The move might set a new standard by making Nairobi less dependent on US dollars and helping Beijing reach its goal of more commercial deals in yuan.
Analysts say that Kenya’s intention to change its Chinese debt from US dollars to yuan is a “win-win” since it will lower the African country’s interest payments and help China reach its objective of getting more people to use its currency around the world.
The accord could set a new standard for how to restructure debt in the future and maybe even reduce the need for the US dollar.
Kenya’s Treasury said in late August that talks with the Export-Import Bank of China were going well to prolong the terms of its loans and swap dollar-denominated debt into yuan to help the country’s foreign reserves.
If it works, the interest rates on the loans for the Standard Gauge Railway (SGR) would drop from 6.37 percent to 3.18 percent, which is what they are now under dollar-denominated loan terms.
In 2014 and 2015, the East African country got two loans worth around US$5 billion (35 billion yuan) to develop the Standard Gauge Railway line. This line connects the port city of Mombasa with the capital city of Nairobi and has a 120-kilometer (74-mile) extension to Naivasha in the Central Rift Valley.
Kenyan Treasury Minister John Mbadi says that the interest rate on the loans will drop from more than 6% in US dollars to roughly 3% in yuan. This is because the secured overnight financing rate (4.6%) is higher than the yuan rates.
The deal is expected to help reduce the US$1 billion Kenya spends annually on servicing its debt to China, creating greater flexibility within its national budget.
Nairobi has in the recent past come under severe financial pressure, especially following the cancellation of the 2024 Finance Bill, which stalled plans to introduce new taxes after widespread protests.
The International Monetary Fund (IMF) classified Kenya at a high risk of debt distress and suspended the final review of its programme with the country, a move that left the government without access to a final loan disbursement of nearly US$850 million.
Sub-Saharan Africa geoeconomic analyst Aly-Khan Satchu said the debt swap would be a “win-win” for both Kenya and China. For Kenya, Satchu said it “diversifies the borrowing currency basket side of the balance sheet”. He said for China, it increased the penetration of the yuan in the global marketplace in a measured manner.
“It’s a no-brainer,” Satchu added.
According to Mark Bohlund, a senior credit research analyst at REDD Intelligence, it remains to be seen if the Kenyan government’s requests to extend the repayment of Chinese loans will be more successful than previous efforts.
Bohlund said Kenya’s financing needs in the 25/26 fiscal year had risen due to delays in IMF and World Bank funds, prompting the government to redirect the proceeds from the US$1.5 billion eurobond sale in February from their planned use of prepaying syndicated loans arranged by Trade and Development Bank, currently costing 12-13 per cent, to finance the budget deficit.
“The continued divergence between the Shanghai interbank rate and libor and other US dollar-centred interest rates makes it attractive for the Kenyan government to shift the SGR loans and other debt owed to Chinese creditors into yuan,” Bohlund said.
David Omojomolo, Africa Economist at Capital Economics, a London-based macroeconomic research consultancy, said other heavily China-exposed borrowers like Angola would be watching closely.
“The US will be watching too, having warned against deeper Chinese-Brics financial integration,” Omojomolo said.
Ultimately though, he said these liability management exercises did not change Kenya’s fundamental challenge.
“Without IMF support and meaningful fiscal consolidation, the country’s debt trajectory remains unsustainable,” Omojomolo added. “Kenya may muddle through in the short-term but its ability to service its obligations will remain strained, leaving sovereign default risks elevated.”
This move aligns with China’s broader strategy to internationalise its currency and challenge the dominance of the US dollar. It has signed currency swap agreements with countries such as Nigeria and South Africa.
The continent is also witnessing more yuan-based deals, such as a recent 2.1 billion yuan loan between China Development Bank and the Development Bank of Southern Africa.
Furthermore, both the African Export-Import Bank (Afreximbank) and South Africa’s Standard Bank have joined the Cross-border Interbank Payment System, China’s alternative to the Swift international payment network, to facilitate direct yuan interbank payments in China-Africa trade.
Culled from : South China Morning Post Publishers Ltd.
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