In need of a new deal

Nairobi Law Monthly - - Analysis -

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

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