Uganda’s SGR Revival Gathers Pace as Kenya Pursues Landmark Panda Bond, Reshaping East African Trade Corridors

A new chapter is unfolding in East Africa’s ambitious quest for modern infrastructure and enhanced regional trade. On parallel tracks, Uganda is signaling the imminent start of its Standard Gauge Railway (SGR) construction from Malaba to Kampala, backed by significant funding from the Islamic Development Bank (IsDB) and a consortium of lenders. Meanwhile, neighboring Kenya is making a pivotal move into China’s financial markets, seeking a substantial Panda bond to fund the critical Naivasha-Malaba section of its own SGR network. These synchronized developments underscore a renewed commitment to connecting the region, promising to drastically cut transport costs and transit times, and reshape the economic landscape of East and Central Africa.

Uganda’s SGR: A Decade-Long Dream Takes Shape

After years of anticipation and numerous delays, Uganda’s long-awaited Standard Gauge Railway (SGR) project is finally poised to break ground. The Ugandan government has earmarked a substantial Ush2.17 trillion (approximately $560.2 million) in the next financial year specifically for the construction of the Malaba-Kampala line. This significant allocation signals a decisive push to advance a project deemed strategic for the nation’s economic future.

The Funding Breakthrough: IsDB and a Syndicated Approach

A crucial turning point for Uganda’s SGR came on May 20, 2025, during the Islamic Development Bank (IsDB)’s 50th Annual Meetings in Algiers. It was there that Uganda secured a landmark $800 million financing agreement from the IsDB Group. This three-year agreement forms a key component of Uganda’s Country Engagement Framework (CEF) for 2025–2027.

The IsDB Group, a multilateral development financial institution focused on driving socio-economic development in its member countries and Muslim communities worldwide, has a strong track record of supporting critical infrastructure in Africa. Its commitment to Uganda’s SGR is particularly noteworthy given the project’s transformative potential. The $800 million package for Uganda’s economic resilience and sustainable human development extends beyond just the railway, also encompassing vital health, transport, and energy projects. This holistic approach aligns with the IsDB’s strategic pillars, which include supporting climate-resilient infrastructure development and enhancing human capital for inclusive development.

Of the total $800 million, the IsDB will directly provide $500 million. The remaining $300 million will come from other entities within the IsDB Group: the Islamic Corporation for the Development of the Private Sector (ICD) and the International Islamic Trade Finance Corporation (ITFC) will each contribute $150 million. Additionally, the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) has earmarked $400 million for insurance and reinsurance services, providing crucial risk mitigation for the project. Uganda’s direct financial commitment of Ush79.03 billion (approximately $21.9 million) further demonstrates its ownership and readiness to kick-start the project.

With a significant 19.4 percent of the financing for the Malaba-Kampala stretch now secured, construction is poised to commence after nearly a decade of anticipation. This funding is critical for issuing a Notice to Proceed (NTP) – a formal authorization from the project owner, granting the contractor the green light to begin work. The NTP is a vital milestone, ensuring that all necessary contractual, financial, and regulatory requirements are meticulously aligned before any on-site activities begin.

While the current funding helps initiate civil works, the remaining financing for the NTP is expected to be concluded through a syndicated loan deal involving multiple international lenders. Key participants in this consortium are anticipated to include UK Export Finance, Turkish Exim Bank, and the China Exim Bank. This diversified funding approach, involving both multilateral and bilateral institutions, signals a robust financial structure designed to ensure the project’s completion.

The Malaba-Kampala Link: Heart of the Northern Corridor

The Malaba-Kampala SGR section, spanning 272 kilometers, is not merely a domestic rail line but a strategic artery within the broader Northern Corridor Integration Projects (NCIP). The NCIP is a regional initiative involving East African countries, primarily aimed at enhancing trade, connectivity, and economic integration through large-scale infrastructure developments, including railways, roads, and oil pipelines.

President Yoweri Museveni’s launch of the SGR construction in November 2024 underscored its national significance. As Finance Minister Matia Kasaija articulated in his budget speech on June 12, “The SGR is a strategic investment for our country. It will cut cargo transport cost by half from the current $120 per tonne and reduce transit time from Mombasa to Kampala from seven days to one day, turning Uganda into a land-linked country as opposed to being landlocked.” This transformation from a “landlocked” to a “land-linked” nation is profound, promising to unleash significant economic benefits by drastically improving logistical efficiency and reducing the cost of doing business.

For a landlocked country like Uganda, heavily reliant on imported goods and keen to boost its exports (such as coffee, tea, and agricultural produce), efficient and affordable transport links to seaports are paramount. The SGR’s ability to slash freight costs and transit times will make Ugandan products more competitive in international markets, attract foreign investment, and stimulate industrial growth.

Overcoming Hurdles: A History of Delays and Perseverance

Uganda’s SGR journey has been fraught with challenges, primarily due to persistent funding difficulties. The project faced significant setbacks after many potential financiers, including key Chinese lenders, initially withdrew their support. These withdrawals were often tied to concerns regarding the commercial viability of the entire regional SGR network, particularly Kenya’s unresolved Naivasha-Malaba section, which was crucial for a seamless connection.

In response to these delays, Kampala in January 2023 opted to cancel its contract with China Harbour Engineering Company (CHEC), which had previously been slated for the project, and instead pivoted towards Turkey’s Yapı Merkezi Construction Group. This strategic shift highlighted Uganda’s determination to push forward, even if it meant re-evaluating partnerships. The delays in finalizing the comprehensive financing package, however, meant construction had remained on hold. The recent IsDB agreement, coupled with ongoing efforts to finalize the syndicated loan, signifies a breakthrough in securing the necessary capital.

Another critical component of the SGR development is land acquisition. The total estimated cost for land acquisition from Malaba to Kampala currently stands at Ush620.87 billion ($172 million). This covers approximately 135 kilometers out of the 232 kilometers mainline right-of-way, accounting for about 58 percent of the required land. While land compensation has been successfully completed from Malaba to Buikwe, efforts will continue towards Kampala, contingent on the availability of funds. Efficient and equitable land acquisition and compensation are vital for infrastructure projects of this scale, often impacting local communities and requiring careful management to avoid delays and social friction.

Kenya’s Pivotal Panda Bond: Unlocking the Naivasha-Malaba Stretch

Concurrent with Uganda’s SGR revival, Kenya is actively pursuing a significant financing strategy to complete its own SGR network. Nairobi is looking to raise Ksh358 billion (approximately $2.77 billion) from the Chinese money markets to extend its SGR line from Naivasha to Malaba, aiming to link up with Uganda’s system at the border.

The Financial Gambit: A Maiden Panda Bond for Kenya

The Kenyan Treasury has dispatched a mission to China to finalize the details of Nairobi’s maiden Panda bond issuance. Government sources indicate that the floatation of this bond in Shanghai is being fast-tracked, with a target to be completed before the end of this year.

A Panda bond is a unique sovereign facility issued in the Chinese domestic market, denominated in Yuan Renminbi, and specifically targets Chinese investors and institutions. For Kenya, venturing into the Panda bond market offers several compelling advantages, particularly at a time when traditional financing avenues face headwinds.

• Diversification of Funding Sources: Accessing the Chinese capital market broadens Kenya’s investor base beyond conventional Eurobond markets and bilateral loans, reducing over-reliance on any single source.
• Lower Borrowing Costs: China’s benchmark interest rates have been comparatively lower than those in Western countries, which have been rising to combat inflation. This divergence in interest rates means Kenya could potentially secure financing at more favorable rates than those currently available in the Eurobond market, where yields remain high. This directly impacts Kenya’s debt servicing costs.
• Strengthening Bilateral Ties: Issuing a Panda bond further cements financial and economic ties with China, Kenya’s largest bilateral creditor and a key development partner.
• Currency Matching: While not explicitly mentioned for this bond, the ability to raise funds in Renminbi could offer future flexibility, especially if Kenya’s trade with China continues to grow, potentially allowing for better currency matching of revenues and liabilities.

If successful, Kenya would become the second African country, following Egypt, to access the Chinese capital markets through a Panda bond. Cairo successfully raised $480 million via such an instrument in October 2023, which was priced at a competitive 3.5 percent for a three-year period. This precedent provides a positive outlook for Kenya’s endeavor.

A Shifting Partnership with Beijing

China has been a pivotal financier for Kenya’s SGR project from its inception. The first two phases – from Mombasa to Nairobi, and then from Nairobi to the Naivasha dry port – were largely financed through substantial loans from the China Export-Import (Exim) Bank. These phases, operational since 2017, have dramatically improved cargo and passenger movement within Kenya, positioning Mombasa as a key logistical hub.

However, Beijing had previously pulled back from financing the final extension beyond Naivasha to Malaba. This withdrawal stemmed from two primary concerns: the perceived commercial viability of the entire SGR line, particularly without a guaranteed Ugandan connection, and Kenya’s rapidly rising debt, which raised the risk of loan default, including on Chinese credit. Indeed, Kenya’s public debt had soared, leading to increased scrutiny from international lenders and prompting Nairobi to seek alternative financing for the SGR extension.

After years of seeking alternative funding and facing significant delays, Kenya recently returned to Beijing for financial support. During President William Ruto’s state visit to China in April, a crucial deal was signed where the two countries agreed to jointly finance the 475-kilometer rail from Naivasha to Malaba. This new agreement marks a shift in the financing model: while China will provide support, its contribution is expected to be a lower percentage of the total cost (reportedly around 30%) compared to the earlier phases (where it funded up to 90%). This implies Kenya will bear a larger share of the burden, which the Panda bond is intended to help cover.

Prime Cabinet Secretary and Foreign and Diaspora Affairs Secretary Musalia Mudavadi played a key role in these renewed negotiations. Speaking after a meeting with his Chinese counterpart Wang Yi in Changsha, the capital of Hunan province in Southern China, Mudavadi stated that Nairobi was “banking on Chinese support to ensure the Panda bond is floated at the start of the next fiscal year.” His attendance at the Ministerial meeting of Coordinators on the Implementation Follow-up Actions of the Forum on China-Africa Cooperation (FOCAC) further highlighted the diplomatic efforts to secure this critical financing within the broader context of China-Africa partnerships. FOCAC, a triennial forum, has been China’s primary platform for engaging with African nations, often involving pledges of development finance and infrastructure cooperation.

Bridging the Gap: The Economic Imperative for Regional Connectivity

The concerted efforts by Uganda and Kenya to complete their respective SGR segments are driven by a singular, overarching economic imperative: to bridge the critical infrastructure gap that currently hampers trade and logistics across East and Central Africa.

The Burden of Road Transport:

The absence of a continuous rail link between Kenya and Uganda has meant that the vast majority of cargo from the bustling Mombasa port – East Africa’s primary gateway – is transported by road to Uganda, Rwanda, Burundi, South Sudan, and the Democratic Republic of Congo (DRC). This overreliance on road transport is incredibly inefficient and costly. For instance, cargo movement from Mombasa to Kampala can currently take up to seven days or more by road, a journey that the SGR promises to cut to a single day. This prolonged transit time inflates logistical costs, adds to wear and tear on roads, increases carbon emissions, and exposes goods to higher risks of damage or theft.

The Port of Mombasa itself has seen remarkable growth, handling over 41.1 million tons of cargo in 2024, a 14.1 percent increase from the previous year. Uganda remains the port’s main transit destination, accounting for a significant 65.7 percent of transit cargo. This immense volume underscores the urgent need for a more efficient evacuation system. Without the SGR, the port’s capacity and efficiency gains cannot be fully translated into benefits for the wider region.

East Africa’s Integration Vision:

The completion of the SGR connection is foundational for the East African Community (EAC)’s ambitions for deeper regional integration. The EAC, which includes Kenya, Uganda, Tanzania, Rwanda, Burundi, South Sudan, and the Democratic Republic of Congo, aims to establish a common market, customs union, and ultimately a political federation. Efficient transport networks are the arteries of such integration, facilitating the free movement of goods, services, and people.

However, the EAC faces ongoing challenges to full trade integration. Non-tariff barriers (NTBs), varying customs procedures, and inadequate infrastructure often create bottlenecks that hinder cross-border trade. The SGR, by providing a high-capacity, standardized, and efficient transport backbone, aims to circumvent many of these traditional barriers. It promises to reduce friction at borders, streamline customs processes through digitalization, and lower the overall cost of trade within the bloc. This improved connectivity is vital for realizing the full economic potential of the region, fostering intra-EAC trade, and attracting further foreign direct investment.

Broader Landscape of African Infrastructure Finance

The dual SGR funding pursuits in Uganda and Kenya reflect broader shifts in the landscape of infrastructure finance across Africa.

China’s Evolving Role and the Belt and Road Initiative:

China has emerged as the single largest bilateral financier of infrastructure in Africa over the past two decades, largely through its Belt and Road Initiative (BRI). The BRI, a massive global infrastructure development strategy, aims to connect Asia, Africa, and Europe through a network of roads, railways, ports, and energy pipelines. In Africa, the BRI has addressed significant infrastructure deficits, facilitating trade, improving connectivity, and stimulating economic growth.

However, China’s lending practices in Africa have also drawn scrutiny, particularly concerning debt sustainability. The “debt trap” narrative, suggesting that Chinese loans are designed to ensnare countries in unmanageable debt, has been a contentious point. While some countries, like Zambia, have faced severe debt distress, many economists argue that the issue is more nuanced, often stemming from poor project viability assessments, governance issues within recipient countries, or broader macroeconomic challenges, rather than predatory lending by China. Many Chinese loans for infrastructure, unlike concessional loans from Western development banks, are commercial or semi-concessional, requiring repayment.

The shift in China’s engagement, as seen in Kenya’s case, indicates an evolving approach. Beijing is increasingly moving away from funding 90% or more of large state-backed projects, favoring instead joint financing models, public-private partnerships, and encouraging African nations to access its capital markets directly, as with Panda bonds. This evolution suggests a more diversified and perhaps less debt-intensive engagement, reflecting lessons learned from past projects and a growing emphasis on project sustainability and co-ownership. FOCAC platforms also increasingly emphasize sustainable financing, trade facilitation, and industrial capacity cooperation over just large-scale lending.

Diversifying Financing Sources in a Challenging Environment:

The search for alternative financing, such as Kenya’s pursuit of a Panda bond and Uganda’s diversified consortium, highlights a critical trend: the drying up of traditional concessional funding for African infrastructure. Concessional financing, typically provided by multilateral development banks and bilateral donors, offers loans with more favorable terms (lower interest rates, longer repayment periods) than market-rate loans. The expiry of certain international programs in March and a global shift in priorities (e.g., towards climate finance or other geopolitical urgencies) have reduced the availability of such funds.

Concurrently, Eurobond yields have remained persistently high for many African economies, making it expensive and risky to raise capital from Western financial markets. This environment has pushed African nations to explore new capital markets in Asia (China, Japan) and the Middle East (UAE) as more attractive alternatives. These markets offer different liquidity pools and, at times, more favorable terms, reflecting the increasing multipolarity of global finance and development partnerships.

Conclusion: A Collaborative Path to Prosperity

The coordinated advancements in Uganda and Kenya’s SGR projects, backed by a mix of multilateral, bilateral, and innovative capital market financing, represent a pivotal moment for East African economic integration. The successful completion of these railway lines promises to unlock unprecedented efficiency in trade and logistics, transforming landlocked nations into “land-linked” economic powerhouses.

While the journey has been long and fraught with challenges, the renewed political will and diversified financing strategies underscore a determination to realize the transformative potential of the SGR. These projects are more than just steel and sleepers; they are arteries of commerce that will drive down costs, accelerate goods movement, boost exports, and ultimately foster deeper economic integration and shared prosperity across the East African Community and beyond. The intricate dance between national ambition, regional cooperation, and global finance is shaping a future where East Africa plays an even more significant role in the global economy.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

24th June, 2025