Early in December 2023, the Governor of the Central Bank of Kenya suggested that the most advanced economy in East Africa could be about to conclude terms for a $1 billion loan from China. The loan sought is designed to help pay off an existing loan (the Eurobond) that is due in June 2024, and to stall infrastructure projects that were initiated with previous Chinese loans.
According to African Business, this move comes despite the President of Kenya, William Ruto, striking a hawkish tone on China during his 2022 election campaign. Indeed, Ruto has criticized the extensive Chinese loans secured by the previous administration, citing concerns about debt sustainability and potential lack of transparency. He argued that loan agreements between China and African countries are often opaque, lacking public scrutiny and raising concerns about potential corruption or hidden clauses. However, since taking office, his tone has shifted. He acknowledged the need for infrastructure development and the potential benefits of Chinese finance while prioritizing responsible borrowing practices.
The major reason African countries tend to lean toward Chinese lenders than Western lenders is that compared to traditional Western lenders, Chinese banks often offer faster loan approvals with less stringent conditions, making them attractive to African governments seeking rapid development. As the shrewd politician that he is, this shift in tone signaled Ruto's pragmatic approach, valuing the immediate benefit of funding crucial infrastructure projects alongside responsible debt management.
Kenya's growing public debt (exceeding $68 billion) raises concerns about long-term economic stability. Kenya is already overleveraged. President Ruto who was determined to reduce Kenya’s national debt to sustainable levels is now compelled to double it. And this decision will have severe consequences for Kenyan consumers and taxpayers.
The increase in the national debt is what increases the cost of living. As the national debt grows, the government needs to borrow more money to finance its spending. This increased demand for loans can drive up interest rates across the economy. Higher interest rates make borrowing more expensive for businesses and households, which can lead to higher prices for goods and services. Additionally, increased debt servicing costs (paying interest on existing debt) can divert resources from other areas, potentially leading to decreased public investment in programs that help keep living costs down.
This loan sought will certainly reduce investment because high national debt crowds out private investments. When the government borrows money, it essentially competes with businesses and individuals for available capital. This can make it more expensive for businesses to invest in projects that create jobs and boost productivity, ultimately impacting consumers through potentially higher prices and limited choices.
While this loan may help the Kenyan government achieve its immediate objectives, it will slow economic growth in the long run because the government may need to implement austerity measures such as tax increases to manage the debt, which will dampen economic activity; thus, reduce growth and potentially increase its dependence on China.