Home Economy Kenya’s debt repayment to China, India increases

Kenya’s debt repayment to China, India increases

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Beijing remained the biggest gainer from Kenya’s external debt repayment in the six months to December 2018 compared to a similar period of the previous year, data by the Treasury showed, signalling the rising concessional and semi-concessional loans China has been injecting into Kenya’s infrastructure development.

India and South Korea also posted significant gains in the value of debt repayment by Kenya over the period — defying a general trend of a dip in the value of repayments to other traditional key lenders to Nairobi.

China gobbled up more than a fifth of the overall amount Nairobi spent on servicing its external debt in six months through December, the Treasury statistics show, signalling the cost of concessional and semi-concessional loans China has been injecting into Kenya’s infrastructure development.

Kenya spent nearly Sh15.43 billion on servicing loans from China in the July-December 2018 period, the Treasury says in its latest report, an equivalent of 22.05 percent of the Sh69.45 billion spend on total foreign debt.

Repayments to China have more than doubled from Sh6.3 billion, or 15.41 percent of the total spend on servicing the external debt, in a similar period in 2016 and Sh12.72 billion, or 18.53 percent of the total foreign debt costs, in 2017.

The amount paid to China, Kenya’s largest lender, which comprised Sh12.80 billion interest and Sh2.63 billion principal sum, also accounted for 60.79 percent of the Sh25.37 billion costs on the bilateral debt.

That made the world’s second-largest economy the largest to a single creditor in the review period.

The value of Kenya’s debt repayment to India jumped 719 percent to Sh368 million in the six months through December 2018 compared to the previous year while debt repayment to South Korea was up 117 per cent to 207.8 million over a similar window.

World Bank Group’s International Development Association (IDA), the country’s largest multilateral lender, pocketed Sh7.42 billion in debt servicing costs compared to Sh8.13 billion in 2017 and Sh7.28 billion in 2016.

Foreign commercial banks, whose debt stock surged to Sh938.15 billion last December from Sh712.27 billion the year before and Sh458.12 billion in December 2016, were paid Sh33.17 billion in debt costs a slight drop from Sh34.56 billion a year earlier, but more than Sh14.49 billion remitted in 2016.

Kenya’s debt obligations to France rose to Sh2.93 billion from Sh2.73 billion in 2017 and Sh3.13 billion in 2016, while Japan got Sh2.83 billion compared to Sh3.29 billion and Sh3.44 billion in the respective review period in 2017 and 2016.

Treasury PS Kamau Thugge disclosed the data in the latest quarterly Economic and Budgetary Review report for the half-year period ended last December.

President Uhuru Kenyatta’s administration has largely contracted a mix of semi-concessional and commercial debt from China as well as international capital markets (Eurobond) since 2014 to build much-needed roads, bridges, power plants and a modern railway line (the standard gauge railway).

Access

This started after Kenya became a lower middle-income economy, limiting its access to highly concessional loans from development lenders such as the IDA.

Total public debt crossed Sh5.27 trillion last December, the Treasury statistics show, up from Sh4.57 trillion a year earlier and Sh3.83 trillion in December 2016.

The bulk of the debt accumulated in recent years has been foreign loans, which made up 51.66 percent of the total debt last December, or Sh2.72 trillion.

“We note that between FY2005/06 and FY2012/13, debt accumulation averaged Sh109.4 billion per fiscal year but has since surged to an average of Sh509.6 billion per fiscal year between FY2013/14 andFY2017/18. This has generated discourse on debt and its sustainability,” said analysts at Genghis Capital in a report on Friday.

Treasury secretary Henry Rotich has budgeted for nearly Sh870.62 billion to be paid to creditors this financial year ending June 2019. This is more than half the revised Sh1.61 trillion in projected tax receipts, assuming there will be no debt rollover.

That comprises Sh505.96 billion in domestic obligations and Sh364.66 billion to foreign creditors.

Interest payment

Interest payments to domestic investors will gobble up nearly Sh285.61 billion, while another Sh220.35 billion will be spent on redemptions (principal sums) of the maturing debt contracted locally.

About Sh250.28 billion will go into the payment of principal amounts for foreign loans, while interest will eat up Sh114.37 billion, according to 2018 Medium Term Debt Management Strategy.

“Kenya will face elevated debt service obligations in 2019, as the initial five-year grace period extended by the Export-Import Bank of China for the standard gauge railway ends in May. Debt redemptions related to other infrastructure projects are also likely to rise,” says London-based Standard Chartered Bank chief economist for Africa Razia Khan in her latest note on Kenya.

Debt contracted from Beijing climbed to $6.20 billion (Sh626.2 billion) in December 2018 from $5.30 billion (Sh535.30 billion) a year earlier and $4.09 billion (Sh413.09 billion) in December 2019, the official data indicate, an average growth of nearly $1.06 billion (Sh107.06 billion) every year in the last two years.

Loans from China largely have concessional and semi-concessional terms.

The spike in debt procured from China underlines the active participation of East Asia’s powerhouse in Kenya’s infrastructure development-led growth strategy.

China’s influence on the country’s infrastructure development started in earnest with the 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.

The deal by Exim Bank of China to fund 90 percent of the $3.6 billion (Sh363.60 billion), 485-kilometre Mombasa-Nairobi standard gauge railway line — cash which was disbursed in phases — saw Beijing overtake Tokyo as Kenya largest bilateral lender.

Lion’s share

There has been no looking back ever since with China’s State-run firms bagging the lion’s share of Kenya’s mega construction projects such as roads and bridges.

“We decry the low yield in public big-ticket capital expenditures, which has further crowded out investment to the more productive sectors,” Genghis Capital analysts say, citing the Mombasa-Nairobi standard gauge railway line, which reportedly posted a loss of nearly Sh10 billion in 2018 — its first year of full operations.

“Therefore, effective evaluation of the public projects, more so in the infrastructure sector, are welcome. We note strides have been made which will result in both Executive and Legislature reviewing and monitoring public projects.”

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