Costly se­crets in Kenya’s debt de­bate

In spite of pub­lic out­cry and a bur­den to the cof­fers, Trea­sury plans to bor­row Sh100 bil­lion to set­tle other loans

Daily Nation (Kenya) - - FRONT PAGE - BY ED­WIN OKOTH @Ed­win­cowino [email protected]­tion­media.com

Planned Sh100 bil­lion loan turns fo­cus on bor­row­ing spree as Trea­sury boss Rotich de­fends move

The story of Kenya's bor­row­ing spree since 2013 has been a pot­pourri of se­cre­tive deals, lop­sided con­tracts and mas­sive loans whose use raises more ques­tions than an­swers.

Rev­e­la­tions that the gov­ern­ment plans to bor­row Sh100 bil­lion to set­tle two other syn­di­cated loans ma­tur­ing next year have once again turned the spot­light on the ris­ing level of debt.

Yes­ter­day, Na­tional Trea­sury Cab­i­net Sec­re­tary Henry Rotich came out to ex­plain the de­ci­sion amid pub­lic out­cry, say­ing the lat­est move — said to be ar­ranged by the Trade and De­vel­op­ment Bank (for­merly PTA Bank) — will only help to lengthen the ma­tu­ri­ties of the Eu­robond debts be­yond the 2019 date.

“We are do­ing a syn­di­cate to term out (lengthen ma­tu­rity) of a ma­tur­ing two-year syn­di­cated loan taken in April 2017. This is a stan­dard prac­tice world­wide to re­tire short-dated loan and re­place it with longer-dated loan as part of li­a­bil­ity man­age­ment,” Mr Rotich told the Sun­day Na­tion.

The Cab­i­net Sec­re­tary de­nied re­ports that Kenya was opt­ing for a more ex­pen­sive syn­di­cated loan op­tion to set­tle the Eurobonds taken in 2014. Such a move could pile more re­pay­ment pres­sure on the loans since it is al­most im­pos­si­ble to se­cure a syn­di­cated loan at a rate equal to or lower than the 5.75 per cent Eu­robond was se­cured at.

Syn­di­cated loan

Crit­ics of the syn­di­cated loan ap­proach, how­ever, be­lieve the coun­try may be run­ning out of op­tions to go back to the in­ter­na­tional mar­ket. This is af­ter con­di­tions wors­ened with lenders now de­mand­ing more re­turns cou­pled with the pub­lic scru­tiny that fol­lowed the float­ing of the first and sec­ond Eurobonds.

Un­der the syn­di­cate loan ar­range­ment, a bank (syn­di­cate) is used to source for the bor­rowed bil­lions from var­i­ous lenders, in­clud­ing other fi­nan­cial in­sti­tu­tions and in­di­vid­u­als, who re­main un­known, at usu­ally higher in­ter­est rates com­pared to the open debt mar­ket.

With no need of a prospec­tus to ex­plain the finer de­tails of the loan to the pub­lic, the quick loans may have be­come Trea­sury's re­sort to fund its ex­pen­di­tures in­clud­ing loan re­pay­ments.

Econ­o­mist David Ndii de­scribed the move as a fall­back strat­egy for Kenya, which is now less op­ti­mistic to go back to the in­ter­na­tional mar­ket to float another bond.

“We are in a fi­nan­cial dis­tress and Kenya knows that should we go to the in­ter­na­tional mar­ket now we will ob­vi­ously get pric­ing even above 10 per cent.

“A syn­di­cate is like a shy­lock un­like go­ing to a cor­po­rate bond where you can be ad­vised on bet­ter op­tions. It will be im­por­tant to know whether this is in ad­di­tion to the cor­po­rate bonds or an al­ter­na­tive,” Mr Ndii said.

The loan will be the sixth syn­di­cated one ar­ranged by the Trade and De­vel­op­ment Bank, ac­cord­ing to dis­clo­sures made in a Eu­robond prospec­tus ear­lier this year.

In Fe­bru­ary, Kenya raised its sec­ond Eu­robond in a span of four years. The Sh202 bil­lion ($2 bil­lion) bond that has a 30-year ma­tu­rity pe­riod will cost tax­pay­ers at least Sh323 bil­lion in in­ter­est re­pay­ments as var­i­ous in­ter­na­tional agen­cies con­tinue to raise con­cerns over Kenya ‘s fis­cal deficits that push it to keep bor­row­ing.

The tax­pay­ers will also have to pay the lenders the prin­ci­pal of $2 bil­lion at the dates of ma­tu­rity in Fe­bru­ary 2028 and 2048. The first such bond raised $2.75 bil­lion is­sued in 2014 in two tranches of five ($750 mil­lion) and 10-years ($2 bil­lion).

Since 2013, the level of debt has been on a steep climb amid con­cerns the econ­omy could fail to cope with the bal­loon­ing bur­den. Pres­i­dent Uhuru Keny­atta's gov­ern­ment has put more pref­er­ence on com­mer­cial and semi-con­ces­sional loans in­stead of the cheaper con­ces­sional loans that have more flex­i­ble re­pay­ment terms. The Chi­nese gov­ern­ment has par­tic­u­larly been the fo­cus of at­ten­tion over the dishing of loans with the Stan­dard Gauge Rail­way project be­ing the most prom­i­nent.

In a re­cent spe­cial re­port, the

de­tailed how the Trea­sury has come un­der in­creas­ing pres­sure to show value for the multi-tril­lion-shilling loans Kenya has ac­cu­mu­lated in re­cent years as tax­pay­ers stare at record high debt re­pay­ments.

Ma­tu­rity of some of the com­mer­cial and semi-con­ces­sional loans the coun­try has con­tracted from for­eign and do­mes­tic in­vestors has pushed debt obli­ga­tions to a new high.

In Oc­to­ber, for­mer Chief Jus­tice Willy Mu­tunga re­newed calls for an in­de­pen­dent pub­lic in­quiry into how the Sh5.04 tril­lion debt has been ac­cu­mu­lated and the value it has had on the econ­omy in terms of grow­ing na­tional wealth — gross do­mes­tic prod­uct.

“We need a com­mis­sion of in­quiry into pub­lic debt since in­de­pen­dence,” Dr Mu­tunga said dur­ing the launch of tax­pay­ers' month graced by Mr Rotich. “The ques­tions may never go away if we don't ad­dress this.”

Mr Rotich dis­missed claims of Kenya's debt bur­den be­ing too heavy.

“We present a budget to par­lia­ment, we fully in­di­cate the ex­ist­ing deficit, which is meant to be plugged by bor­row­ing and the MPS ap­prove it as it is. You should be sur­prised when you hear them (MPS) crit­i­cise it. I don't mean to say we don't re­ally worry about the strain debt re­pay­ment will have on the econ­omy but I can as­sure you it is well thought-out,” Mr Rotich told the

yes­ter­day.

Bor­row­ing ceil­ing

In 2014, Par­lia­ment in­creased ex­ter­nal bor­row­ing ceil­ing from Sh1.3 tril­lion to Sh2.5 tril­lion, but in 2015 the Pub­lic Fi­nance Man­age­ment Act was amended and par­lia­men­tary over­sight role was re­moved giv­ing lee­way for in­creased bor­row­ing which now stands at more than Sh5 tril­lion.

Kenya is set to spend a record Sh1 tril­lion — equiv­a­lent to Sh54 out of ev­ery Sh100 col­lected in rev­enue — ser­vic­ing debt in the 2018/2019 fis­cal year, up from Sh658.2 bil­lion in the cur­rent fis­cal year and Sh435.7 bil­lion in 2016/17.

The amounts cover both prin­ci­pal ma­tu­ri­ties and in­ter­est pay­ments.

There have also been con­cerns that some min­istries and gov­ern­ment de­part­ments have been on a bor­row­ing spree by en­gag­ing in­ter­na­tional fi­nanciers in big projects, some of which do not give value for money.

An ex­am­ple of such “con­trac­tor-ne­go­ti­ated for­eign loans” is the Sh30 bil­lion the Min­istry of En­ergy signed with an Is­raeli se­cu­rity ser­vices provider to se­cure the crude pipe­line from Turkana to Lamu, which is yet to be prop­erly con­cep­tu­alised (see story on Page 5).

The in­ter­na­tional firms would usu­ally ap­proach a gov­ern­ment depart­ment with a con­vinc­ing pro­posal com­plete with fund­ing ar­range­ments and later have the Trea­sury ap­prove the loans that are some­times ac­com­pa­nied by lop­sided con­tracts and costly re­pay­ment terms.

How­ever, Mr Rotich told the

the re­cent guide­lines is­sued on such ar­range­ments will tame the project con­cep­tu­al­i­sa­tions that have been ram­pant over the years.

Trea­sury for­mally im­posed tighter con­trols on planned gov­ern­ment pro­grammes, push­ing through yet another crit­i­cal piece of ac­tion needed to re­duce spend­ing and re­store sta­bil­ity in the coun­try's pub­lic fi­nances.

In a cir­cu­lar sent to min­istries, de­part­ments and agen­cies, the Trea­sury says any new pro­pos­als sub­mit­ted through sec­tor work­ing groups (SWGS) that de­cide on budget pri­or­i­ties must fo­cus on Pres­i­dent Keny­atta's “Big Four” agenda and com­ple­tion of on­go­ing projects.

“The gov­ern­ment re­cently di­rected that no new projects should be started with­out the ap­proval of the Na­tional Trea­sury.

“The SWGS are there­fore ad­vised to only con­sider new projects ap­proved by the Na­tional Trea­sury [with] … pri­or­ity to “Big Four” in­ter­ven­tions and com­ple­tion of on­go­ing projects,” Trea­sury Sec­re­tary Henry Rotich says in the cir­cu­lar in­tended to en­sure greater spend­ing con­trol.

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