In need of a new deal
attracted bids four times its target. US investors bought about two thirds of the bonds, with British investors taking one quarter. It is to be paid back in five and ten years with interest on an annual basis and the principle amount at maturity i.e. $500 million five-year securities that will price to yield 5.875 pc, and $1.5 billion of a tenyear bond at 6.875 pc.
The government, through the Central Bank of Kenya (CBK) gave the private investors a piece of paper known as a bond, and in return CBK collected on the government's behalf $2 billion cash in the form of a loan. The proceeds of the transaction were to be used for general budgetary purposes, funding of infrastructure projects, which included geothermal development, road and rail link to quell the huge infrastructure deficit, and the repayment of $600 million (Sh61 billion) syndicated loan in 2011/2012 that was to mature later in August that year.
Only good things
Among others the Eurobond was aimed at accelerating economic growth and aiding poverty reduction. Infrastructure projects would increase revenue earnings and create employment opportunities. It would lower the interest rates in the country and stop the government from borrowing from domestic markets. As President Uhuru Kenyatta put it, “it will stop government borrowing from domestic markets thereby helping drive down interest rates, which will boost investment and spur economic growth and provide growth to our people.” The President further promised that the money would be put into good use in ways that would bring about positive momentum to the country's economy. It would also elevate Kenya's credit worthiness in capital markets, thereby attracting more foreign investors.
The challenges that accompanied the uptake of the Eurobond included, one, whether the money would be put into effective and efficient use; two, we faced the risk referred to by economists as the “original sin” – this doctrine warns against borrowing in a foreign currency, when you do not have sufficient earnings in that currency that will service the debt. The bond was issued in dollars yet Kenya spends and collects taxes in shillings, hence high foreign exchange risks. In a situation where the shilling substantially depreciates against the US dollar, which is what the Eurobond is denominated in, the cost of servicing and repaying the bond becomes much higher and could impact on debt sustainability.
One year down the line, we are experiencing all the anticipated negative effects, with bank interest rates going haywire – Standard Chartered Bank interest rates rose from 17.5 pc to 27 pc. The value of the shilling in relation to the dollar has dropped significantly with the dollar trading at more than Sh100. Further, the Eurobond billions cannot be accounted for in infrastructural developments, energy, transport and agricultural projects.
Auditor- General Edward Ouko expressed his fears in his report that the $2 billion received in June 24, 2014, could have been stolen since it was not deposited in the Consolidated Fund. Rather, it was deposited in an offshore account contrary to Article 206 of the Constitution, and Section 17(2) of Public Finance and Management Act 2012, which requires that all money raised or received by or on behalf of the National government be paid into the Consolidated Fund. In July, out of the Sh210 billion raised, Sh34.6 billion was moved to the exchequer to fund infrastructural projects, while Sh53.2 billion was withdrawn to repay the syndicated loan.
His counterpart, the Controller of