“President Ruto’s Inaugural Budget Heralds Subdued Chinese Debt Obligations: A First in Two Decades”

by | May 12, 2023 | News | 0 comments

In an unprecedented fiscal shift, President William Ruto’s inaugural budget blueprint for 2023-24 reveals a measured decline in Kenya’s debt repayments to China’s state-run lenders. It is the first such contraction since Beijing ceased its grace period to Nairobi, according to the newly released budget documents.

Under the stewardship of Kenya’s Treasury, the budget allocation for China’s loan service has been prudently pared down by 7.32 percent, amounting to Sh112.39 billion for the forthcoming fiscal year. This modest decrease contrasts with the prior Sh121.26 billion estimates earmarked for the fiscal year concluding in June.

This fiscal contraction owes largely to Kenya’s successful clearance of its debt to the China Development Bank, a prominent lender known for non-concessional loan offerings, within the current fiscal year.

Treasury data shows that Kenya’s financial obligations to the China Development Bank will cease from July onwards, coinciding with the implementation of President Ruto’s first full-year budget since assuming office last September.

The administration of President Uhuru Kenyatta, in which Ruto wielded significant influence as Deputy President until their political schism in early 2019, had primarily borrowed from China since 2014. These loans funded various infrastructural projects, including roads, bridges, power plants, and the Standard Gauge Railway (SGR) — Kenya’s most expensive infrastructural undertaking since independence.

Beijing has played a pivotal role in financing Kenya’s high-cost infrastructural endeavors since 2015. This engagement was kindled during the former Chinese Premier Li Keqiang’s state visit to Nairobi in May 2014. Predominantly, these projects have been backed by the Export-Import Bank of China and the China Development Bank.

However, Kenya’s debt obligations to China have been on the upswing since the grace period provided by the two Chinese lenders expired in June 2019. This prompted the Kenyan Treasury to commence the repayment of principal sums in tandem with interest costs.

Still, the upcoming fiscal year’s repayments will surpass the Sh99.65 billion initially budgeted for the year that ended in June 2022. Despite a slowdown in Chinese loans to Kenya and Africa due to the Covid-19 pandemic, the obligations to Beijing persist, chiefly due to repayments to the Exim Bank of China.

The Exim Bank is responsible for a significant chunk of the loans, including the colossal financing for the 485km Mombasa-Nairobi SGR line, estimated to total $3.6 billion (roughly Sh490 billion, given the current exchange rate).

The terms of Beijing’s loan agreements with developing nations are often veiled, obligating countries like Kenya to prioritize repayments to Chinese state-owned banks over other creditors, according to a study by AidData, a research laboratory at the College of William & Mary in the US.

President Ruto has expressed his commitment to mitigating costly foreign borrowing, including from affluent countries such as China. He has pledged to enforce policies that boost tax compliance and elevate national savings from a modest 7% of the GDP towards the 30% target envisioned in Kenya’s long-term development strategy, Vision 2030.

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