The withdrawal in late October follows the Central Bank of Kenya's (CBK) rejection of a proposal by the country's cabinet, chaired by President Mwai Kibaki, to have the bank release $209 million from Kenya's foreign-exchange reserves to a third-party escrow account that had been set up by the government after lengthy negotiations with energy project developers.
The money would enable the country's main power purchaser and distributor, Kenya Power and Lighting Company - in which the government has a major stake - to issue letters of credit to independent power producers whose projects have been delayed for lack of financing. Such projects include the 300MW Lake Turkana wind power project (LTWP) and the 100MW Kinangop Wind, as well as some diesel and geothermal projects. Kenya's current installed wind capacity stands at 5MW.
CBK governor professor Njuguna Ndung'u says that releasing $209 million from foreign-exchange reserves would put pressure on the exchange rate.
Withdrawal of the guarantees will further delay at least five independent power-producer projects with a combined capacity of 600MW, says permanent secretary for energy Patrick Nyoike.
The decision comes four months after the International Monetary Fund (IMF), leading project financiers in Kenya, expressed reservations on the approval of sovereign guarantees for the projects.
Before the CBK withdrew funds, both the ministries of energy and finance had failed to work out a formula for restructuring the guarantees, with the latter pushing for partial guarantees to jump-start the projects.
The bank's position bolstered that of the IMF, which has argued against providing sovereign guarantees for large energy projects in Kenya on grounds that it would increase the country's external debt, which stood at $6.7 billion in April.
The IMF says that additional debt will weaken Kenya's credit rating. "Higher reliance on foreign direct investment flows - especially in the form of debt and corporate borrowing from abroad to finance the private-sector initiatives - could, together with public sector financing, worsen the overall debt dynamics," it says.
However, the energy ministry says there is currently no link between Kenya backing independent power producers and the country's position in the debt market. "The target is to maintain a 40% ratio of debt to Gross Domestic Product. The guarantees only amount to contingent liabilities to government rather than actual debt," Nyoike says. "We are looking at all options, including partial risk guarantees."
LTWP chairman Carlo Van Wangenigen says the IMF's position has swayed the government to rethink its commitment to securing guarantees for the energy projects.