China has overtaken France as the second largest lender to Kenya after Japan, reflecting Beijing’s increasing importance as a source of development funds for the country.

Data from the Central Bank of Kenya shows that Kenya’s debt to Beijing rose by 50 per cent to about $750 million in the year ended June 2013, compared with $500 million in fiscal year 2011-2012.

At the same time, loans from multilateral lenders like the International Development Association (IDA) — the World Bank’s lending arm — and the African Development Bank rose sharply, a trend analysts interpret to mean that Nairobi is increasingly looking for loans with fewer conditions than those of the traditional lenders.

Loans from traditional partners like the US, Germany, Japan (Kenya’s largest creditor) and Italy either remained constant or dropped. France was the only country to increase loans to Kenya during the period.

Infrastructural projects

“The increase in bilateral debt stock was largely attributed to disbursements from China meant for financing infrastructural projects, and disbursements from France during the period,” said the CBK in its June monthly report.

In the year ended June 2013, Kenya’s external debt rose by Ksh79 billion ($908 million) to stand at Ksh843.6 billion ($9.68 billion), of which about 38 per cent is owed to IDA.

The debt owed to Japan declined from Ksh107.4 billion ($1.23 billion) in June 2012 to Ksh86.8 billion ($997 million) in June 2013. Debts to the UK, Italy, Netherlands and US remained flat at less than $100 million each.

China’s ascent as a key creditor to Kenya has been quick, with the country only appearing on the list of the top 10 creditors to Kenya in 2012. The willingness of Beijing to loosen its purse strings has made it a favourite partner in government circles, a development that is causing discomfort in Washington, where China’s rising influence in Africa is being closely monitored.

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Nothing captures China’s growing influence in Nairobi better than the complaint last year by Western diplomats that it was becoming hard to access the president, hinting at a cosiness between Kenya and China. The official response was that the president was accessible to “any nation that works for the good of the Kenyan people.”

Analysts say the strengthening of the relations between the two countries stems from the relatively flexible nature of Chinese lending to Nairobi.

Whereas Western countries demand environment and social impact assessment reports before funding projects, Beijing is known to ignore such requirements, with its main condition being that the contracts be handed to Chinese companies.

“China’s strategy is clearer than that of the West. If its own interest converges with that of the host country, it will fund a project without engaging in the sideshows of, say, governance,” said Macharia Munene, a professor of history and international relations at the United States International University, Nairobi.

“For China, it’s about creating access to raw materials — be it through building roads, rails or ports. If there is political and economic backing for the project, you can bet the Chinese will not hesitate to fund it,” said Dr Samuel Nyandemo, an economist at the University of Nairobi.

Channelled directly

The credit extended by Beijing to Nairobi could be higher than the official figure of $750 million, as part of the loans are channelled directly to parastatals under which the intended projects fall.

Whereas they are guaranteed by the state, they are not directly given to it. For example, China has agreed to give the Kenya Airports Authority about $500 million for the construction of Kenya’s second airport. Beijing has also extended loans to power generating company KenGen.

James Shikwati, director of the Inter Region Economic Network, said the Chinese and Japanese have a clear and proactive strategy to reach out to African markets.

“Kenya is simply responding to signals from these two countries,” he said. But experts urge caution.

“Kenya’s engagement with China is akin to sailing in an uncharted sea,” Mr Shikwati said.

Loans and grants

Global research firm Open Data for International Development (AidData) estimates that between 2001 and 2011, China extended $11 billion in loans and grants to the Kenya, Uganda, Tanzania and Rwanda. Tanzania and Uganda received 80 per cent of the funds — $4.6 billion and $4.5 billion respectively. Kenya received $1.6 billion, while Rwanda and Burundi received $469 million and $165 million respectively.

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In August, Kenya announced it had agreed on a Ksh425 billion ($4.8 billion) concessionary loan from China to fund the construction of the Mombasa-Malaba standard gauge railway as well as energy and wildlife protection projects.

The loan will be repaid at a floating interest rate of 360 basis points above the London Interbank Offered Rate (Libor). The Kenyan government has been getting funding from the China Export Import (Exim) Bank, the China Development Bank or the China Agricultural Development Bank.

“The terms of loans from Beijing are favourable — they have long repayment periods with a huge component being concessional,” Dr Nyademo said.

Growing prominence

Apart from Beijing, the growing contribution of the AfDB — which funded 85 per cent of the Thika superhighway — mirrors the growing prominence of the Africa-focused lender. The bank plans to raise $100 billion to finance infrastructure projects across the continent.

Over the past five years, China has emerged as a key trading partner with Kenya, with trade between the two countries growing steadily fuelled by a spike in imports from the Asian country.

In the first six months of this year, data from the Kenya National Bureau of Statistics (KNBS) shows that imports from China rose to $1.9 billion, compared with $1.8 billion in the same period last year.

Imports from India grew from $1.58 billion in 2011 to $2.57 billion as of last year, while those from UAE dropped from $1.78 billion in 2011 to $1.68 billion in 2012.