China debt tax load slows down in Ruto’s first budget

Former National Treasury Cabinet Secretary Ukur Yatani’s briefcase at parliament buildings on April 7, 2022. PHOTO | JEFF ANGOTE | NMG

Kenya’s debt repayments to China are set to slow down in the new financial year for the first time since the grace period Beijing extended to Nairobi ended, budget documents show.

The Treasury has trimmed the budget for servicing loans from China’s state-controlled lenders by 7.32 percent to Sh112.39 billion in the 2023-24 financial year from Sh121.26 billion estimates for the current year ending June.

The modest drop is on account of Kenya clearing the debt to China Development Bank, which largely offers loans on non-concessional terms, this financial year ending June.

Treasury data shows Kenya will not have any financial obligation to China Development Bank from the year starting July, which will mark the implementation of President William Ruto’s first full-year budget since taking power last September.

The previous administration of President Uhuru Kenyatta, in which Dr Ruto served as a powerful deputy president until fallout in early 2019, largely took loans from China since 2014 to build roads, bridges, power plants and the SGR (a modern railway) — the country’s single costliest infrastructure project since independence.

Read: World Bank clout rises as China cuts Kenya loans

Beijing has been an active financier of Kenya’s capital-intensive infrastructural projects since 2015 when former Chinese Premier Li Keqiang made a three-day State visit to Nairobi in May 2014.

China has largely funded the projects in Kenya through the Exim Bank of China and China Development Bank.

Kenya’s debt obligations to China have been growing in recent years after the grace period the two lenders gave Kenya lapsed in the year ended June 2019, prompting the Treasury to start repaying principal sums in addition to interest costs.

The projected repayments in the upcoming year will, however, still be higher than the Sh99.65 billion that had been budgeted for the year ended June 2022.

The obligations to Beijing, which has since the Covid-19 pandemic been slowing down loans to Kenya and Africa, remain elevated due to repayments to the Exim Bank of China.

The Exim Bank accounts for the bulk of the loans, including the mega financing deal for the 485km Mombasa-Nairobi SGR line whose total is estimated at $3.6 billion (about Sh490 billion under the prevailing exchange rate).

The Treasury has projected the repayments to the Exim Bank will reach Sh111.93 billion in the year starting July from Sh96.09 billion estimates for the current financial year and Sh22.69 billion budget in 2018-19 before the grace period ended.

The terms of Beijing’s loan deals with developing countries are usually secretive and require borrowing nations like Kenya to prioritise repayment to Chinese state-owned banks ahead of other creditors, according to a dataset compiled by AidData, a research laboratory at the College of William & Mary in the US.

The dataset, based on an analysis of loan agreements between 2000 and 2019, suggested the Chinese deals have clauses for “more elaborate repayment safeguards” than its “peers in the official credit market”.

The terms further “give Chinese lenders an advantage over other creditors”.

The Chinese lenders, for example, declined Kenya’s request to extend a debt repayment holiday at the height of Covid shocks on the economy for a further six months through December 2021, prompting the Treasury to recall the application for “mutual benefit”.

Beijing has in recent years adopted a cautious approach to lending to Kenya and Africa amid warnings that key economies were facing many debt tripwires in the wake of global economic turmoil and could default on payments.

This was touched off by President Xi Jinping, who in November 2021, told the Eighth Ministerial Conference of the Forum on China-Africa Cooperation (FOCAC) that Beijing will reduce investments in Africa by a third in three years.

For the year starting July, for example, Chinese funding will plunge to a measly Sh1.74 billion from Sh29.5 billion in the current fiscal year and Sh71.2 billion in 2017, according to budget documents.

This comes at a time Dr Ruto has made it clear that his administration will cut down on expensive foreign borrowing, including rich countries like China.

Read: Kenya’s debt repayments to China shoot to Sh73.5 billion

He has vowed to enforce policies that enhance tax compliance levels and grow national savings from a measly “seven” percent of gross domestic product (GDP) towards 30 percent envisioned in the country’s long-term development blueprint, Vision 2030.

“I am looking forward to the day, soon enough, when we borrow from the savings of the people of Kenya to run our development instead of borrowing from other countries, and that is what holds the future for us,” the President said ahead of being sworn into office.

“I am encouraging the people of Kenya as we work together to get our economy out of the mud… that each and every one of us must pay their taxes and I am going to lead from the front, making sure I pay my taxes.”

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