A restrictive clause in the standard gauge railway (SGR) loan agreement has left Sh44.6 billion collected from passenger fares and freight charges sitting idle in several accounts at KCB Bank, triggering calls for a review of the credit terms.
Kenya and China’s Eximbank inked a loan deal in 2014, which demands that revenues from SGR operations are deposited into a joint account at KCB as security against repayment default.
Cash in the KCB frozen accounts stood at $344 million (about Sh44.63 billion), says Treasury Cabinet Secretary John Mbadi, arguing that Kenya is unable to use the billions of shillings on expenditures such as settling the loans used for laying the railway.
Kenya borrowed three loans amounting to $5 billion (Sh648 billion) in 2014 and 2015 for construction of SGR from Mombasa to Nairobi and later extended to a station near Naivasha.
Mr Mbadi says restrictions on the KCB accounts bars Kenya from using the cash for SGR loan repayments, forcing the State to use taxes to pay tens of billions of shillings annually to pay China’s Eximbank.
He says the restrictive terms of the joint account are unnecessary amid push from the Treasury to renegotiate the agreement in a bid to ease the terms.
“The agreement that was signed included [a clause which requires] that some money should be paid into an escrow account as security, which was completely wrong in the first place,” the CS said in a telephone interview last Friday.
Under the financing arrangement, the Treasury pays the sovereign loan obligations through Consolidated Fund Services (CFS) or government main account.
In its annual debt management reports, the Treasury records the funds used to build the SGR line as cash advanced to Kenya Railways Corporation (KRC) as on-lent loan, which the State-run firm is expected to reimburse.
However, the Kenya Railways has struggled to repay the Treasury, partly because the escrow conditions restrict the use of its revenues.
Under the financing agreement, all SGR revenues are deposited into a special account jointly managed by KRC and the Export-Import Bank of China.
The Treasury earlier identified the escrow arrangement as part of obstacles to Kenya Railways reimbursement of funds to the Treasury.
The report recommended renegotiating the terms to allow the corporation service debts alongside operating and maintenance costs.
“This arrangement has effectively locked out loan repayments, resulting in the steady accumulation of arrears despite continued SGR operations,” the Treasury said, referring to the escrow account requirements.
The latest Annual Debt Management Report for 2025/26 shows Kenya Railways’ outstanding loan balance was unchanged at Sh547.378 billion in the year ended June 2026 compared with 12 months earlier.
The corporation accounted for 53 percent of the total government on-lent loan portfolio of Sh1.145 trillion as at end of last June.
The Treasury again warned that concentration of exposure to a single State corporation presented a significant fiscal risk, given the non-servicing of a substantial portion of the loan portfolio.
Mr Mbadi, however, said the escrow account had not impaired the government’s repayment of the sovereign loan, maintaining that the debt was being serviced like any other government obligation.
“The SGR loan is paid like any other sovereign loan,” he said. He declined to disclose whether Nairobi had approached Beijing to renegotiate the escrow terms or whether any discussions were under way.
Last year, the Treasury indicated the need to renegotiate terms of the joint accounts.
“I cannot start giving details of any possible agreements before it is reached… cannot even discuss if we have approached China until we have something concrete to report,” he said.
Mr Mbadi expressed confidence that Kenya’s diplomatic relationship with China would support negotiations, but did not provide a timeline for resolving the escrow issue or explain whether the government had submitted a formal proposal to amend the agreement.
The dispute comes as Kenya’s annual repayments to China Exim Bank have begun to decline following a separate restructuring of the SGR loans in 2025.
Treasury data shows Kenya paid Sh107.74 billion to Chinese lenders in the year ended June 2026, down from Sh129.35 billion a year earlier.
The payments for last financial year were Sh21.61 billion lower than what was wired in the year ended June 2025 and Sh44.95 billion below the record Sh152.69 billion paid in the 2023/24 financial year.
The decline followed an agreement with Beijing to convert three dollar-denominated SGR loans into Chinese yuan, extend repayment maturities and secure additional grace periods, reducing annual debt-servicing costs.
The deal also replaced floating dollar interest rates linked to the Secured Overnight Financing Rate (SOFR) with fixed rates denominated in renminbi, shielding Kenya from fluctuations in US interest rates.
“When the loan is in US dollars, then it is SOFR plus a mark-up, but in renminbi it is a fixed rate which is almost half the rate if we were to apply US dollars. So there is a huge saving there,” Mr Mbadi said in an earlier interview.
He said the currency conversion was saving the government about $215 million (about Sh27.9 billion) every year.
The Treasury CS said the dollar loans had attracted interest rates of more than six percent, comprising SOFR plus a margin of about two percentage points, compared with a fixed rate of about three percent under the renminbi financing.
