Why Chinese loans are a recipe for huge debt burden on Kenya

What you need to know:

  • In the Standard Gauge Railway project for example, local businesses are said to have received less than 25 per cent of the money paid for supplies of materials as the Chinese contractor chose to source from home.
  • Transport Cabinet Secretary James Macharia said Kenya had paid out Sh167 billion to foreign suppliers representing 72 per cent of the total money spent in the project which had hit 80 per cent completion in terms of civil works.

Kenya’s high appetite for expensive Chinese loans is driven by the unconditional and high speed at which the Asian giant gives credit.

Economic experts say that unlike the World Bank and other European lenders who keep an eye on the way money is spent and carry out due diligence before disbursing, China’s is a ‘free to spend’ affair.

They, however, warn that Kenya risks choking in the heavy loans whose ‘no strings attached’ outlook are deceiving given the way the country gives in to various economic benefits during implementation of the projects done by the Chinese.

Nairobi-based Economic analyst Gitau Githogo said the Asian giant attaches the financing to its participation in the projects and effectively denies Kenyan firms a chance to bring about more economic impact locally.

“One cannot cite pricing because we all know China is one of the most expensive market for loans. The biggest controversy, however, is that most of the projects have Chinese firms carrying out feasibility studies, winning the tenders to do them and then we have financing from China, that is obviously conflicting. I think we are giving too much to the Chinese and before we notice it, we would have been better off with the strict lenders rather than having the quick fixes from China,” Mr Githogo said.

Local businesses

In the Standard Gauge Railway project for example, local businesses are said to have received less than 25 per cent of the money paid for supplies of materials as the Chinese contractor chose to source from home.

Transport Cabinet Secretary James Macharia said Kenya had paid out Sh167 billion to foreign suppliers representing 72 per cent of the total money spent in the project which had hit 80 per cent completion in terms of civil works.

“From Mombasa to Nairobi, there were complaints that the contractor did not meet the obligation in taking up materials from local suppliers and even the 28 per cent achievement we got was really a big push for us.

What we are doing in the second phase of the project is to make it a contractual obligation that 40 per cent of the supplies be sourced from local suppliers, the first phase was just a gentleman’s agreement which was not honoured,” Mr Macharia told the National Assembly Transport Committee in June.

Kenya got Sh295 billion from China Exim Bank to fund the first phase of the project with President Uhuru Kenyatta in December securing yet another Sh140 billion for the second phase of the project which stretches 120 kilometres  from Nairobi to Naivasha.

“Unlike the conditions given by the IMF and other multinational lenders, China is simply looking for business and the more projects they get, the easier they lend Kenya. They are very costly loans though and Kenya is definitely tying its future generations in heavy indebtedness that could have been avoided by taking other options,” Economic analyst Robert Shaw told the Nation.