Why Kenya has failed to exploit economic ties with China

Biashara Street, which for long has been a forte for Kenyan-Indian enterprise, is now changing face. The street once dominated by Indians running their dukawalla has new tenants - the Chinese.

One of the tenants is Dong Fang, a Chinese stall that deals in all kinds of wares - curtains, utensils and sculptures. Dong Fang has four of such stalls along the historical street alone, all selling nothing but ‘made-in-China’ products.

Only that most of these wares can also be made in Kenya.

It is not only Chinese imports that have found an unrestricted market in Kenya. About 13km away is another Chinese activity - construction of Outer Ring Road.

This is one of the many infrastructural projects being undertaken by the Chinese, which include the Standard Gauge Railway, financed using borrowed funds from the Government of China.

But it has also been a boon for Chinese contractors such as SinoHydro Corporation, which is currently building the Sh7.4 billion super-highway.

The projects have also created employment for Chinese nationals as expatriates through contractors such as China Wu Yi.
Africa has thus been flooded with Chinese products, capital and labour.

This is largely due to the Kenya Government’s puzzling approach to relations with China. The country has thus missed out on enormous opportunities that it could have tapped to transform itself into a continental powerhouse.

The approach has also left the country grappling with a huge debt, already a strain on the economy and trade imbalance skewed in favour of China.

China’s credit to Kenya has grown from Sh36.7 billion in June 2012 to Sh313 billion four years later. Only the World Bank has given Kenya more cash than China. Kenya has received about Sh504 billion from the World Bank Group’s International Development Association and the International Fund for Agricultural Development.

The script has been the same for Chinese imports into Kenya, which have grown by leaps and bounds. Kenya bought goods worth Sh337.4 billion last year from a low of Sh167 billion in 2012, surpassing even imports from all the 28 European Union countries combined.

Although cheap Chinese imports - largely disparaged for being substandard - have helped improve the standard of living for many poor Kenyans who could not afford costly Kenyan-made products, they have also been blamed for the stagnating manufacturing sector.

A World Bank report found that from 2012 to 2014, Kenyan consumers enjoyed a 10 per cent lower unit price on manufactured goods and a seven per cent lower price on chemicals, thanks to the proliferation of Chinese imports.

Unfortunately, exports from Kenya to China have not been as high as Chinese imports into Kenya.

The World Bank report, Deal or No Deal: Strictly Business for China in Kenya, shows Kenya only sends one per cent of its exports to China worth $63 million (Sh6.3 billion) in 2012, $48 million (Sh4.8 billion) in 2013 and $70 million (Sh7 billion) in 2014.

“Kenya exports little to China because it is an oil importer and relatively resource-scarce. With fewer natural resources, Kenya has been unable to take advantage of the commodity boom from China’s growth,” read the report.

“What’s more, the growth does nothing for Kenya’s agricultural sector because it lacks a comparative advantage in China’s main food imports (wheat, corn, beef, soybeans), making it difficult for Kenya to increase its exports of agricultural products,” it said.

Kenya has also opened the gates to Chinese labour. Other than the expatriate labour the Chinese offer in their companies that have set up shop in the country, they are competing in the general labour market and even trade where they are almost overrunning local small businesses.

While the Asian super power has been clear on what it wanted when it started engaging with African countries, many African countries – Kenya included – have been gobbling up Chinese loans, in many instances to finance projects that may not have been well thought out.

According to a new McKinsey report, Kenya is among the countries that have been tactless in engaging China. This is despite the huge opportunity offered by the close ties that the two countries have had in the recent past and the ideal positioning of Kenya as the gateway to Africa on the continent’s eastern seaboard.

“Kenya, Nigeria and Tanzania do not yet have the same level of engagement with China as Ethiopia and South Africa, but government relations and Chinese business and investment activity are meaningful and growing,” said the June 217 report titled, Dance of the Lions and the Dragons.

PASSIVE POSTURE

“These three governments recognise China’s importance, but they have yet to translate this recognition into an explicit China strategy. Each has several hundred Chinese firms across a diverse set of sectors, but this presence has largely been the result of a passive posture relying on large markets or historical ties; much more is possible with true strategic engagement.” 

McKinsey said China had expressed interest in cultivating more balanced partnerships with African countries, with the view that more strategic direction from African countries “is in the interests of the long-term sustainability of the Africa-China relationship”.

A Chinese diplomat surveyed for the report said China has over time told African countries to be clear on their objectives of engaging with China.

“We have been clear on how we’d like to see our relationships in Africa evolve. What would be tremendously helpful for us is if we could get that same level of clarity from our African counterparts,” the diplomat is quoted having said in the report.

The McKinsey report notes that some countries will over the next few years default repaying loans borrowed from China, which might force the Asian nation to consider revising debt structures as well as the model it has been using to advance credit to African governments.

“Some African countries will default on Chinese debt, further straining the current EPC contracting model. Several countries such as Zambia are already bumping up against their debt ceilings. As a result, China may be forced into additional rounds of debt forgiveness - and rethinking its debt-fuelled infrastructure provision model in Africa (and beyond),” said the report.

While it has not been explicitly named by the report as among the countries that are at risk of defaulting on its debt obligations to China, Kenya could as well be among those with high risk.

The country’s public debt stood at Sh4.1 trillion as of March this year. According to National Treasury documents, external debt stood at Sh2.16 trillion, half of which is owed to China.

Among the key projects that China has financed in Kenya is the Mombasa-Nairobi Standard Gauge Railway.

The Exim Bank of China is gearing up to finance the second phase that will extend the railway to Naivasha and cost Sh150 billion, and a later phase to Kisumu at a cost of Sh380 billion.

The loans are expected to hit Sh1 trillion when the SGR project is complete.

According to McKinsey, the huge appetite for Chinese loans is not unique to Kenya but is all over Africa.

“New debt issuance by Chinese institutions to African governments increased dramatically in the past five years, rising to some $5 billion (Sh500 billion) to $6 billion (Sh600 billion) of new loan issuances each year in the 2013–15 period,” said the report.

“We estimate that in 2015, these loans accounted for approximately one-third of new sub-Saharan Africa government debt. Most of these loans are linked to infrastructure projects, such as China Exim Bank’s $3.6 billion (Sh360 billion) loan to finance the Standard Gauge Railway in Kenya.”

Among the countries that are benefiting from ‘dancing with the dragons’ include Ethiopia, which has been able to attract investments from China in sectors that are crucial to economic growth such as manufacturing and a high degree of technology and skill transfer.