Kenya’s debt to China outpaces the rest (2015)

The World Bank has warned that Kenya’s level of borrowing from China could be close to unsustainable.

The caution from the US-based international lender that provides loans to developing countries, is contained in a policy paper on Kenya. “Kenya still has a heavy debt burden and China’s loans can bring debt to unsustainable levels,” the Bretton Woods Institution says of the country’s appetite for loans from the Asian economic giant.

The fears of the loans harming Kenya in the longer term are compounded by the fact that China does not tie aid or loans to governance, the paper says.

“The loans, however, could harm Kenya in the long-run because of their lack of transparency and failure to tie aid to key governance reforms.”

Some of China’s loans are non-concessional, meaning they are granted at market rates, which can raise debt to GDP levels quickly – Apurva Sanghi, the author of the study warns.

“China’s aid to Kenya is almost entirely loans,” added Sanghi, who is WB’s lead economist for Kenya, Rwanda, Uganda, and Eritrea, in one of the fiercest criticism of the World’s second largest economy.

While the Western countries have billions worth of outstanding loans given to Kenya, some like the US and UK are running several programmes in health and education sectors that qualify as grants.

Aid programmes are often run by organisations from the respective donor countries, often due to lack of transparency and accountability when the funds are channeled through the government.

Among the loans granted in the recent period is the project financing for the Standard Gauge Railway, estimated at 90 per cent of the total cost worth Sh327 billion.

China has already signed up the funding to the second part of the railway project to Naivasha, and is almost certain to finance the rest of the line to Kisumu and Malaba border point.

China is the country’s single largest lender, holding more than half of the total external debt - which is already more than Sh3 trillion, according to official data.

Shock of many

Sanghi’s warning comes amid accelerated borrowing by Kenya from China, which has emerged as the preferred lender since it does not attach any conditions to its loans or aid.

Chinese government-owned Exim Bank is the main source of funds to Kenya, often giving loans at near market rates, according to the findings in the report.

WB’s report comes weeks after the State announced the loan repayment schedule, breaking down how much of each installment goes out as interest and principal reduction. In the six months to December, Kenya had paid a total of Sh4.1 billion to China.

Of that payout, however, only Sh738 million went to reduce the outstanding loans while the bulk of it was paid as interest, to the shock of many.

A breakdown of how Kenya is servicing debts from bilateral partners indicates that China received Sh4.1 billion in the second half of last year. Of that amount, only Sh738 million went to reducing the principal loans worth Sh275 billion in December.

The shift from the West to China as source for funds came soon after former President Mwai Kibaki took office in 2003, at a time when Kenya was dealing with several corruption scandals that turned off most traditional lenders.

Since then, China has become the go-to friend for Kenya, reaching a new record since President Uhuru Kenyatta took over three years ago.

Among reasons for the appetite on Chinese loans is that they come at attractive interest rates, at least when compared to the costs of borrowing domestically, and without strings attached for good governance.

Sanghi also reported that the Chinese aid was almost entirely given to the education sector. One of the biggest aid programmes funded by China is the China-Kenya vocational training where the Asian country is equipping up to 10 higher education institutions including the Technical University of Kenya with engineering equipment.

But even that programme aimed at enhancing industrialisation through training of mechanical, electrical and automation engineering, is funded through a concessional loan facility.

Male-dominated

It is the traders at home who have, however, greatly benefited from the close relationship between the two countries.

WB found that the traders were able to book huge profits by dealing in the cheap Chinese-manufactured goods including clothing and electronics which are marked-up by huge margins.

“Chinese goods help small kiosks and shops earn greater profits, and since small shops make up 70 per cent of shopping, Chinese goods appear to have benefited retailers on a large scale.”

In another rather surprising finding, Chinese companies operating in Kenya hire fewer female employees. Women form a mere 5 per cent of the staff of the average Chinese firm, which could be explained by the fact that most of their businesses are in the male-dominated fields of manufacturing and construction.