Kenya is seeking a $600 million loan from China, pushing to $1.35 billion the debt it has picked up this financial year from its two international loans, as it seeks to bridge a budget deficit.

The current loan deal with China is three times what the country received from the Asian nation in 2015 for its development expenditure, raising questions over the country’s debt sustainability.

National Treasury Principal Secretary Kamau Thugge said Nairobi was finalising the deal with Beijing, but the details and terms would be provided later.

“We expect these funds to come in any time now to finance the budget deficit in the current fiscal year. We expect this loan to reduce the country’s local borrowing. Therefore, we expect pressures on domestic interest rates to also come down,” said Dr Thugge.

READ: Kenya seeks $600m from China to plug budget deficit

This is the country’s second international loan in the current financial year, after a $750 million syndicated loan taken in October last year. The loan, arranged through CfC Stanbic, Standard Chartered and Citi was also meant to plug the gaping $6 billion deficit in the budget, which has been worsened by missed revenue targets.

The country anticipates a budget deficit of 6.9 per cent of GDP in the 2016/17 fiscal year, compared with 8.1 per cent in the 2015/16 financial year. In its Budget Policy Statement released in February, Treasury revised downwards its domestic borrowing target to $1.7 billion, from $2.2 billion.

Infrastructure projects

In the past decade, Kenya has relied on Chinese loans to fund its infrastructure projects. Last month, the World Bank warned that the country’s growing appetite for Chinese loans risked hurting the economy due to the huge debt repayment burden.

Apurva Sanghi, the World Bank lead economist for Kenya, Rwanda and Ethiopia said that China’s loans to Kenya had grown by 54 per cent a year in the past four years, with some having high interest rates.

“China’s loans come with attractive interest rates and without strings attached for good governance. The loans, however, could harm Kenya in the long-run because of their lack of transparency and failure to tie aid to key governance reforms. Some of China’s loans are also non-concessional, which can raise debt-to-GDP levels quickly,” said Mr Sanghi.

READ: World Bank warns Kenya over rising appetite for Chinese loans

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Documents from Treasury show that Kenya will in the 2015/16 financial year pay $23.4 million as principal and $46 million as interest on its Chinese loans, with the debt burden expected to grow to $161 million in the next two years.

In the 2014/15 financial year, Kenya received $200.6 million from China in loans for development expenditure. China gave $120 million to the Ministry of Energy and Petroleum that included the large geothermal loans from China Exim Bank, $56 million to the Ministry of Transport and Infrastructure, and $25 million to the Ministry of Information, Communications and Technology (ICT).

The Chinese loan comes barely after Kenya borrowed $832 million from the domestic market between February 25 and the start of this month in a bid to knock off its more expensive issuances that were taken in quarter three last year. Currently, the government bonds due in the next three months stand at $510 million.

The government uses redemption to refinance itself. Redemption is when the government goes back to the market to get new debt to cover those that have matured.

Domestic debt

Data from the Central Bank of Kenya (CBK) shows that the country’s domestic debt rose to $16.46 billion between February 26 and mid this month, from $15.31 billion at the start of the year.

Treasury bills have gone up since the start of last month to stand at $4.72 billion, while the stock of domestic debt held in Treasury bonds is up by $226 million. The Treasury’s overdraft at the CBK has also increased by $70 million over the same period.

The rate of growth of the debt is, however, likely to slow down considering that there will be T-bill and bond redemptions worth $1.27 billion in the second quarter of this year coupled with the negative revision of the government borrowing target.

Genghis Capital fixed income analyst Vinita Kotedia said that the Treasury currently has minimal pressures to borrow from the domestic market.

“The new borrowing as at mid this month stands at $1.72 billion and bearing in mind that the government needs to borrow approximately $1.8 billion or approximately $451 million every month after taking into account the net redemptions for the remaining part of the 2015/16 fiscal year,” said Ms Kotedia.

Eric Musau, a fixed income analyst at Standard Investment Bank said that the increase in the domestic debt is not necessarily unusual but could be explained through issues are playing around this spike.

“It is important to look at whether it’s the government looking at additional funding or is it partly matching the maturities coming up, or other subsequent large offers,” Mr Musau said adding that the Central bank reopened two bonds worth $500 million in February creating the increase in the domestic debt.

Shortfall

“If there is a shortfall, especially in terms of revenue collections, then the Treasury will request the central bank to get into the market to borrow. These bonds are where the money came from. We are also seeing the maturity of some of these bonds within the near here months. The way government tries to manage its cash see them looking at which debt is coming up in terms of maturities vis a vis the demand by government,” Mr Musau said.

Investors are also rushing to lock in higher rates as the yields on government securities continue trending down due to high liquidity in the money markets and the revised borrowing target.