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17/08/2018 | Africa - Is Kenya Falling into the China Debt Trap?

Geopoliticalmonitor.com

Kenya is an important component of China’s overall Africa strategy. The country is home to major Chinese-funded and built infrastructure projects and has thus become a showcase for Beijing’s development and investment initiatives on the continent.

 

It is also home to the port of Mombasa on the Indian Ocean, a key link in the Belt and Road Initiative’s ‘Maritime Silk Road’ between Asia and Europe via the Suez Canal.

A large chunk of Chinese financing has gone into Kenya’s 485 km standard gauge railway linking the capital of Nairobi with the port city of Mombasa. Now known as the ‘SGR’ or Madaraka Express, the rail line is the result of a US$ 3.2 billion contract signed with the state-owned China Roads and Bridges Corporation in 2014. Over 85% of financing for the project came from China, and as of 2018 both passenger and freight service have commenced. The passenger line cuts travel time from its previous twelve hours to five. It moved some 1.3 million passengers in its first year and raked in nearly US$ 10 million in passenger sales. Freight service has not been so successful out of the gates. Importers have been reluctant to use the line, and it was used to transport just 1,600 of the roughly 80,000 containers that went through Mombasa in the first month it was operational. The lack of customers has prompted several tariff cuts by the authorities, who are trying to encourage shippers to switch from road-based options. As it stands there are fears that the railway will never transport the kind of volumes that would allow it to pay off the loans required to build it.

Chinese bilateral and commercial loans have funded a variety of development projects in Kenya. Some fall into the same category as the SGR in that they could potentially stimulate economic activity and ultimately build government revenues in the future. One such example is a new coal plant at Lamu, a $2 billion project that is being financed primarily by Chinese banks. On the other hand, there is some lending that has dubious long-term economic value. This includes vague ministry loans and educational initiatives such as a loan to the National Youth Service (NYS) so that it could purchase China-produced training materials. Such initiatives might have previously fallen under the umbrella of official development assistance, but in this case these are loans that will one day have to be paid back –with interest. There’s also the problem of investment value being lost to graft and a lack of transparency in the procurement process. For example, the aforementioned National Youth Service was the subject of a massive corruption scandal in early 2018 where dozens of NYS members and private citizens made off with over US$ 100 million in state funds. The incident echoes similar scandals in 2007-2008 surrounding Kenya’s public sector procurement process.

Kenya’s public debt now exceeds US$ 50 billion, which is equivalent to just over 60% of the country’s GDP. China accounted for around 57% of Kenya’s bilateral debt in 2015; by 2018, the number had grown to 72% with around US$ 5.2 billion owing. The next biggest bilateral lender is France, which provided just one eighth of the Chinese total.

Around 69.4% of Kenya’s total external debt is now USD-denominated, up from 60.4% in 2016.

The size of the debt will create servicing challenges for Kenyan policymakers. In 2018 financial year, the government was on the hook for approximately US$ 259 million in debt repayments to Chinese banks. Starting in fiscal year 2019 (July 2019-June 2020), that number will grow to US$ 817 million (going by current exchange rates). According to one estimate by Genghis Capital, interest payments will grow by 31% in fiscal 2018, eating up approximately 51% of government revenues.

Kenya posted a budget deficit of 7% of GDP in fiscal 2017 (July 2017 – June 2018), down from 9% the year before. The country currently has a stand-by arrangement of IMF funding worth US$ 939 million, which was arranged in 2016 and recently extended another six months on the request of the Kenyan authorities.

Kenya’s current debt loan can be considered burdensome over the short-term yet still manageable. However, the country’s current trajectory of debt accumulation is unequivocally not sustainable. This view is shared by the IMFand various financial analysts. Two key considerations loom large when looking ahead: 1) the government’s ability to rein in its deficit spending; and 2) the amount of new revenue the government can raise via capacity building and healthy economic expansion. Should the Kenyatta government fail to get the country’s fiscal house in order, it’s possible we’ll see a repeat of Sri Lanka with the Hambantota Port. In this case the prize would be facilities in or around Mombasa, a port that has already been singled out for a prominent role in the Belt and Road Initiative.

Geopoliticalmonitor.com (Canada)

 



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