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Is Kenya’s Mombasa Port another victim of China’s debt diplomacy?

The crescendo around claims that the Belt Road Initiative (BRI) is nothing more than Chinese debt diplomacy to secure strategic assets reached a crescendo at the end of 2019. The central claim is that China engages in ‘debt for asset’ swaps to secure control of strategic assets along the BRI. Whilst this is an important discussion to have, much of the criticism has not stood up to scrutiny when one looks at the facts. In some extreme cases, the BRI is portrayed as the “end time” prophesied in the Bible’s book of Revelation.

There is, however, an interesting case emerging in Africa, and the Port of Mombasa in Kenya. When analysing Kenya’s position, there does appear to be the potential for a debt for asset swap with regards Mombasa port. There is however a need for some context around the debate. Lost in the debate is the reality that Kenya’s debt repayment is only due to commence in June 2020. This makes any analysis around Kenya as being speculative at best.

Central to the claims of Kenya’s debt risks is the port of Hambantota in Sri Lanka. Hambantota is used as the exemplar of China’s acquisitive strategy under the BRI, with the port used as a warning to those developing countries looking to China for financial assistance. Unfortunately, the choice of Hambantota is poor as the claims made do not stand up to scrutiny. Essentially, Kenya’s loan arrangements with China are significantly different to that of Sri Lanka. In order to appreciate this, a better understanding of the Sri Lankan funding arrangements is needed.

The current position with Sri Lanka is that its international debt obligations by the end of 2015, was such that $17bn was required to pay for maturing foreign loans between 2019 and 2023. With $55bn in foreign debt and foreign reserves only totalling $8.3m, Sri Lanka was headed for financial ruin. It is worthwhile noting that China accounted for only 10% of that debt. This raises some interesting questions as to the veracity of claims that only China uses the notion of debt diplomacy.

Contrary to claims made with regards China charging high commercial interest rates in order to create financial stress in recipient Countries, the typical loan structure offered by China, are offered on concessional terms. The rate is typically set at 2% with a typical repayment period of 20 years as well as a grace period for repayment between 5 – 12 years. In the case of Hambantota, there were five loans paid to Sri Lanka between 2007 and 2014 to construct the port. Whilst the total amounted to around $1.3bn, only $357m were obtained at the higher commercial interest rate of 6%, the balance have been given at the concessionary rate of 2%. Furthermore, the loan repayment instalments required by China’s EXIM Bank, only accounted for 5% of Sri Lanka’s total foreign debt repayments – suggesting that the debt was manageable.

It should also be noted that there was no debt for asset swap in Sri Lanka, with no debt written off in exchange for equity. The loans and port lease agreements are separate items, with 70% of Hambantota being leased for 99 years to China. The remaining 30% is held by the Sri Lanka Port Authority. Both parties are involved in the joint operations of the port. In other words, Sri Lanka still owns the port and the $1.12bn paid in lease agreement was used, not to pay for construction of the port, but used to cover Sri Lanka’s balance of payments issues, that involves a number of countries other than China.

Kenya, on the other hand, has important differences in their loan arrangements. Whilst these differences potentially make the country vulnerable, it is still a moot point as debt default payments to China can only take place after June 2020. Some of the key differences include debt for asset swap securities and the level of indebtedness of Kenya.

The level of debt exposure has recently come to a head with the recent opening of the rail link connecting Nairobi to the Central Rift Valley. This rail connection is part of the BRI’s global integration strategy that looks to pair port and rail connections that gives access to markets, particularly landlocked countries. As a reminder, the BRI focus is on integrated energy, logistics, transport and ICT across Eurasia into the Middle East and Africa. Whilst this track is seen as going nowhere and at a cost of $1.3bn, critics fail to appreciate that this project is not a stand-alone project. It is in fact the second phase of a development plan that intends to link Mombasa with the Ugandan border, known affectionately as the Standard Gauge Railway project or the SGR. The complete SGR plan connects Mombasa Port with Burundi, Congo, Uganda, Rwanda, and South Sudan. To date, Kenya has accepted over $5bn in loans for the SGR that currently operates at a loss.

The SGR has introduced two critical dimensions not seen in Sri Lanka.

First, it has highlighted the growth of debt and trade deficit Kenya has with China. It is now one of China’s largest trade partners in Africa, with China holding 11.55 % of Kenya’s foreign loans, valued at around $6.5bn. External debt is said to be about $60bn, which is 61% of GDP. In simple terms, Kenya owes more than half of its economic output to foreign entities. More critically, China’s interest payments represent 87% of the cash used to service debt expenditure in 2019.

Secondly, unlike Sri Lanka, Kenya has used Mombasa Port assets as security for the SGR directly linking debt repayments to assets. The loan agreement specifically waived Kenya’s sovereign immunity on these ports’ assets. The instrument by which this occurs is granting power over the escrow account security if Kenya defaults on its payment terms. In a practical sense this would make China EXIM Bank the principle over Kenyan assets. The significance of this cannot be understated as the SGR is currently operating at significant losses and has not reached the minimum rail cargo volumes set under the agreement. This is understandable in that road transport is cheaper than rail. Furthermore, the dispute settling provisions under the loan agreement would be arbitrated in China.

Is Kenya victim to China’s alleged debt diplomacy? The jury is still out, but if past practice is a good indicator, then it is unlikely that Kenya will be a victim. Supporting this notion is the US-based Rhodium Group’s research examining 40 instances of China’s external debt renegotiation between 2007 and 2019. It has found that Beijing rarely takes up the asset default position, showing a preference to extend payment terms.

Andre Wheeler

CEO of Asia Pacific Connex with more than 20 years’ experience in international business, with a diverse network throughout the USA, Asia, SE Asia , Africa and the United Kingdom. Holding a B. Science (Hons) degree and an MBA, he is currently working towards his Doctorate on the Impact of the China One Belt One Road initiative. Andre has expertise in oil/gas, construction, marine services and mining.


  1. A really informative article. Well researched, thank you. It certainly does put a different slant on this very important issue.

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