Kenya: China halts Kenya lending amid debt relief offer

China has frozen active loan disbursements to Kenyan projects due to disagreements over Nairobi’s offer to extend the debt repayment vacation until December.

China-funded projects face a money shortage as contractors report late payments from banks such as Exim Bank of China.

Executives at state-owned firms say the projects are delayed because of the funding problem.

Sources familiar with the delay say Chinese lenders, particularly Exim Bank, are uncomfortable with the terms of Kenya’s application to extend debt servicing beyond June.

“Payments to contractors working on Chinese projects who are paid by the direct method have been delayed since last month. We were told that Chinese banks are not paying bills because of the moratorium,” said a CEO of a state-owned company operating on the condition who spoke anonymity.

In the direct method, Kenyan companies with Chinese loans send notifications of supplier payments to Chinese banks through the Ministry of Finance.

China is one of Kenya’s largest foreign creditors and loaned Ksh 758 billion ($ 7.02 billion) in April 2021 for the construction of railroad lines, roads and other infrastructure projects over the past decade.

On Thursday, the Chinese Embassy in Nairobi admitted the funding gap, adding that the matter would be handled by officials from the two countries.

“To the best of my knowledge, the relevant parties on the two sides are in close contact on certain issues under the DSSI framework,” said Huang Xueqing, head of the embassy’s information and public affairs department, in an email response to the questions from Business Daily in the event of delayed credit approval.

“They also communicate with one another in this regard within the framework of the DSSI (Debt Service Suspension Initiative (DSSI)).”

Kenya’s tax officials denied delays in releasing Chinese loans, saying the country had received positive responses from all countries where they had applied for debt relief extensions.

“That’s not true,” said Finance Minister Ukur Yatani.

“I am not aware of that. All of the creditors have reacted very strongly,” said Haron Sirma, director of the public debt management bureau.

In January, China and other rich countries granted Kenya six-month debt relief under the Debt Service Suspension Initiative (DSSI).

The effects of the Covid-19 pandemic have weighed on Kenya’s tax revenues at a time when more of its debt is falling due and the country is still grappling with gaping budget deficits.

Now Kenya is seeking arrangements to suspend debt servicing with wealthy nations under the Paris Club and other creditors, including China, for the six months ending December.

The G20 countries, including Belgium, Canada, Denmark, France, Germany, Italy, Japan, Republic of Korea, Spain and the USA, have payments of 32.9 billion Ksh (304.77 Million US dollars) in principal and interest postponed four years with a one-year grace period.

The International Monetary Fund (IMF) announced that Kenya has requested an extension of G20 debt relief until December, saving an additional Ksh 39 billion (US $ 361.27 million).

Although China is a G20 member and has signed the agreement, much of its loans to Kenya have been made on a commercial basis by government agencies, quasi-public corporations and state banks such as the China Development Bank and Exim. awarded Bank of China.

China has tried to negotiate its debt relief separately, but on the same terms as the G20 countries, reserving the right to determine the amount and which loans result in the moratorium.

The World Bank had estimated that Kenya could save Ksh 55.9 billion (US $ 517.8 million) from China between January and June as part of the DSSI deal on freezing principal and interest payments.

But China announced it would give Kenya a relief of Ksh 26 billion ($ 240.85 million).

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It is unclear how much relief the government demanded and which loans were waived. But parliamentary revelations suggested some of the relief came from standard-gauge rail financier China Exim Bank.

Since 2014, the government of President Uhuru Kenyatta has mainly taken out loans from China for the construction of roads, bridges, power plants and the SGR.

This began after Kenya became a low-middle-income economy and excluded it from highly discounted loans from development lenders like the World Bank.

However, China’s influence on Kenya’s infrastructure development began in earnest with the construction of the Thika Superhighway between January 2009 and November 2012, which cost nearly Ksh 32 billion (US $ 296.4 million) during the last tenure of President Mwai Kibaki.

In the agreement to finance the first phase of the SGR, Kenya’s largest infrastructure project in terms of cost since independence, China overtook Japan as Kenya’s largest bilateral lender.

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