alexa China can help Kenya cope with coronavirus-induced debt - Daily Nation
 
  

China can help Kenya cope with coronavirus-induced debt

Saturday May 23 2020

PUBLIC DEBT

Few deny Kenya has a “debt problem”, but the country is not in a “debt crisis” – not yet. ILLUSTRATION | NATION MEDIA GROUP 

PETER KAGWANJA
By PETER KAGWANJA
More by this Author

The coronavirus epidemic is raising the scale of indebtedness in Africa.

In Kenya, the pandemic has slowed down economic growth from an initial projection of 6.2 per cent to 3.4 per cent – the slowest since 2009.

Moreover, an array of social-distancing protocols to contain the spread of Covid-19 has severely disrupted economic activity, diminishing Kenya’s capacity to meet all its debt obligations. The disease has also raised external debt by Sh158 billion ($1.58 billion).

Even after the coronavirus cloud has passed, its impact will haunt efforts to modernise structures and guarantee social and political stability in low-income countries like Kenya.

China, which is entering its post-Covid-19 phase, is by far Kenya’s largest bilateral lender. This raises the question: how can China help Kenya cope with the impact of coronavirus debt?

Kenya’s debt portfolio is complex. The country’s total national debt reached an all-time high of Sh6.3 trillion by the end of March 2020, very close to the 70 per cent of the Sh9 trillion ($90 billion) national debt ceiling. Its debt to China stood at Sh660 billion ($6.6 million) as of end of March 2020.

Advertisement

China’s debt is about 10 per cent of Kenya’s total national debt, accounting for 72 per cent of its bilateral debt, over 22 per cent of the country’s total external debt while 90 per cent of the country’s repayment of bilateral debt is to Beijing.

PRIVATE CREDITORS

Between 2006 and 2017, Kenya acquired at least $9.8 billion, making it Africa’s third-largest recipient of Chinese loans. These include funds to build the Standard Gauge Railway (SGR) from Mombasa to Malaba. By May 2020, China surpassed all of Kenya’s traditional bilateral creditors combined.

Despite this, Kenya owes the bulk of its debt to multilateral financial institutions, mainly the International Development Association (the World Bank Group) and the private sector.

On the whole, these two lenders of choice own 35 per cent and 32 per cent of Africa’s debt, respectively.

Between 2014 and 2020, the country secured a relatively small commercial debt from the International Debt Capital Markets.

Kenya’s immediate financial trouble in combating coronavirus comes from debts from external private markets.

Unlike bilateral creditors like China, private lenders are predisposed to be less forbearing to borrowers in the face of Covid-19. This raises the risk of default as a result of the pandemic.

Kenya’s domestic debt is the elephant in the room. It constitutes more than 50 per cent of the entire public debt.

Interest payment on domestic debt is equally high, averaging 11 per cent, compared to an average of 4.5 per cent for external debt.

Few deny Kenya has a “debt problem”, but the country is not in a “debt crisis” – not yet. Its public debt as a proportion of GDP remains low, well below the lower-middle-income country debt sustainability benchmark of 70 per cent of GDP.

DEBT FORGIVENESS

However, Kenya is a key candidate for reorganisation of its debt, including with China.

The discourse on debt is not immune to the forceful return of Cold War-era geopolitics. China is damned if it gives loans to Africa, and damned if it doesn’t.

It is contrasted with “the well-meaning Western institutions” while its loans are depicted as having predatory intentions – giving rise to the cynical “debt trap” theory.

Inversely, Western calls for debt relief depict China’s response as greedy, self-interested and thus lacking compassion.

Beyond the geopolitical power of Babel, China needs clear strategic options to guide its intervention to help Kenya contain the epidemic and forestall a debt crisis.

In mid-April, President Uhuru Kenyatta announced that Kenya had initiated talks with foreign lenders to suspend debt payments in order to free up resources to mitigate the impacts of the virus.

Offering a blanket debt cancellation for low-income countries is embraced in some quarters as an option to combat Covid-19 and manage post-epidemic recovery plans.

Manifestly, China is not a newcomer to debt forgiveness. Between 2000 and 2020, China has forgiven debts worth more than $9.8 billion owed by other countries worldwide.

BUDGETARY SUPPORT

It also has cancelled some of Kenya’s debts in the past. If China follows the pattern of writing off zero-interest, Kenya hopes to benefit.

However, a blanket debt cancellation is neither a viable nor a desired option. China’s economy is just recovering from a combination of Covid-19-induced domestic economic slowdown and the impact of trade wars with the US.

The second option is suspension of debt payments to avoid hurtling to a severe debt crisis.

During their March 26, 2020, virtual extra-ordinary summit, the G20 nations decided on a time-bound (for seven months) suspension of debt service payments for the poorest countries as they struggle to deal with the coronavirus pandemic.

Kenya, which is within the eligibility for the debt standstill by the G20, is likely to benefit from this decision.

China might choose to improve on the G20 package to reduce Kenya’s exposure to the impact of Covid-19, including rescheduling payments due in 2021.

The third option is to provide poor countries like Kenya with additional funding for budgetary support.

The final option is to step up humanitarian assistance to build community resilience and post-coronavirus recovery.

The African Union estimates Africa will need $200 billion to combat Covid-19. This cannot be realised through debt suspension.

AID SCHEME

China should draw from its huge experience in using humanitarian aid to support Africa’s war on the deadly Ebola virus in 2014 and the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003.

It should put in place a comprehensive aid scheme to fight coronavirus, undergirded by President Xi Jinping’s philosophy of “building a community of shared destiny for mankind” as a clarion call for post-Covid globalisation.

On its part, Kenya should ensure corrupt officials do not siphon millions of aid dollars to foreign banks.

Professor Peter Kagwanja is the Chief Executive of Africa Policy Institute and former Government Adviser. This article draws from an API policy brief, ‘Disease and Debt: Managing the Impact of Coronavirus Epidemic on Kenya’s Debt to China’ (May 2020).

Advertisement