Damage to Kenya’s creditworthiness and difficulty in accessing international capital markets in the future informed the Treasury’s move to immediately retract a statement indicating it had discussed debt restructuring with China’s finance minister.
The Treasury amended a reference in a social media post released in the wake of a meeting between the two countries’ top finance officials, deleting statements mentioning talks on a debt restructuring
Analysts reckon that a default or restructuring could have hurt the country’s reputation as a reliable borrower, making it harder and more expensive to access future loans.
A debt restructuring can also create a picture of an economy in crisis, hurting investments that could trigger capital flight and financial instability.
China’s Finance minister Lan Foan and his Kenyan counterpart, John Mbadi, had held talks in Beijing, aimed at securing stronger trade and investment ties between the East African nation and the world’s second-largest economy.
“He [China’s finance minister] also expressed China’s willingness to facilitate discussions on debt restructuring and concessional financing to support Kenya’s economic stability,” the Treasury said in a post on X yesterday morning. The post was then deleted and later reposted without any reference to restructuring or concessional financing.
The Treasury told Reuters news agency that there had been no discussions on restructuring debt at the meeting in Beijing.
The news outlet didn’t get an immediate response from China’s finance ministry.
“Treasury or government is not usually generous with information, so my bet would be avoidance of pre-empting the deal or agreement because again, restructuring is a sensitive topic, especially with foreign investors,” said Stellar Swakei, a senior research associate at Standard Investment Bank. “It requires a better way of phrasing and announcing to avoid panic and dwindling investor confidence.”
China has become Kenya’s biggest bilateral lender after Nairobi took a number of loans to finance infrastructure projects, including the standard gauge railway (SGR) line from Mombasa to Naivasha.
Kenyan officials have been engaging with their Chinese counterparts to secure funds for more projects, including the extension of that railway line to the border with Uganda.
“Kenya and China have reaffirmed their commitment to deepening economic cooperation, with a focus on trade, infrastructure investment, and financial collaboration,” the Treasury said in a report of a meeting.
President William Ruto, who took office in September 2022, has vowed that his government will not default on its external debt, pledging to cut waste and boost revenue to tackle the challenge.
His government tried to bring in new taxes last year but backed down after deadly protests forced the withdrawal of the Finance Bill.
Kenya has also been seeking to diversify sources of financing, including striking a deal for a privately placed bond with the United Arab Emirates for $1.5 billion. Debt servic costs take more than half of taxes, leaving the country with little cash it requires for projects that are critical to ease the growing youth unemployment.
China is Kenya’s biggest bilateral lender, and is expected to be paid a total of Sh134.44 billion in the current financial year in principal and interest payments, a figure that is expected to rise to Sh155.6 billion in the financial year starting July.
Most of the loans being repaid were for the building of the standard gauge railway, which runs from Mombasa through Nairobi to Naivasha.
Kenya has previously rebuffed the push to restructure its debt.
In 2021, in the middle Covid-19 economic hardships, Kenya declined to seek to overhaul its debt under a G20 initiative because it feared that would curtail its ability to raise funds from global capital markets.
The G20 group of major economies introduced a “common framework” to help developing nations cope with the financial pressure of Covid-19 by allowing them to suspend bilateral debt service and then restructure their debts.
Neighbouring Ethiopia and Ghana have restructured their public debt.
Kenya’s debt is in high distress, having moved from moderate, as the country breached most of the critical debt sustainability indicators, including external debt service as a ratio of income from exports.
