Kenya is in advanced discussions with Chinese authorities to convert its dollar‑denominated loan for the Standard Gauge Railway into Chinese yuan. The shift is expected to nearly halve the interest rate from the current rate of over six percent to approximately three percent thus easing the fiscal burden on the government.
Treasury Cabinet Secretary John Mbadi explained that dollar‑linked borrowing comes with a floating rate based on SOFR plus a markup, whereas yuan‑based financing offers a fixed cost that is significantly lower.
The negotiations are part of Kenya’s broader strategy to diversify its debt portfolio and reduce reliance on expensive foreign currency loans. The annual servicing cost of the loan, estimated at over Sh130 billion, would ease markedly under the new arrangement.
Converting the loan currency is seen as a dual‑win Kenya would benefit from both lower interest rates and relief from the volatility associated with the US dollar.
Under the dollar arrangement, Kenya faces SOFR at roughly 4.6 percent, plus a two percent margin, whereas a yuan‑linked loan would lock in a stable interest rate of around three percent.
Financial experts suggest that Kenya is also aiming to extend the loan maturity and move toward concessional rather than commercial terms. Although maturity extension is not currently part of the negotiations, it remains a potential future outcome.
The SGR, commissioned under a previous government, spans nearly 700 kilometres from Mombasa to Suswa and carries a construction price tag exceeding Sh500 billion. Nearly 90 percent of the cost was financed via a loan from the Export‑Import Bank of China.
The fiscal pressure exerted by servicing these loans has been significant. For the 2025 financial year, Kenya paid Ksh129.35 billion in principal and interest, down from Ksh152.69 billion in the previous year a rare decrease attributed to favorable global interest trends and currency stability.
Kenya’s push to reconfigure its debt comes in the wake of public backlash against tax hikes in 2024, which were reversed amid widespread protests. Instead of burdening taxpayers, the administration is exploring alternative debt strategies that relieve pressure on public finances.
Beyond reducing debt service costs, shifting to yuan will also ease foreign exchange strain. Presently, servicing dollar obligations forces Kenya to procure large sums of US dollars, putting downward pressure on the shilling.
A yuan‑denominated loan would lower dollar demand, thereby aiding shilling stability, improving forex reserves, curbing import costs, and boosting economic predictability.
While talks are focused on cost reduction, Kenya is also carefully considering future financing models, including public‑private partnerships and more innovative commercial structures.
These approaches are especially relevant for extending the SGR line toward Uganda an infrastructure priority that remains stalled due to Kenya’s constrained fiscal space.
As these negotiations proceed, the prospects for Kenya’s finances look more hopeful. By reducing interest costs, containing foreign exchange risk, and exploring new funding models, the country aims to safeguard its development vision without compromising fiscal resilience.
Written By Ian Maleve
