bri: Kenya: Case of increasing Chinese debt obligations

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Kenya has refused to release loan contracts for its China-built railway despite a legal petition from two activists, saying they had non-disclosure clauses and publishing them would violate a bilateral agreement, altering bilateral relations with China. It exposes the secrecy surrounding China’s deals with developing countries, which experts say complicates debt renegotiations.

According to Kenyan officials, releasing the documents would undermine Kenya’s national security, “as the terms of the contract relate to foreign government information with national security and external relations implications.”

The Kenyan government is reportedly finding it increasingly difficult to repay debts related to Chinese-funded infrastructure projects. Debt service has climbed to 135.5% in the current year. Amid the growing energy crisis and rising food prices due to the Russian-Ukrainian conflict as well as Covid-19 shocks, Nairobi is facing difficulties in servicing Chinese debt due to the foreign exchange constraints and declining public revenues.

Earlier in December 2021, Beijing rejected Nairobi’s request to defer debt obligations as Kenya intended to avoid the bulk payment due to China in the first half of the current fiscal year. learned ET.

Chinese lenders were also uncomfortable with Kenya’s request to extend Covid-induced debt service suspension programs, as evidenced by the subsequent delay in disbursements of active Chinese-funded projects, mainly in the electricity transmission sub-sector. Nairobi was forced to drop a request for suspension of debt service over fears of Chinese discontent.

Fearful of losing control, Beijing has sought to negotiate its debt relief deals with poor countries separately from the G20 framework, despite applying the same terms. Separate negotiations were preferred to secure Beijing’s reserved right to decide which loans and the size to be subject to the repayment moratorium.

Kenyans have often claimed that Chinese-funded projects are secretive, expensive and debt-inducing. Although these projects have imposed an additional burden on the population, state assets are at risk due to the risks of debt service failure, given the limited flow of revenue from these projects.

According to AidData, a US research lab, the terms of Beijing’s loan agreements with developing countries are generally secretive and require borrowing countries to prioritize repayment to Chinese state-owned banks over other creditors. He also observed that contracts had become more secretive over time and that all Kenyan contracts since 2014 had a confidentiality clause.

The World Bank president also noted that China needs to improve its lending practices in the developing world, especially in terms of transparency in lending programs. The International Monetary Fund constantly warns African and other Third World countries

that the increase in Chinese debt is dangerous. He points out that Chinese creditors often create instability and vulnerabilities in recipient countries.

Like other needy developing countries, the Kenyan government has shown a growing appetite for Chinese funding for its major infrastructure projects without giving much weight to its long-term economic implications. This often leads to an unsustainable debt service burden.

Kenya’s debt problem worsened after the country became a lower-middle-income economy, leading to the drying up of highly concessional loans from development lenders such as the World Bank Group. . Since 2014, the Kenyan government has mainly sought Chinese loans for large infrastructure projects such as roads, bridges, power stations and the Standard Gauge Railway (SGR). This

on Chinese short-term commercial loans has placed an additional burden on the Kenyan government’s debt service, it has been learned.

The SGR is Kenya’s most expensive infrastructure project and since its inception, the project has been marred by accusations of overcost and environmental degradation. Additionally, freight owners avoid SGR for reasons such as higher fees and longer time to clear goods compared to using trucks, ET has learned.

There are several other controversies related to Chinese loans in Kenya. In September 2021, Kenya’s State Department of Labor failed to pay China Jiangxi for work at a shopping mall. The Kenyan government was forced to negotiate compensation in July 2021 after canceling an airport terminal project. There are also concerns over the Chinese developer taking over the port of Mombasa if Kenya does not repay the loan, although Beijing has denied any such clause in the contract, ET have learned.

Kenya’s Directorate of Criminal Investigations had even summoned a Chinese contractor for failing to complete a 1.2 billion Ksh (Kenyan currency) water project in Siaya County, angering the Chinese government. The investigations were launched due to concerns about the contractor’s ability to complete the project.

Churchill Ogutu, an economist at IC Asset Managers, an Africa-focused investment bank, noted that “Chinese debt has reached or is about to decline in returns if large government spending in Kenya, for example, is something to do”. .

Meanwhile, Beijing’s loans to Kenya are already showing a downward trend. It is expected to decline to Ksh 29.46 billion for FY 2022-23 from Ksh 140.03 billion in 2015-16.

President Xi Jinping also revealed that China will cut its investment in Africa by a third in three years during the eighth Ministerial Conference of the Forum on China-Africa Cooperation (FOCAC) in November 2021. projects aimed at gaining strategic access to Africa’s natural resources.