Will Kenya fall into China’s “Debt Trap”?

Kenya is among the African nations that China has had a growing influence in since the turn of the millennium. China has spent billions of dollars in Africa over the past few decades. Majority of its investments in Kenya go to infrastructure development, much like what China has been doing in the rest of Africa, as part of its Belt and Road Initiative, an estimated one trillion dollar plan to connect the country to trade routes all over the world.

History

China-Kenya relations date back to December 1963, when Kenya gained independence from British colonial rule. The alliance between the two nations started gaining momentum in the past couple of decades as China boosted investments aimed at infrastructure development in developing countries around the globe. It was the election of Mwai Kibaki as President of Kenya in 2002 that paved the way for a new era of Chinese investments in the country.

The global development strategy officially adopted as the “Belt and Road Initiative (BRI)” was initiated in 2013. The Belt and Road Initiative currently involves more than 125 countries spanning Asia, Europe, Africa, the Middle East, and the Americas that have signed collaboration agreements according to official data from China.

Economic relations

China is flexing its economic muscles in Africa, not because it wants to colonise Africa, but because of mercantilist ambitions in search for raw materials – petroleum, timber, cobalt, platinum, copper, diamonds and so on.

There has been a growing dominance of Chinese influence on the economic front of Kenya. China has penetrated the Small & Medium Enterprise (SME) market in Kenya, causing a lot of controversies in Kenya.

Chinese foreign direct investments have been on the up in Nairobi, opening up the Kenyan economy to a range of consumer and industrial goods from the second largest economy while enjoying technical and financial assistance.

There has been growing pressure on Kenya in recent years to make a shift from a consumer driven economy to an export driven economy. It imports double the amount it exports to the rest of the world.

Kenya introduced a procurement bill in 2018; made to address the concern of the local traders and the general public. The bill replaces the old rule which needed 51 percent of ownership of an entity to be considered Kenyan. The new law would require 100 percent ownership by Kenyans to ensure ownership.

Local traders find it increasingly difficult to compete with Chinese counterparts. Because China has a policy- to give loans at 3 percent interest only (what they do to many African nations).

According to 2018 figures, over 400 Chinese owned companies were operating in Kenya, creating thousands of jobs for the local community. Since 2015 China has provided Kenya with 67,000 training opportunities.

Chinese Ambassador to Kenya Wu Peng  stated earlier this year that huge infrastructural projects like the standard gauge railway connecting key port city of Mombasa to Nairobi may take long to yield returns, but they are solid and valid assets, whose value will grow in time, he stressed. The standard gauge railway, according to Wu, is a flagship project that showcases the fast speed and high quality of China-Kenya cooperation.

The construction of the SGR project has driven economic growth of Kenya by 1.5 percent and created 46,000 jobs for local residents.

Wu also said the train shortened the Nairobi-Mombasa trip from over 10 hours to five hours. Since its launch in May 2017, with an average booking rate of 99 percent, over 2.77 million passengers have travelled by the SGR, and around 4.2 million tonnes of goods have been transported, said Wu.

Apart from foreign direct investments, the Chinese ambassador claimed that China had made non-financial direct investment in Kenya worth around 520 million US Dollars in 2018. He also said that Currently there are over 2,400 Kenyan students studying in China. And in 2018, over 81,000 Chinese tourists travelled to Kenya for leisure and adventure.

Latest trade deals

In the first quarter of 2019 Kenya signed deals worth USD 2.23 billion with China to build a tech city and an expressway in the former. The Konza Data Centre and Smart Cities deal is worth USD 1.72 billion while the JKIA-James Gichuru expressway project is worth half a million USD.

Debt-trap Diplomacy

Between 2006 and 2017, China has loaned 132 billion to African countries. Many believe the these investments are a death trap and that most African nations will not be able to pay these debts back. China has always denied being involved with any kind of debt trap policy.

Kenya ranks as Africa’s third most indebted country to China for the period between 2000 to 2017, according to data from the China Africa Research Initiative.

The country’s current debt to China is understood to be about US$9.8 billion, which has funded large chunks of national infrastructure, including a number of highways and the Standard Gauge Railway (SGR) which provides a high-speed connection between Mombasa and Nairobi, the country’s capital, to facilitate the import and export of goods.

In 2018 reports started to emerge stating that Kenya is fast getting caught in China’s debt trap diplomacy , as a result of which the latter is preparing itself to seize major assets, the most significant of which is the port of Mombasa. Despite there being no authenticity in these reports, some media reports claim that Kenya’s Auditor General had stated it may only be a matter of time till the port is taken over by China because it is seeming increasingly likely that Kenya will fail to pay off their debts on time.

Risks associated with the Belt and Road initiative

The Belt and Road Initiative presents standard risks with regards to major infrastructure projects: debt risks, governance risks (corruption and procurement), stranded infrastructure, environmental risks and social risks, all of these primarily in the developing world context.

In recent years Kenyan media have been drawing analogies with the Sri Lanka’s debt situation, with experts warning the country about the possible consequences of Chinese loans.

Military/defence agreements

There are no formal defence specific agreements, however Kenya has been increasingly buying Chinese arms for two reasons- they are cheaper than Western arms, and because of the flourishing bilateral trade relations. According to some of the recent available information, Kenya purchased arms worth approximately 76 billion USD in 2015. According to Stockholm Peace Research Institute (SIPRI), the purchase included tanks, armoured vehicles and spare parts. SIPRI figures also reveal that East Africa has increased its military spending over the years with Kenya leading the race.

Conclusion

China have expanded investments in Kenya since 2002, and the two nations have since seen increasing levels of trade and cooperation and currently China is Kenya’s largest trading partner.  If the Belt and Road Initiative is to be completed, transport projects could reduce travel times along economic corridors by 12%, increase trade between 2.7% and 9.7%, increase income by up to 3.4% and lift 7.6 million people from extreme poverty, and Kenya would be among the significant beneficiaries. However, there’s still a long way to go. The ever improving bilateral relations and increased trade and cooperation between the two nations could potentially be a win-win for both parties, however there are many sceptics who would disagree, pointing the finger at China as the sole winner. Only time will tell what will eventually happen, and what china’s real motives are.