9 May 2018

Kenya Must Avoid China Debt Trap or Fall Into Sri Lanka Pit

opinion

It seems to me that we are gradually sinking deeper and deeper into the phenomenon described in contemporary literature as the Chinese debt-trap diplomacy.

The Chinese will readily offer you infrastructure loans but you will only start feeling the pinch when the time for servicing the debt comes calling -- and you realise that your economy is not raising enough dollars to repay it.

If you are in doubt that we are gradually sinking into the Chinese debt trap, just grab a copy of the of the Budget documents which National Treasury Cabinet Secretary Henry Rotich tabled in parliament last Wednesday.

The data from the National Treasury reveals that loan repayments to Chinese State-owned banks will nearly treble soon when we will be required to cough up a whopping Sh82 billion in debt repayment to them in the year starting July 2019. In the current financial year, the bill for debt service to Chinese banks will be Sh26 billion.

ASSET

When the Sri Lankans found themselves in the middle of a China debt trap last year, they handed over management of a key port to the Chinese under a 99-year lease agreement. How I hope that we will not get to the point when we will have to surrender a key asset to the Chinese as the Sri Lankans did!

Djibouti is also about to cede control of a key port to a Bejing-linked firm in circumstances not too dissimilar.

We have taken too many Chinese loans. While the huge loans to finance the standard gauge railway are what hits the headlines, we have also borrowed heavily for projects of little economic impact -- such as loans to procure equipment for the National Youth Service (NYS) and purchase drilling materials -- from China.

Going through the external debt register, you will be surprised at the sheer number and size of loans we have taken for all manner of projects -- such as for buying MRI equipment, procuring of power materials, rehabilitation of technical institutes, modernisation of Kenya Power distribution systems and building Kenyatta University.

It is a reflection and the power and influence the Chinese companies wield. Indeed, Chinese contractors are more adept at putting such deals together and in having financing approved by the Treasury.

OPAQUE AGREEMENTS

They have become adept at colluding with Cabinet secretaries and heads of parastatals into signing opaque commercial agreements that end up saddling our external debt register with expensive loans.

Just the other day, Head of Public Service Joseph Kinyua was forced to issue a circular warning against the proliferation of these deals.

The Chinese will always have their way -- even when others are told to wait. Just look at the way the politics around the proposed Mombasa-Nairobi expressway is playing out.

The American conglomerate Betchel Construction and Engineering plans to build an express highway with four lanes and 19 exchanges. Last year, the company accomplished a major feat when it managed to secure a commercial contract with the Kenya National Highways Authority (Kenha).

However, it seems getting the Treasury to sign a financial deal is becoming trickier.

EXTERNAL LOANS

From what I gather, support for the project within key decision-making centres in government is beginning to wane with its opponents arguing that Kenya does not have space for more external loans.

The country, it is argued, should instead go for a public-private partnership deal, where the private sector bears most of the risk.

I have argued here before that the project, as currently conceived, has the potential of worsening our debt situation. But if you asked me, this is not the real reason why it is being resisted.

The reason behind the lacklustre political support for the project is to be found in the big influence of Chinese contractors and their powerful backers in government.

One of the biggest construction companies in the United States, with a global turnover of $35 billion in 2016, Betchel's entry into the mega infrastructure space is a prospect the Chinese are not too willing to countenance.

STRUGGLE

If it flies, there will be major implications for the Chinese contractors, especially on pricing of projects and the quality of engineering.

Only occasionally bursting in the news, the struggle behind doors between US and Chinese for control and influence over mega infrastructure deals is one of the most intense ongoing political struggles in Africa.

In March, during a tour of Africa, then-US Secretary of State Rex Tillerson expressed the frustration of the Americans when he cautioned African countries against taking too many Chinese loans.

Tillerson's view may have been self-serving but Kenya must not be left to suffer the indignity of the Sri Lankans.

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