World Bank warns Kenya over rising appetite for Chinese loans

World Bank lead economist for Kenya Apurva Sanghi. PHOTO | FILE 

By NEVILLE OTUKI, notuki@ke.nationmedia.com

In Summary

• China’s loans to Kenya have been growing by 54 per cent a year between 2010 and 2014 with some of the credit having high interest rates, according to a research paper by World Bank economists.
• In contrast, Kenya’s loans from its traditional foreign markets of Japan and France stagnated or declined.
• The Treasury has in the past said growing preference for external debt is due to cheaper or concessional terms with a grace period beyond six years.

The World Bank has warned that Kenya’s huge appetite for Chinese loans risks choking the economy on huge repayment burden.

China’s loans to Kenya have been growing by 54 per cent a year between 2010 and 2014 with some of the credit having high interest rates, according to a research paper by World Bank economists.

In contrast, Kenya’s loans from its traditional foreign markets of Japan and France stagnated or declined. The main borrowing pertains to the standard gauge railway (SGR) funding.

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“Kenya still has a heavy debt burden and China’s loans can bring debt to unsustainable levels. Some of China’s loans are non-concessional, which can raise debt-to-gross domestic product (GDP) levels quickly,” World Bank lead economist for Kenya Apurva Sanghi and his counterpart Dylan Johnson said.

They added that Kenya’s debt to China stood at Sh262 billion ($2.6 billion) in June last year, up from Sh82.9 billion ($821 million) a year earlier and Sh14.7 billion ($146 million) in 2010.

In June last year, Kenya’s total stock of debt stood at Sh2.8 trillion, accounting for 49.7 per cent of the GDP. Half of the debt load or Sh1.4 trillion was sourced from foreign markets.

The Treasury has in the past said growing preference for external debt is due to cheaper or concessional terms with a grace period beyond six years.

Kenya’s domestic debt market has no grace period, while the cost has remained high due to high interest rates.

The World Bank said China issued a credit line of Sh20.6 billion to Kenya for development expenditure in the last fiscal year ended June 2015, another Sh12 billion to the Ministry of Energy for geothermal energy activity.

The Ministry of ICT got Sh2.5 billion and Ministry of Transport Sh5.6 billion.

But as the mountain of debt from Beijing grows, that from Japan has dropped by 2.9 per cent in every quarter of the review period while France’s has shrunk by 0.5 per cent.

“Traditional donors must coordinate efforts with China to avoid undermining governance and debt sustainability programmes,” the economists said.

The multilateral lender recently cautioned Kenyan officials against increased use of foreign loans for major infrastructure projects to make up for decades of underinvestment that stunted economic growth.