Kenya’s Chinese debt to hit USD9.8 billion as world meets in Beijing

Loans from China closed 2018 at USD6.2 billion (Ksh 627.1 billion)

Kenya will be keen to secure additional funds from China for construction of Phase 2B of the Standard Gauge Railway (SGR), as the World meets for the second Belt and Road Forum for International Cooperation (BRF) in Beijing.

The forum which takes place this week is expected to attract a high number of Heads of States from Africa and across the globe, with thousands of delegates from over 100 countries.

President Uhuru Kenyatta’s administration is seeking a Ksh370 billion (USD 3.67 billion) loan to extend the rail project which is currently at its second phase of construction (Nairobi-Naivasha).

Phase one of the project, 472 kilometre Mombasa —Nairobi line, is currently operational having been completed and commissioned by President Kenyatta on May 31, 2017.

It was constructed by China Road and Bridge Corporation (CRBC) on a Ksh327 billion (USD3.2 billion) loan from the Exim Bank of China.

READ: Boost for East Africa trade as Kenya commences SGR cargo services

Phase 2A is being developed by a sister company-China Communications Construction Company (CCCC), funded by the Chinese at a cost of Ksh150 billion (USD1.48 billion).

The 120-kilometre line which runs between Nairobi-Mai Mahu and -Duka Moja, a small centre between Suswa and Narok town, is 90 per cent complete.

The funds being sought by the government are meant to fund Phase 2B (Duka Moja-Kisumu) and the final stretch (Phase 2C) connecting Kisumu to the Kenyan-Ugandan border of Malaba.

President Kenyatta and former Prime Minister Raila Odinga are expected to lead a delegation from Kenya to the Beijing meeting.

“I will be part of the delegation that will accompany the President to the Asian country next week,” Mr Odinga confirmed at a public forum over the weekend.

In a recent meeting at the Chinese Embassy in Nairobi, Kenya Railways acting Managing Director Philip Mainga said the government is keen to secure funds during the BRF meeting.

“We hope to sign phase 2B during the meeting,” Mainga said, “Kenya Railways is working with the Chinese government in achieving the commitment we have on the 974 kilometre Mombasa-Malaba SGR project.”

Heavily indebted to China

If secured, Kenya will push up its debt obligation to China to above USD9.8 billion (Ksh991.2 billion), after loans from Beijing closed 2018 (December) at USD6.2 billion (Ksh627.1 billion).

This is up from USD5.3 billion (Sh536 billion) a year earlier, where a lion share has gone towards the construction of the multi-billion SGR.

The move will add pressure to the country’s debt portfolio which stands at USD53.3 billion (about Ksh5.4 trillion), nearly double the country’s annual budget.

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China tops the list as the biggest lender to Kenya followed by Japan, France and Germany.

Other sources for Kenya’s funds include the International Development Association (IDA), International Fund for Agricultural Development (IFAD) and the African Development Bank (AfDB).

In the next financial year commencing July 1, the government plans to borrow Ksh306.5 billion (USD3.03 billion) externally and Ksh277.5 billion (USD2.24 billion) in the domestic market to bridge its budget deficit.

It plans to spend Ksh2.67 trillion (USD26.3 billion) in the fiscal year with the budget focusing on President Kenyatta’s Big Four Agenda of affordable housing, growth in the manufacturing sector, universal healthcare and food security.

Kenya Revenue Authority (KRA) is expected to collect Ksh1.88 trillion (USD18.5 billion) to support the budget up from the current revised Ksh1.65 trillion (USD16.3billion).

The proposed spend for the year 2019-2020, by Treasury Cabinet Secretary  Henry Rotich, is up from the Ksh2.51 trillion (USD24.8 billion) he had proposed for the current fiscal year(2018-2019) which ends on June 30. The budget was however revised upwards to Ksh3.074 trillion(USD30.3 billion).

Kenya country’s ballooning debt has continued to spark debate over its sustainability with both the World Bank and the International Monetary Fund (IMF) cautioning the government to go slow on its borrowing.

In a recent report, the IMF noted that the country’s risk of defaulting on debt repayment had increased from low to moderate.

There has been a heated debate that Kenya could lose its key assets, among them the Port of Mombasa, to China if it defaults its debt. Kenya could lose Mombasa port to China over SGR debt

Financial experts have since questioned China’s motive in its increasingly lending spree to Kenya to finance mega infrastructure projects, warning that it could be a debt trap.

READ: Is China setting a debt trap on Kenya?

The Chinese government has however dismissed the claims, even as it defended its relationship with Kenya, which it has termed mutually beneficial.

“We are not putting Kenya into a debt trap. China-Africa Corporation cannot put Africa into a trap but booming economic growth,” the Chinese Embassy in Nairobi said.

The Belt and Road Initiative

A project of President Xi Jinping, China is using the Belt and Road Initiative (BRI) to enhance both China’s development and its cooperation with global partners.

According to the Chinese government, BRI represents a major breakthrough in “both theory and practice, and it carries far-reaching significance.”

Since its inception, the BRI has received a strong endorsement and warm support from the international community. So far, a total of 124 countries and 29 international organizations have signed BRI cooperation documents with China.

Most recently, during President Xi’s visit to Italy, the two countries signed an MOU on promoting BRI cooperation, giving a new impetus to this process.

Meanwhile, the BRI vision has been included in documents of major international institutions including the United Nations, the G20, the Asia-Pacific Economic Cooperation and the Shanghai Cooperation Organization.

China has been using the platform to strengthen global trade links across the world, in particular between Asia, Africa and Europe, with investment in an array of large-scale infrastructure projects along these two land and sea corridors.

The land route runs along the ancient Silk Road that for centuries connected China with Europe via Central Asia and Russia. Once completed, it will consist of a number of new road and rail routes, as well as energy pipelines and other key infrastructure.

The sea route is a maritime trade corridor built for the 21st century. It will stretch from Chinese coastal ports all the way to Europe via new and upgraded ports in the South China Sea, the Indian Ocean, the Middle East and the Mediterranean.

The potential size and scope, with related investments totalling as much as USD8 trillion by 2020, is projected to boost global trade by 12 per cent, impacting more than 65 countries and nearly two-thirds of the world’s population.

This year’s BRI has three things to look out for. First, the number of foreign heads of state and government officials in attendance (expected to be high) as they seek partnerships.

Secondly, the number of countries participating with thousands of delegates expected and third, there will be numerous side events including 12 thematic forums focusing on practical cooperation, and for the first time, a conference organized specifically for the business community.

A huge number of African leaders are expected to attend the forum where they will be keen to present the interests of their respective countries, especially on development.

Business communities from Africa are also expected to sign numerous MoUs for closer trade ties, a move that will tighten China’s grip on Africa.

ALSO READ: How China plans to beat US in capturing Africa

Average age of an East African citizen

The indicator in question in this column is figure 17.6.

17.6 of what?

According to published government statistics, the median weighted average age of an East African citizen is 17.6 years old. Among the 157 million East Africans alive today there are equal numbers of people over 17.6 years old as there are people under 17.6 years old.

So how do 17.6 years as a median age compare to other locales around the world?

average age of an East African citizen - The Exchange
Average age of an East African citizen – The Exchange

If the EAC were a country it would be the 13th youngest country in the world with Uganda, Burundi, and Tanzania bringing down the weighted average against the relatively older Kenya. To add perspective, the median age of both the #1 and #2 economies of the USA and China are more than twice as old at 37.8 years and 36.8 years respectively than an East African. Even more dramatic, ageing Japan has 46.5 years as median age and not surprisingly has a large retired population. Other countries in Africa are the closest in the median age of the population followed by economically challenged areas of the Middle East.

Young people demand different goods and services than older citizens. What types of goods and services are most likely to be in higher demand in East Africa versus developed nations?

Food, lots of it. A younger population means more mouths to feed. In addition, East Africans have children younger than citizens of other developing nations. Education – both secondary, tertiary, and vocational education will continue to experience high aggregate demand. Energy – either at home or in some productive means will be required for all the people. Telecom services tend to be very popular among more youthful populations.

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Do local markets have the ability to meet the demands of this young and growing population?

On the food front, East Africa has tremendous arable land available for farming though complex land rights issues and lack of capital for the use of modern farming techniques limit potential.

Education is sorely lacking throughout the EAC and affordable private schooling is entering the marketplace with early signs of success. It is likely that increased options and suitability of vocational and other means of education will emerge in the upcoming years to meet demand.

To meet its energy needs, thankfully, East Africa has a high potential for renewables such as solar with rapidly decreasing costs as well as traditional energy sources such as natural gas and other carbon-based energy sources.

Telecommunications is one of Africa’s great growth stories. Telecom services, mobile money transfers and mobile banking are making first impressions on youngsters all throughout the East African community.

With the scalability of telecom towers and networks, any location economically viable can connect East Africans to the sum of human knowledge through the magic of the internet.

What are the economic implications of millions of young East Africans coming of age in the upcoming years?

East African citizens have the benefit of the development of the remainder of the world and can leapfrog over the past and skip the expensive learning curves that have come with it. Things such as landline telephones, electrical poles to homes and businesses, bank branches, money transfers, and a host of other services have cost developing nations hundreds of billions of dollars, costs which were passed on to consumers. Not so for today’s East African youngster.

East Africa’s population is unconstrained by corporate institutional structures, products, or means of providing services.

It is highly likely that new brands and entire categories of businesses will emerge to meet the needs of the youngest and most interesting generation on the planet today.

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About the authors:

David L. Ross is Managing Director of Statera Capital and US Ambassador to the Open University of Tanzania active in growing companies in Eastern and Southern Africa through primary investment, investment advisory, strategic partnerships, and executive education. Connect on LinkedIn at https://tz.linkedin.com/in/davidlross1 or at david@stateracapital.com

Catherine Mandler is a Senior Analyst at Statera Capital. Connect on LinkedIn at http://www.linkedin.com/in/CatherineMandler or at catherine@stateracapital.com

How Kenya plans to deliver 500,000 houses in three years

The government expects private sector to contribute 60% of the development

International property developers are angling themselves to tap into the housing projects in Kenya’s Big Four Agenda, a boost to President Uhuru Kenyatta’s ambition to deliver 500,000 units by 2022.

This came out at the sixth East Africa Property Investment Summit (EAPI) held in Nairobi this week, where the government called on the private sector to support the projects, assuring them of offtake.

An offtake assurance or agreement is a commitment between a producer and a buyer to purchase or sell portions of the producer’s future production.

“We want to assure the developers that whatever they build, we will buy,” Charles Hinga, Kenya’s Principal Secretary -State Department of Housing and Urban Development.

He spoke during the event  which saw Nairobi host some of the largest international and regional developers and financial investors such as USA’s Echostone housing, South Africa’s International Housing Solutions, UK’s CDC, USA’S OPIC, World Bank’s IFC and REIT Groups from across Africa.

The forum attracted over 1,000 delegates and 240 leading real estate development and investment companies, with representation from all member countries of the East African Community (EAC).

Under his plan, President Kenyatta, through is administration has promised Kenyans affordable and decent houses, universal health care, food security and a revamp of the manufacturing sector to increase its contribution to the GDP to 20 per cent by 2022, from the current 9.2 per cent.

Government housing plan

The government has lined up a number of incentives to attract developers and investors. They include availing land for housing projects, zero rating of construction material, Value Added Tax (VAT) refunds on imported machinery among other tax rebates.

The State also plans to adopt modern building technology which is cheaper and faster to put up a house.

It is considering 14 modern technologies including the 3D printing, where a house can be constructed with US$4000 (Ksh402,880), with a completion timeline of 48 hours (two days).

To guarantee offtake, the State is setting up a pooled fund that will see formally employed Kenyans contribute 1.5 per cent of their gross salary towards the fund..

Employers will also contribute a similar percentage of the employees’ basic salary with total contribution capped at Ksh5, 000 (US$ 49.58).

Individuals earning a basic salary of Ksh166, 000 (US$1,646) and above will part with up to Ksh2, 500 (US$24.79) for the fund.

According to PS Hinga, the government estimates to collect between Ksh6 billion (US$59.5 million) and Ksh18 billion (US$178.5 million) monthly. Kenya Revenue Authority (KRA) is expected to effect the tax anytime soon.

The funds will be used to support individuals purchase homes. Where developers have failed to sale a unit, the government has promised to move in and buy the houses.

“Of course is it going to be a slow start as information gets out there but we are good to go,” Hinga said.

The government has set up an online platform dubbed “Boma Yangu” which is Swahili for “My Home” to support the home ownership programme.

Under the programme, Kenyans are required to register on the platform which will guide allocation of homes in the affordable housing scheme. At least 200,000 individuals have registered on the programme, the government has confirmed.

During his last week State of The Nation address, President Kenyatta said those who have registered on the ‘Boma Yangu’ platform will be given first priority in allocation of houses.

“We are now on track to deliver affordable housing to Kenyans.  This life changing programme is being undertaken in partnership with County Governments and the Private Sector,” President Kenyatta told the nation.

Additionally, the Affordable Housing Programme is expected to create opportunities for the local industry.

“We have ring-fenced the supply of certain components, such as doors and windows, for exclusive delivery by Micro, Small and Medium size enterprises.This will not only put money in the pockets of our local artisans, but also supports formalization of the industry,” Kenyatta said.

Mortgage

To further support Kenyans acquire homes; the government is setting up the Kenya Mortgage Refinance Company (KMRC).

KMRC will refinance Primary Mortgage Lenders (PMLs) such as commercial banks, microfinance banks and Saccos, using funds from the capital markets,  to provide affordable mortgages to eligible members of the public.

21 private entities have already come on board in the programme where they control (private sector) 80 per cent of the company, with government taking the remaining 20 per cent shareholding.

“This is a single purpose institution that is coming in to provide primary funding for lending institutions,” said Johnstone Oltetia, Interim CEO-Kenya Mortgage Refinance Company, noting the financing will be “long-term” as opposed to short-term mortgage products offered by other lending institutions.

KMRC is currently counting on concessional funding from the government, with other funds expected from the World Bank and the African Development Bank (AfDB). It plans to issue bonds in future to raise capital to firm up its operations.

“We will be going to the capital markets to raise funds for re-financing housing projects,” Oltetia said.

Investor readiness

A section of developers including architects have expressed interest in the programme, even as they call on the government to fulfill its promise on incentives and meet its offtake obligation.

“It is about time that we had that conversation about affordability of houses. It is time that our citizens lived in dignity. I think the government has done a lot of home work in terms of putting it together on the way to crack it and we will support the initiative,” said Emma Miloyo, the Architectural Association of Kenya President.

The National Cooperation Housing Union (NACHU) has also expressed confidence on uptake of the projects by the private sector.

“Investors are ready. They are just waiting on the government to sort out the procurement processes,” said Stanley Ndungu, NACHU Finance Manager.

If implemented properly, the affordable housing programme will bridge the housing deficit in Kenya which currently stands at two (2) million and continues to grow at a rate of about 200,000 units a year, with the market offering a paltry 50,000 units annually.

There is a proliferation of informal settlements in urban areas with 67 per cent of the urban population living in slums in overcrowded homes, typically with only one room and no adequate ventilation, drainage and other important facilities.

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