Kenya Seeks China’s Approval to Convert Dollar Loan to Yuan

Substantial Interest Rate Reduction Expected

The proposed currency conversion could deliver significant financial relief to Kenya’s strained public finances. Treasury Cabinet Secretary John Mbadi revealed that converting the loan from US dollars to Chinese yuan could reduce interest rates from 6.37 percent to approximately 3 percent, representing a dramatic halving of debt servicing costs.

“The moment we move from US dollar to renminbi, automatically, the interest rate reduces by almost half,” Mbadi said. “To us, that is a big saving.” The difference stems from variable dollar-denominated rates tied to the Secured Overnight Financing Rate (SOFR) versus China’s fixed yuan rates.

The country spends nearly $1bn a year in debt service to China. The negotiations, which are at an advanced stage, are aimed at helping reduce the Sh130 billion ($1 billion) that Kenya spends annually on servicing its debt to China.

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Mounting Debt Service Burden

Since 2022, Kenya’s debt servicing costs have skyrocketed owing to higher interest rates and a strong dollar. Servicing of the SGR loans, which is done in January and July, is one of the biggest burdens on taxpayers, with repayments to China accounting for more than three-quarters of the annual spend on external debt obligations.

The financial pressure has been mounting steadily. Kenya’s external debt stood at $40.5 billion as of March 2025, including $14.4 billion owed to the World Bank, $7.52 billion to eurobond holders, and $5.04 billion to China, according to Treasury data.

It is not known if Kenya has sought to convert any other dollar denominated loans.

High Risk of Debt Distress

There was no word from Beijing on the news.

Of Kenya’s $40.5 billion in external debt at the end of March, it owed $14.4 billion to the World Bank, $7.52 billion to eurobond investors and almost $5.04 billion to China, according to Treasury data.

The International Monetary Fund lists Nairobi as being at a high risk of debt distress. Recent World Bank analysis confirms that Kenya’s public debt remains at high risk of distress, with interest payments absorbing about a third of tax revenue.

Kenya’s debt to the International Monetary Fund and World Bank has risen steadily over the years. As of December 2024, Kenya owed Sh1.53 trillion to the World Bank and Sh420.53 billion to the IMF, bringing the total to nearly Sh1.95 trillion.

The Standard Gauge Railway Project

The Standard Gauge Railway (SGR), part of a regional connectivity project runs from the port of Mombasa to Naivasha in central Kenya. The 480-kilometer railway connects the port city of Mombasa with the capital city of Nairobi, replacing the colonial metre gauge railway. Construction began in 2013, with the initial segment completed in 2017 at a cost of approximately $3.8 billion.

The project represents Kenya’s largest infrastructure project since independence in 1963. An additional $1.5 billion extension to Naivasha was completed in October 2019, extending the total line length from 472 km to approximately 592 km.

Operational Challenges and Revenue Shortfalls

While the SGR has achieved some successes, particularly in passenger services, its primary economic justification—freight transportation—has faced significant challenges. The Chinese-funded feasibility study that underpinned the project claimed the railway would be profitable by moving 22 million tons of freight a year, or 20 trains a day — more than double the line’s actual operating capacity according to subsequent analysis.

As of 2020, railway operation expenses exceeded revenues. In 2023, the Kenya Railway Corp. reported an average of 18 to 20 trains a day between Mombasa and transit hubs in Nairobi and Naivasha. Kenyan authorities reported that the SGR’s income reached $84 million in 2022, up 4% over the previous year.

The railway faces structural challenges in freight operations. The SGR is more expensive for shipping companies compared to truck transportation from Mombasa, primarily due to last-mile costs and the need for cargo transfers.

Stalled Regional Expansion Plans

The SGR’s original vision extended far beyond Kenya’s borders. The project was planned as the first step toward an East African regional SGR network, reaching the Ugandan border, Kampala, and Rwanda’s capital of Kigali.

However, construction stopped far short of Uganda when repayment concerns caused Chinese lenders to throttle SGR financing. The railway now ends near Naivasha, more than 300 kilometers from the Ugandan border. The Ex-Im Bank of China rejected Kenya’s request for a loan to extend the SGR to the Ugandan border, and declined to loan Uganda funding for its SGR segment.

Uganda pulled out of the SGR project, opting to use a Turkish company to develop its end of the rail line.

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Currency Conversion Benefits and Implications

The proposed yuan conversion represents part of Treasury’s policy shift to diversify the currency composition of foreign debt. Currently, Kenya’s repayment obligations require constant dollar purchases from the foreign exchange market, creating additional pressure on the Kenyan shilling.

If Kenya converts the loan into Chinese yuan, the repayment shifts from dollars to yuan, likely reducing dollar demand as Kenya will no longer need to purchase as many dollars from its reserves to service the loan.

The timing appears favorable for such negotiations. The Kenyan shilling has strengthened significantly against the US dollar, recovering from around Ksh161 in early 2024 to stabilizing near Ksh129 in 2025, representing a recovery of over 14 percent year-on-year. This turnaround has been driven by sharply improved foreign reserves (now covering over 4 months of imports), robust diaspora remittances, and sound monetary policy.

Broader Economic Context and Fiscal Pressures

Kenya’s pursuit of the yuan conversion occurs against a backdrop of mounting fiscal pressures and political constraints on revenue generation. Last year, the East African nation’s efforts to hike taxes to improve its financial situation sparked deadly protests, leading the government to backtrack.

More than 50 people were killed during youth-led demonstrations against the government’s proposed tax measures, forcing President William Ruto to abandon tax hikes worth Sh346 billion. The political aftermath fundamentally altered Kenya’s fiscal approach, with the government seeking alternative solutions to balance its books.

Kenya’s real GDP is expected to pick up gradually in the medium term, with growth projected to increase from 4.5 percent in 2025 to about 5.0 percent in 2026–27. However, the economic slowdown has stemmed from multiple challenges including floods, high interest rates, and subdued business sentiment following protests and reduced development spending.

IMF Relations and Alternative Financing

Kenya’s debt management strategy has been complicated by its relationship with the International Monetary Fund. Kenya has excluded IMF funding from national budgets through 2029 following uncertainty over whether fresh talks could unlock multi-billion shilling loans.

After Kenya’s loan facility was terminated in March due to a breach of restrictions, the country missed out on debt worth Sh110 billion. The government is seeking to avoid the strict lending conditions typically attached to IMF support, including higher taxes, job freezes, and spending cuts.

Regional Economic Implications

The SGR remains central to Kenya’s role as a regional economic hub. Kenya’s current account deficit narrowed to 3.1% of GDP in the 12 months to February 2025, supported by a rebound in exports—particularly agricultural goods and re-exports—and strong remittance growth of 19%.

The railway’s performance has broader implications for East African trade and connectivity. The 700-kilometre Kenya Standard Gauge Railway links the port city of Mombasa to the country’s hinterland as part of the Northern Corridor transit network planned to link the Great Lakes Region with the sea.

Future Prospects and Completion Plans

Despite current challenges, there are renewed efforts to complete the SGR network. In May 2024, the Kenyan government secured a commitment from the Export-Import Bank of China to fund construction of the remaining sections of the SGR from Naivasha to Malaba on the border with Uganda.

The remaining sections include Phase 2B from Naivasha to Kisumu (262.3km), and Phase 2C from Kisumu to Malaba (102km), with total costs estimated at $5.3 billion. The project would connect with planned extensions to the Democratic Republic of Congo, Rwanda, and South Sudan.

Expert Analysis and Market Response

Financial analysts view the yuan conversion as part of Kenya’s broader debt management strategy. The move reflects growing recognition that the current dollar-denominated debt structure is unsustainable given Kenya’s fiscal constraints and forex pressures.

Economist Aly Khan Satchu noted that “The Kenya SGR desperately needs cross-border expansion” to make it a financially sustainable project. This is another key element in Kenya’s negotiation with Chinese creditors.

Political and Social Considerations

The SGR project remains politically significant beyond its economic implications. The project emerged during President Uhuru Kenyatta’s administration and was seen as a flagship achievement, though questions about procurement and cost-effectiveness have persisted.

Public transparency around the SGR contracts has been a contentious issue, with Kenya’s new Transport and Infrastructure minister releasing three Chinese loan contracts in November 2022 to address long-standing rumors about collateral arrangements.

Looking Forward: Implications for Kenya-China Relations

The yuan conversion negotiations reflect the evolving nature of Kenya-China economic relations. President William Ruto’s state visit to China in April 2025 demonstrated continued high-level engagement between the two countries despite the financing challenges.

Success in these negotiations could provide a template for other African countries seeking to restructure their Chinese debt obligations. However, the discussions also highlight the broader challenges facing China’s Belt and Road Initiative as borrower countries confront mounting debt burdens.

The outcome of the yuan conversion talks will be closely watched by other African nations with significant Chinese debt exposure, potentially influencing future lending and borrowing practices across the continent. For Kenya, the immediate priority remains securing more favorable repayment terms while working toward the SGR’s long-term viability as a regional transport corridor.

As negotiations continue, the success of this financial restructuring will depend on China’s willingness to accommodate Kenya’s fiscal constraints while protecting its own economic interests in the strategically important East African region.

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By: Montel Kamau

Serrari Financial Analyst

22nd August, 2025