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China slaps Kenya with Sh1.312 billion fine, here's why

Kenya owes the third largest amount of debt to China among African countries

President William Ruto making addressing the nation at State House on September 27, 2022

Chinese banks which extended a Sh600 billion loan to build the Standard Gauge Railway have fined Kenya Sh1.312 billion.

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Treasury reported in its internal disclosures that the Sh1.312 billion fine was due to defaulting on the loan in the 2021/22 financial year that ended in June.

This (Sh1.312 billion) relates to the cost of default on interest at one per cent of the due amount,” the document reads in part.

The SGR has struggled to raise adequate revenues to finance its operations and service its debts to the Chinese banks led by the Export-Import Bank of China.

During the 2021/22 financial year, SGR recorded an operational loss of Sh3.4 billion after paying Sh22.7 billion in loan repayments.

Kenya began paying the loan after the lapse of the 5-year grace period that was part of the contract.

In August 2022, China locked Kenya out of a plan to waive debts owed by 17 countries.

Kenya owes the third largest amount of debt to China (Sh946 billion) among African countries but the country said that the debt relief measures would only be extended to struggling economies.

The future looks bleak for the loan repayments following the reverting of Port operations from Nairobi and Naivasha to Mombasa.

President William Ruto also lifted the order that forced importers to ferry cargo via the SGR.

It means that rail transport may lose some business to road transport, further slashing revenue.

Cargo accounted for a higher chunk of the revenue generated by the SGR in the first quarter of 2022 at Sh3.08 billion.

The figure represented 84% of the total revenue, while passenger trains posted Sh569.27million in revenue.

The government will have to dig deeper into the exchequer money to keep up with the SGR loan repayments.

In September 2022, President William Ruto urged the World Bank, International Monetary Fund (IMF) and other financial partners to extend debt relief measures to developing nations, painting a picture of Kenya’s struggling economy.

President Ruto said developing nations such as Kenya were at risk of an economic crisis following the Covid-19 pandemic, the regional conflict between Russia and Ukraine, climate change as well as global inflation.

Treasury CS Ukur Yatani has responded to reports that Kenya defaulted on the loan owed to Chinese banks.

Kenya owes about Sh600 billion for the construction of the Standard Gauge Railway.

In a statement on Thursday, October 13, 2022, CS Yatani refuted the claims, saying the government was up to date with all debt obligations.

"We wish to state categorically, that Kenya has never defaulted on the settlement of its debt service obligations to any of its creditors, nor has any creditor filed or reported any claim of default on debt service payments on facilities extended to the Government of Kenya.

Furthermore, Kenya has not accumulated any debt arrears in decades to suggest difficulties in debt servicing,” the statement read.

He said Kenya undergoes regular evaluation by many independent rating institutions that give the country’s debt servicing a clean bill of health.

The Cabinet Secretary also explained that the government undertakes to pay debts first before allocating money to any other projects or commitments.

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