of debt distress, despite Kenya’s overall debt burden being judged as sustainable.
Kenya also agreed a range of costly syndicated loans during the past decade’s borrowing spree, leaving it with heavy servicing costs to pay. From July 2022 to March 2023, debt servicing on commercial borrowing and the SGR loans to China were similar at around $850 million and $800 million respectively.
Kenya exposed to pressures beyond its control
IMF managing director Kristalina Georgieva described Kenya as an ‘innocent bystander’ in the face of external shocks, the considerable pressures it faces from external lenders such as China, and its position within a volatile global financial environment.
Chinese SGR loans are dollar-denominated and two have floating interest rates, set at either 3.6 or three per cent above the LIBOR (London Interbank Offered Rate) average. Global monetary tightening and a weakening Kenyan shilling have increased the burden of servicing them after initial grace periods on the principal repayments expired.
Both Chinese and commercial lenders have exerted a constraining influence on Kenya’s overall debt management strategy. Fears that a clause in Kenya’s Eurobonds could see any debt relief interpreted as default – potentially triggering a full loan recall – initially prevented Kenya from accessing the G20 Debt Service Suspension Initiative (DSSI) in 2020. When Kenya eventually joined the DSSI, its full impact was limited to the first half of 2021 as China unilaterally refused any extension beyond that date.
With African countries also effectively shut out from international markets under current global conditions, Kenya is reluctantly reverting to costly syndicated loans to supplement inflows from the IMF and World Bank in bridging the 2024 Eurobond gap, while juggling other schemes to address short-term exchange pressures such as an oil credit agreement.
Compounding China’s inflexibility, Kenya’s much-prized market access has managed to be both an obstacle to relief and often inaccessible when needed.
Debt distress driven by poor domestic decisions
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.
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 which saw Kenya’s debt-to-GDP ratio rise from 42 to 69 per cent between 2013 and 2020.
Fiscal consolidation aimed at addressing the resulting debt pressure and retaining IMF support has been a defining feature of the Ruto administration’s first nine months in office, with the removal of government subsidies on food and fuel now joined by proposed tax increases.
Such measures are proving deeply unpopular with Kenyan citizens already feeling the strain of high inflation and currency depreciation, and many have sought to highlight a disparity with the government’s unwillingness to reduce its own expenditure and wastage – most notably a bloated appointments system.