China has frozen disbursements of active loans to Kenyan projects in the wake of differences over Nairobi's bid to extend debt repayment holiday to December.
Chinese-funded projects are facing a cash crunch, with contractors reporting delayed payments from banks like Exim Bank of China.
Executives at State-owned firms say the projects risk delays due to the funding hitch.
Sources familiar with the delay say the Chinese lenders, especially Exim Bank, are uncomfortable with the terms of the Kenyan request for extension of the debt service suspension beyond June.
"Payment to contractors working on Chinese projects and paid under direct method have delayed since last month. We are told Chinese banks are not settling invoice because of the moratorium," said a CEO of a State corporation who spoke on condition of anonymity.
The direct method involves Kenyan firms with Chinese loans sending notices for supplier payments to Chinese banks through the Treasury.
China is one of Kenya's biggest foreign creditors, having lent Ksh758 billion ($7.02 billion) as at April 2021 to build rail lines, roads and other infrastructure projects in the past decade.
On Thursday, the Chinese embassy in Nairobi acknowledged the funding hitch, adding that the matter was being addressed by officials of the two countries.
"To my knowledge, the relevant parties of the two sides are in close communication on specific issues under the DSSI framework," said Huang Xueqing, the Chief of Information and Public Affairs section at the embassy, said in email response to the Business Daily questions on delayed release of loans.
"They are in communication with each other on this matter also under the framework of DSSI (Debt Service Suspension Initiative (DSSI)."
Kenya's Treasury officials denied delays in release of Chinese loans, saying the country had received positive response from all countries where they sought an extension of the debt repayment relief.
"Not true," Finance Cabinet Secretary Ukur Yatani said.
"I am not aware. All creditors have been very responsive," Director of the Public Debt Management Office Haron Sirma said.
In January, China and other rich countries under the under the Debt Service Suspension Initiative (DSSI) gave Kenya a six-months debt repayments relief.
The impact of the Covid-19 pandemic has battered Kenya's tax revenue collection at a time when more of its debts are falling due and as it is still grappling with gaping fiscal deficits.
Now, Kenya is seeking deals to suspend debt service with the rich nations under the Paris Club and other creditors, including China, covering the six months to the end of December.
The G20 countries, including Belgium, Canada, Denmark, France Germany, Italy, Japan, Republic of Korea, Spain and the USA, rescheduled payments of Ksh32.9 billion ($304.77 million) in principal and interest due between January and June to the next four years with a one year grace period.
The International Monetary Fund (IMF) has disclosed that Kenya had sought an extension of the debt relief from G20 countries to December, saving an additional Ksh39 billion ($361.27 million).
While China is a G20 member and a signatory to the deal, a large proportion of its loans 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 sought to negotiate its debt relief deals separately, but applying the same terms as the G20 countries while reserving the right on size and which loans will attract the moratorium.
The World Bank had estimated that Kenya could save Ksh55.9 billion ($517.8 million) from China between January and June under the DSSI deal in principal and interest payment freeze.
But China announced that Kenya would be granted a Ksh26 billion ($240.85 million) relief.
It is unclear how much relief the government was asking for and which specific loans were waived. But parliamentary disclosures indicated a portion of the relief came from the standard gauge railway financier China Exim bank.
President Uhuru Kenyatta's administration has largely taken loans from China since 2014 to build roads, bridges, power plants and the SGR.
This started after Kenya became a lower-middle income economy, locking her out of highly concessional loans from development lenders such as the World Bank.
China's influence on Kenya's infrastructure development, however, started in earnest with the construction of the Thika Superhighway between January 2009 and November 2012 at a cost of nearly Ksh32 billion ($296.4 million) during the last term of President Mwai Kibaki.
The deal to fund the first phase of the SGR, Kenya's single-largest infrastructure project by cost since independence, saw China overtake Japan as Kenya's largest bilateral lender.