The Influence of China’s Belt & Road Initiative on Kenya’s Economic Development
Africa’s economic development in the 20th and 21st centuries has been heavily influenced by foreign investment, most notably from the US, France, the UK, and China. Despite becoming involved in the 1980s, China did not become a significant investor until the beginning of the 2000s. The annual rate of Chinese compound investment in Africa increased by 18% per annum from 2004 to 2016 and peaked in 2015 at $55 billion. According to scholarly data, a 1% increase in foreign direct investment has equated to a 0.138% increase in economic growth in sub-Saharan Africa, meaning that economic growth in African countries can be partially attributed to foreign investments and international projects. Such projects are vital for the development of African infrastructure, namely roads, rail networks, and dams. However, these investments come at a cost, with around 12% of the continental debt burden being owed to China and Chinese lenders. In some cases, debt payments have the potential to overshadow the benefits of international investment. Some countries, including China, are using financial leverage in Africa to win political favours and gain an economic foothold on the continent.
China’s Belt and Road Initiative in Kenya
As of March 2020, 138 countries have signed cooperation agreements for the Chinese Belt and Road Initiative (BRI), which aims to facilitate connectivity and international trade, as well as boost financial integration. Between 2013 and 2019, sub-Saharan Africa received around 22% of all BRI related investments, which amounted to approximately $160.6 billion. Kenya has the largest economy in East Africa and is a major regional transportation hub, which is largely why it has become a major benefactor of BRI investments. Various ‘mega projects’, such as the construction of the Nairobi Expressway, the upgrade of the Standard Gauge Railway (SGR), and the formation of the Eldoret Special Economic Zone (ESEZ), which is part of the African Economic Zone project, have all been developed in close cooperation with China as part of the BRI. The expressway and the SGR upgrade are aimed at improving the transportation infrastructure linking Nairobi to key hubs in the country to boost trade and social mobility. The purpose of the ESEZ is to increase levels of technological development and attract manufacturing and service companies.
Both the Nairobi Expressway and the SGR were contracted to the China Road and Bridge Corporation (CRBC). The expressway started trial operations in 2022 and is currently managed by Moja Expressway Company, another Chinese firm. Totalling 27km, the toll road was designed to ease city traffic and provide access to the Jomo Kenyatta International Airport. Since the trial operation in 2022, around 50,000 motorists have been using the road daily. However, because the CRBC’s government contract states the corporation will collect all proceedings for the first 27 years, the proceeds from the expressway will go to CRBC instead of the Kenyan government. As of February 2023, 10 million motorists had used the road and CRBC had collected around $14,396,538. The SGR, which is designed to connect the port in Mombasa to Uganda, is also predominantly financed by China. This new fast rail link project is designed to increase domestic and international trade and promote international cooperation, but is far from completion. While the Kenyan government has already spent $5 billion to upgrade the SGR, mostly financed by China, it still requires an additional $3.7 billion to finish the project.
Kenya also accepted strict terms on their Chinese loans. The government borrowed $1.6 billion from China for the construction of the Nairobi-Naivasha portion of the rail network at a 2% annual interest rate, and signed an agreement that states that 42% of all revenues will be used to repay the loan. The agreement also stipulates that Kenya needs to approach China first if it wants to purchase any goods with the proceeds from the rail network. Such terms force Kenya into economically unviable decisions, of which China is the only beneficiary. If the SGR is not profitable, Kenya has to repay its debt to China, and if the SGR is profitable, Kenya has to repay its debt and purchase Chinese goods with the rail proceeds. Onerous contracts are incentivising Kenya to seek alternative funding from Europe to finalise the construction of the railway. Being unable to finance the construction of new tracks, the government decided to upgrade part of a 120-year-old track to Melba for $400 million, which was originally constructed by the British in the 19th century. With no additional funding, the country will not be able to finalise the construction of the SGR, which could impact its long-term profitability and consequently prevent Kenya from meeting its debt obligations in the future.
Kenya signed an agreement worth 200 billion Kenyan shilling with China for its Special Economic Zone project in Eldoret. The town is projected to become a major industrial hub, promoting technological innovation and attracting manufacturing and service companies. Kenya contracted the project to Guangdong New South Group Ltd. Five years since the project’s initiation, no progress has been made. From the beginning, water shortages and lack of road access halted progress, and whilst the government predicts that construction will finish within 10 years, the project’s profitability remains uncertain. The official website indicates that only one manufacturer signed a non-legally binding memorandum of understanding, and no additional companies have confirmed that they will operate in the SEZ. The details of the project’s financing remain opaque; however, the Kenyan Finance Act of 2022 might be an indication that the government intends to pay its debts through the Kenyan taxpayer rather than through project proceeds.
Is China ‘Debt-Trapping’ Kenya?
These Kenyan mega projects play a vital role in stimulating the domestic economy. Kenya estimates the projects will create thousands of new jobs. For example, the construction of the SGR created around 30,000 new employment opportunities, whilst the construction of the ESEZ added around 40,000. According to the Kenyan Investment Authority, Kenyans make up 95% of the workforce within 106 Chinese companies operating in the country. As of 2014, foreign contractors were also mandated to subcontract a third of their projects to Kenyan companies; however, Chinese companies often failed to meet this requirement.
Kenya predicts that the successful completion of all projects will contribute to the diversification of the country’s economy. Despite the projects’ faults, the ESEZ attracted the world’s largest silk producer. If the agreement comes to fruition, the company will set up silk production facilities, in addition to contracting around 8,000 hectares of surrounding land for the production of mulberry leaves. The manufacturer is predicted to create a further 300,000 jobs. Economic cooperation with China can also attract Chinese investments in manufacturing plants, which would promote Kenyan exports and help diversify its economy. Currently, Kenya’s economy is reliant on agricultural production. Because Kenya has trade agreements with the US, the UK, and the European Union, augmenting Kenyan manufacturing would provide additional trade opportunities.
However, many of the projects remain economically dubious. The most significant issue is that new employment opportunities created by Chinese contractors are low paying. In addition, as Chinese companies fail to sub-contract Kenyan firms, local businesses miss out on lucrative infrastructure projects. Kenyan companies received only 0.9% of the 1.31 billion shillings for a road construction project from Kisumu to Mamboleo. Another difficulty is that the projects must be successful for Kenya to economically benefit in the long-term. The current state of the SGR indicates that projects may fail as the railway currently operates at a loss. Within three years, the SGR lost around $200 million mostly due to truck transportation, which is more efficient in Kenya. Kenya might have to look for alternative sources of financing to complete its projects and pay its debts to China, which might demand payment in other forms, such as natural resources, if the projects remain unprofitable. This is further worsened by the fact that Kenya’s debt is already substantial. In 2019, Kenya’s public debt was 55.5% of GDP. In 2022, due to mounting economic pressures, China began to request repayments. It also fined Kenya around $11 million for defaulting on one of its SGR payments. China’s ownership of a substantial part of Kenya’s national debt gives them leverage over Kenya, which is required to repay its debt in full regardless of the profitability of the projects.
Consequences for China and the World
Economically, investments in Africa are beneficial for China. By providing loans for projects in various countries, China can secure trade agreements with its borrowers and assure a continuous stream of goods. In the case of Kenya, Chinese companies were not only chosen as contractors for the projects. All required materials were also sourced from China, increasing the revenues of Chinese companies. For instance, all locomotives and freight wagons for the SGR upgrade were purchased from Chinese companies. In addition to collecting financial proceeds, China also collects produced goods. Angola repays its Chinese loans in oil - in 2020, Angola exported 61% of its oil to China. This is an indication that debt ownership provides China with economic influence over African countries.
China’s dominance in Africa can also manifest politically. Africa is a major voting power internationally; by providing economic support to African countries, China can secure African votes in its favour. A study in 2022 by the Foreign Policy Research Institute determined that $1 billion invested in Africa equates to around an 8% increase in political alignment with China based on “ideal points,” which is a metric constructed from the United Nations General Assembly voting data, indicating national voting preferences. The same study determined that as political alignment with China increases, political alignment with the US decreases by an average of 1.3% for every $1 billion invested between the years 2008 and 2012.
There is evidence of pro-Chinese alignment and anti-US sentiments in certain African countries. Like China, many African countries have maintained a neutral stance with respect to the ongoing war in Ukraine, and together have pressured Russia and Ukraine to end the conflict. Simultaneously, many African countries criticise US hegemony and advocate for a multinational global order facilitated by a shift in the balance of power. In the past, African nations have also supported China in its domestic issues. In 2020, around 25 African countries supported Chinese suppression of the Hong Kong protests. In return for supporting China’s domestic policies, African nations not only hope to receive further economic aid and investment, but also legitimacy and political recognition. This is especially the case for nations that the West would consider undemocratic or abusive - undemocratic leaders laud China for not intervening in their domestic affairs. China’s rise in Africa could also increase its global influence. As China continues to win political support from Africa because of its economic influence over the region, China could dominate key resource sectors (as in Angola) and influence the global resource market through both trade and production.
‘debt-trapping’ is in action that is hard to define, but there is evidence which indicates that China benefits from its economic sway over the region. Kenya owes billions to China and has signed agreements which gift most of the projects’ proceeds to the country over more than two decades. China benefits regardless of the success of the projects, as it receives debt repayments and political support. The growing importance of the African continent on the international stage will likely continue to incentivise other nations to invest in Africa, as well as to engage in mutually beneficial partnerships with African countries.
Over the last year, the United States Government, through a number of state linked development finance entities, has drastically increased levels of concessional financing to African countries, as Chinese investment in Africa has dwindled amid a domestic economic crisis and frustration derived from unprofitable projects on the continent. As the US and western partners are likely to maintain higher levels of development financing over the long-term to abate Chinese influence, western and African companies operating on the continent stand to benefit, particularly in countries with strong governance frameworks. These opportunities, especially if met with increased levels of FDI, will likely be particularly fruitful in the fields of trade logistics, mineral and resource extraction, healthcare, contracting, renewables, agriculture, and manufacturing.