Kenya is pushing China to review strict escrow account terms tied to the Standard Gauge Railway (SGR) loan, after the rigid arrangement effectively blocked Kenya from tapping revenues from operations to repay the debt.
The National Treasury says the terms, which require Kenya Railways Corporation to maintain a minimum balance of Sh25 billion in the special account, had driven arrears on the SGR project to Sh413.4 billion by June 2025.
‘This arrangement has effectively locked out loan repayments, resulting in the steady accumulation of arrears despite continued SGR operations,’ the Treasury says in a debt management update.
‘In view of the above, it is recommended that escrow account terms should be renegotiated to allow for debt service alongside operation and maintenance costs,’ it added.
The arrears have piled up despite the SGR generating about Sh112.08 billion in revenue since the launch of commercial operations eight years ago.
Freight services account for more than three-quarters of the income, with passenger trips between Mombasa and Nairobi contributing the remainder.
But none of the revenue has gone towards repaying loans to the State-owned Export-Import Bank of China, the financier of the SGR.
The Treasury blames the rigid escrow arrangement, which has trapped the railway’s cash flows and made repayment nearly impossible.
Under the financing deal, all SGR revenues are deposited into the escrow account, which KRC jointly manages with Exim Bank, requiring that the minimum balance be maintained before any surplus can be applied to loan servicing.
Since the account has never reached the reported threshold of Sh25 billion, no repayments have flowed through from SGR revenues, resulting in KRC loan arrears to the Treasury accumulating even as the SGR project continues to earn income.
The Treasury says that the arrears on the SGR loan-covering overdue principal and accumulated interest- have grown to Sh413.36 billion as of the end of June 2025.
That makes up 80.82 percent of the total Sh511.44 billion arrears, which State Corporations owed Treasury in the form of on-lent and direct loans in the review period.
‘This heavy concentration exposes the Government to significant fiscal risk tied to a single infrastructure project,’ the Treasury said in an update.
Under the SGR financing model, the Treasury services the loans directly, while KRC is expected to reimburse it.
But the breakdown of cash flow due to the arrangement around the escrow account and lower-than-projected revenue has rendered the repayment structure almost unworkable.
The total stock of on-lent and direct loans the Treasury has extended to State corporations stood at Sh1.05 trillion in June 2025, with Sh547.38 billion, or 52 percent, sitting with KRC.
The escalation of KRC arrears tied to the SGR loan has come at a time when the Treasury successfully negotiated with Beijing to reduce the cost of servicing the debt in October.
This was after Nairobi completed the conversion of three dollar-denominated Exim Bank loans into yuan, a shift expected to save the country about $215 million (about Sh27.80 billion) annually in interest.
Previously, the loans attracted floating interest rates of more than 6 percent, driven by the Secured Overnight Financing Rate (SOFR) plus a two-percentage-point margin. Switching to renminbi has cut the cost to about 3.0 percent, according to the Treasury.
‘In US dollars, the interest cost comes to more than 6.0 percent-about 4.6 percent SOFR plus 2.0 percent. But with renminbi it is about 3.0 percent,’ Treasury Cabinet Secretary John Mbadi said ahead of inking the deal.
Servicing of the SGR loans, which is done in January and July, is one of the biggest burdens on taxpayers, with repayments to China accounting for more than three-quarters of the annual spend on bilateral debt repayments.
The Treasury has a budget of Sh129.90 billion towards repayment of loans contracted from China this financial year ending June 2026, comprising Sh95.64 billion in principal and Sh34.26 billion in interest costs. The bulk of these repayments is for the SGR debt.
Kenya borrowed $5.08 billion from the China Export-Import Bank (Exim) for the construction of two phases of the SGR.
The first phase of the modern railway from the port city of Mombasa to Nairobi received two facilities of $1.6 billion and $2 billion, while the second, connecting the capital city to Suswa town near Naivasha, took up $1.48 billion.
The loans were dollar-denominated and had floating interest rates reportedly set at 3.6 percent or 3.0 percent above the average London Interbank Offered Rate (Libor) – a global benchmark retired in June 2023 and replaced by SOFR and other alternative reference rates.
Freight services were the main economic justification for the SGR loan. The SGR line has, however, struggled to hit targeted cargo volumes.
Some importers keen on last-mile delivery of cargo have balked at the tariffs to transport goods from the Port of Mombasa to the Inland Container Depot (ICD) in Nairobi and Suswa for consignment largely destined for western Kenya and neighbouring countries like Uganda and Rwanda.
‘Although the repayment of the SGR loans has been onerous, there should have been far greater concern about the railway’s inflated construction costs and its consistent failure to generate revenue despite government intervention to mandate cargo traffic,’ Fergus Kell, a research fellow at London-based Chatham House, wrote in a past note.
‘This is a legacy of poor Kenyan decision-making and a planning process driven more by short-term electioneering than strategic need. Chinese lending was one component of a surge in borrowing under the Kenyatta administration.’