Kenya too falls into Chinese debt trap

By S Venkat Narayan,

Our Special Correspondent

 NEW DELHI. Kenya is one of China’s largest trade partners in Africa. It owes $6.5 billion to China, which is 22 percent of its total external debt. China’s interest payments represent 87 per cent of the cash used to service debt expenditure in 2019. Kenya is yet to work out an arrangement with China, but has been reluctant to seek debt relief amid reports that it was concerned it could hurt its ability to tap capital markets.

Kenya and neighbouring Ethiopia, according to the World Bank’s international debt statistics, are among the world’s most indebted countries. Kenya’s external debt rose four times over the last decade, only second to Ethiopia that saw its debt increase five-fold during the decade.

 Analysts say the $3.2-billion contract with China in 2014 to build the standard gauge railways connecting Kenya’s capital Nairobi and the port city of Mombasa symbolised the problem. The railway line was expanded in 2015 to Naivasha town 75 miles northwest of Nairobi, raising the project cost by another $ 1.5 billion.

 The railway line made a loss of $ 90 million in its first year. The government promised a profit in 2019. It ended up in the red again. The government has been forcing businesses to move their cargo on the railway to ensure it generates enough cash for operations but the project still recorded a loss of $200 million over three years. In September, a panel of lawmakers nudged the government to renegotiate the loan deal and cut operating expenses by half. Kenya hasn’t had its way yet.

 The overpriced project, hugely criticised by independent observers right from the time it was first announced, has also been in the spotlight after Kenya’s appellate court ruled in June that the contract had been signed in violation of the rules and was illegal.

 In the end, Kenya doesn’t have an option but to pay back the money.

 Or Kenya could stand to lose the lucrative Mombasa port that was pledged as collateral when the huge loan was accepted.

 Mombasa is counted as east Africa’s largest and most valuable port. It is not just the gateway into Kenya, but also its landlocked neighbours; Burundi, Congo, Rwanda, South Sudan and Uganda. Also, Kenyan media has reported, Nairobi could also have to give control of the Inland Container Depot that could bring thousands of port workers under Chinese lenders.

 Zambia has finally received a six-month reprieve from China Development Bank on repayment of its debt due in October, the government in Lusaka announced last month after a desperate SOS that it was on the verge of a default.

 Lusaka had already been attempting to restructure and refinance its Chinese debt when SARS-CoV-2, the virus that causes Covid-19, first reached Africa and rapidly spread across the world, infecting over 52 million and wreaking havoc on global economies. It has only gotten worse.

 Kenya and Zambia’s story repeats itself across Africa, Asia and Latin America. According to the Financial Times (London), China has transferred nearly $150 billion to governments and state-owned firms in Africa alone to secure commodity supplies and fund its global network of infrastructure projects, President Xi Jinping’s signature Belt and Road Initiative (BRI).

 Beijing is already the world’s largest non-commercial lender, more than the International Monetary Fund (IMF) and the World Bank. China’s share of bilateral debt owed by the world’s poorest countries to members of the G20 has risen from 45 percent five years ago to 63 percent last year. A recent World Bank report estimated China’s external loans and trade credits at $1.6 trillion, or close to 2 percent of global gross domestic product.

 China watchers in New Delhi, quoted by the Hindustan Times, speak about how Beijing has expanded its footprint and influence in South Asia too by pouring billions of dollars in pricey infrastructure projects that mostly serve Beijing’s strategic interests and have to be executed by Chinese companies and Chinese workers.

 Like the China Pakistan Economic Corridor (CPEC) that eventually will be paid for by Islamabad. Or the rail and deep-sea port projects along an economic corridor to Myanmar that will link China’s south-western interior to the Indian Ocean.

 Because the loans are not based on the economic feasibility of the projects in the first place and are opaque, they are also seen to fuel allegations of corruption and autocratic behaviour.

 Beijing has its grip on Sri Lanka to an extent that when US Secretary of State Mike Pompeo was in the country to campaign against China’s debt diplomacy. Colombo—-which is in the middle of negotiations with Beijing for another tranche of loans—-politely made it known that it is not going to change its approach to China.

In 2017, Sri Lanka had already handed over the strategic port of Hambantota on the country’s southern coast to China on a 99-year lease when it had trouble repaying its initial loan for the port.