Another Sh310 billion bond on the cards as Eurobond figures saga rages on

Henry Rotich

Even before the Eurobond cash saga has been settled, plans are at an advanced stage to float a fresh sovereign bond in Japan and the Middle East.

The bond will raise the biggest chunk of the Sh310 billion the government plans to borrow from the external markets in the next financial year. A Sovereign Bond is a security for a loan issued by a national government to borrow money from sources outside the country. Details of the 2016 Budget Policy Statement (BPS), a document that explains the economic context within which the forthcoming budget will be presented, show that the Treasury is also looking at the possibility of floating a “Diaspora bond” for Kenyans living abroad.

The Treasury has narrowed down to three bonds to raise money for big expenditure plans of the Jubilee administration. One will be an Islamic bond known as Sukuk, a sharia compliant loan expected to attract little or no interest. The other bond is the Samurai, a yen-denominated bond, which also attracts low interest with possibility of having concessionary terms.

“The Government could venture into either the Sukuk bond which is a sharia compliant bond or Samurai bond from the Japanese market as well as the diaspora bond targeting Kenyans in the Diaspora,” the draft Budget Policy Statement being finalised at the National Treasury ahead of its formal submission to the National Assembly reads.

Unaccounted for

Kenyans have until Wednesday next week to submit their views on the proposals before Treasury forwards the document to Parliament for consideration.

The new loans are expected to help Treasury top guns keep an eye on deficit financing, manage the stability of the shilling and keep domestic interest rates low.

The proposed borrowing comes at a time when the National Treasury is under pressure over the accountability of Sh250 billion Eurobond issued in the 2014/15 financial year. Kenya issued a Sh174 billion ($2 billion) sovereign bond in June 2014, which was oversubscribed more than three times.

This saw the Government go back six months down the line, riding on previous successes and goodwill to raise an additional Sh67 billion in a Tap Sale.

The proceeds from the Tap Sale were received in an account at Citibank, New York. This brought the total loan to Sh250 billion.

Treasury says after repaying the syndicated loan and other commissions, the remaining Sh196.92 billion was disbursed to 14 ministries, departments and Government agencies. But Treasury has not provided additional breakdown on what projects the money was actually used for. However. this will not stop the government from seeking additional loans to deal with budget shortfalls. The government plans to spend Sh2 trillion in the new financial year 2016/17 that starts in July, about Sh100 billion more compared to the current year.

The government targets to collect Sh1.5 trillion in the 2016/17 financial year up from Sh1.3 trillion in the current financial year. This performance will be underpinned by on-going reforms in tax policy and revenue administration.

Ordinary revenues are projected at Sh1.3 trillion in the new financial year up from the projected Sh1.2 trillion in the current budget.

The statement shows that recurrent expenditures will amount to Sh1 trillion compared to Sh989.7 billion in 2015/16. This has left a gap of over Sh500 billion which will be raised through domestic and external financing.

“The fiscal deficit in 2016/17 will be financed by net external financing of Sh310.7 billion (4.3 per cent of GDP) and Sh189.8 billion net domestic borrowing,” the policy statement reads.

Kenya’s seemingly insatiable appetite for loans has been blamed on increased expenditure against a relatively slower growth in revenues. This has put pressure on the government to increase borrowings. The weak shilling that has stabilised at about Sh102 against the dollar has meant an increase in interest rate repayment for foreign currency denominated debts.

This has made external borrowing expensive. In the current budget, Kenya’s overall fiscal deficit had been projected to reduce from Sh624.34 billion last year to Sh569.79 billion. But weak collections by the Kenya Revenue Authority (KRA) have left Treasury with little options but borrowing to plug the deficit.

Plug the deficit

Last month, the government floated two bonds worth Sh35 billion in the domestic market. It is also expected to launch another bond targeting retail investors through an M-Akiba bond, which will be transacted via the mobile phone.

And in order to draw millions of investors, the entry sum has also been lowered to just Sh3,000 down from Sh50,000. The increased borrowing has seen public debt soar 60 per cent to almost Sh3 trillion since President Uhuru Kenyatta took office about 30 months ago.

It is a borrowing spree that has seen debt rise by an average of Sh40 billion every month. This works out to the State borrowing Sh1.3 billion a day, about Sh1 million a minute, or Sh15,432 every second.

But the government says it will ensure its borrowing does not crowd out the corporate sector and that it remains within the debt sustainability ratios.

“The Government will ensure that the level of domestic borrowing does not crowd out the private sector given the need to increase private investment to accelerate economic expansion,” the policy statement reads.

Treasury says the Government will minimise the degree of foreign exchange rate risk and interest rate risk exposure associated with the external debt portfolio by leaning towards borrowing more on concessional terms and fixed rates.

This would be the eighth Budget Policy Statement to be tabled in Parliament and the third under the Jubilee administration.

“We expect the document to improve the public’s understanding of Kenya’s public finances and guide public debate on economic and development matters,” the report reads.