Why China is barring Kenya from new debt relief

Elevating Kenya to middle-income status led China to exclude the country from a new list of African nations that will receive debt relief from Beijing this year, under a plan by the world’s second-biggest economy, 17 poor states in the US to help continent burdened with its huge loans waives repayment.

The deal announced last week sees Beijing making 23 maturing interest-free loans for 17 unnamed African countries classified as least developed countries.

Beijing made the announcement during the China-Africa Cooperation Forum aimed at strengthening ties between China and its African allies.

Chinese Foreign Minister Wang Yi told the forum the debt relief plan “shows China’s determination to promote stronger economic ties with the African continent.”

Chinese authorities in Nairobi on Wednesday said Kenya was excluded from the deal because it is classed as lower-middle income, which Beijing’s new system does not apply to.

“State Councilor and Foreign Minister Wang Yi, in his remarks at the coordinators’ meeting on the implementation of the follow-up to the Eighth Ministerial Conference of the Forum on China-Africa Cooperation, mentioned that China will waive the 23 interest-free loans to 17 African countries that had matured by the end of 2021,” announced the Chinese Embassy in Nairobi Business Daily.

“The African countries mentioned here refer to the least developed countries. Therefore, Kenya is not on this list,” the Chinese authorities added.

Kenya, East Africa’s largest economy, entered the lower-middle-income league in 2014 after surpassing the United Nations per capita threshold of US$1,045 in gross domestic product (GDP) after rebalancing its economy.

China, which will account for about a third of Kenya’s external debt servicing costs in 2021-22, is the country’s largest foreign creditor after the World Bank.

According to budget documents, Kenya planned to issue a total of 117.7 billion shillings on Chinese debt during this period, of which about 24.7 billion shillings will be for interest payments and nearly 93 billion shillings for principal payments.

Kenya faced a deteriorating cash flow situation characterized by declining revenues, worsening debt service obligations and the impact of the Covid-19 pandemic. The debt burden has recently been compounded by the economic turmoil triggered by the war in Ukraine, but Kenya has never lived up to its commitments.

Kenya last year asked for a six-month extension of the debt-repayment moratorium from bilateral lenders, including China, to December 2021 to save it from tying up billions to Beijing lenders.

The moratorium began in January 2021.

China postponed repayments in January and helped Kenya temporarily hold Sh27 billion due for six months to June 30.

However, opposition from Chinese lenders forced Nairobi to drop its push for an extension of the debt repayment holiday to avoid straining relations with Kenya’s largest bilateral creditor.

Kenya previously remitted Sh29.86 billion to China in the quarter ended September 2021 to ease a standoff on debt repayments that delayed disbursements to projects funded by Chinese loans.

Financial documents earlier revealed Kenya paid the billions at a time when Chinese lenders, notably Exim Bank, had rejected Kenya’s request for a debt-repayment holiday.

The G20 countries, including Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Republic of Korea, Spain and the US, postponed payments of 32.9 billion shillings of principal and interest due between January and June to the next four years one-year grace period.

While China is a G20 member and a signatory to the agreement, much of its lending to Kenya has been made on a commercial basis by government agencies, quasi-public corporations, and by state-owned banks such as China Development Bank and Exim Bank of China.

China has attempted to negotiate its debt relief deals separately, but using the same terms as the G20 countries, while reserving the right to scale and credit that the moratorium entails.

President Uhuru Kenyatta’s government has borrowed mostly from China since 2014 to build roads, bridges, power plants and the standard gauge railway (SGR).

This began after Kenya became a lower-middle-income economy, which excluded it from highly concessional loans from development lenders such as the World Bank.

The terms of China’s lending deals with developing countries are unusually secretive, requiring borrowers to prioritize repayments to Chinese state banks over other creditors. A cache of such contracts was revealed in a previous report by Reuters.

The dataset, compiled over three years by AidData, a US research lab at the College of William & Mary, includes 100 Chinese loan agreements with 24 low- and middle-income countries, some of which are struggling with rising debt and the economic fallout from the Covid -19 pandemic.

It uncovered several unusual features, including confidentiality clauses that prevent borrowers from disclosing the terms of the loans, informal collateral arrangements that benefit Chinese lenders to other creditors, and promises to keep the debt out of collective restructurings – dubbed “no Paris” by the authors “referred to club” clauses.

The Paris Club is a group of officials from major creditor countries tasked with finding solutions to debtor countries’ solvency problems.

China’s “Belt and Road” initiative has been hailed by supporters for providing vital funding to countries lacking infrastructure. Critics, including the United States, say the program is burdening poor nations with debt.

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