By James Anyanzwa
Nairobi, Kenya: The decision to defer a Sh52.2 billion ($600 million) loan repayment signals that the financial crisis facing the Government may be bigger than previously thought.
Taxpayers will now have to pay Sh574.2 million as an additional cost to save the Government from eminent embarrassment of defaulting on its debt obligations to three international banks. The amount is owed to Citibank, Standard Chartered Bank (UK) and Standard Bank of South Africa.
This has become even more urgent because defaulting would further sabotage the desperate effort to float a Euro denominated sovereign bond worth Sh174 billion ($2billion) that the Government has factored into the budget.
Part of the process of effectively floating the bond includes the Sh1.4 billion payments last Thursday to two European companies in the infamous Anglo Leasing contracts once condemned by President Uhuru Kenyatta.
“The President has had to make a painful decision on what is the greater evil: either (pay) the money or put the country’s economy at risk. By making this payment, the President is not legitimising what he and many Kenyans believe to have been a series of fraudulent transactions,” read in part a statement from State House Spokesman Manoah Esipisu.
National Treasury Principal Secretary Kamau Thugge (pictured) confirmed to The Standard that the Government would pay an extra fee of 1.1 per cent to a consortium of three foreign banks, which agreed to defer the loan of Sh52.2 billion for three months.
Dr Thugge said the Government has other options of paying off the loan but had opted for a cheaper alternative in the shape of the sovereign bond issue.
“We are ready to repay the loan, but we had discussions with our lead arrangers to give us time to access the sovereign bond. By August, we shall clear this debt. Our interest is to issue a bond,” Thugge said in a telephone interview.
The Government has set out an ambitious Sh1.8 trillion budget even as it struggles to contain the runaway wage bill that stands at 55 per cent of the country’s revenue collection of Sh900 billion. The public service has up to 700,000 employees and its wage bill has shot up from Sh200 billion in 2008/2009 to Sh461 billion in 2012/2013.
The two-year loan that has been deferred for three months was to fund the Government’s ambitious development plan. Thugge confirmed to The Standard that the Government would pay the Sh574.2 million as commission for the extension.
“We had the money but realised it was cheaper for that extension than to settle the amount,” said Thugge, while downplaying the risks of the deferral that has the potential to send wrong signals to local and international lenders.
He denied that there were fresh conditions attached to the extension granted by the banks. “There was an extension by three months. We extended on the same terms and conditions like before. There were no new conditions. There was nothing,” he explained.
However, a cross-section of renowned economists said the request for the extension of the repayment period points to a Government facing severe financial stress.
“This means the Government has overstretched itself in terms of expenditure. We are running a shortfall in revenue collections and there is no money in circulation. All these are signals that our economy is in bad shape,” said Samuel Nyandemo, a senior lecturer at the University of Nairobi’s School of Economics.
According to Dr Nyandemo, rescheduling the loan repayments comes with penalties that make the loan even more expensive, coupled with the weakening of the Kenya shilling against international currencies.
“There are penalties on the extension of the repayment period, which depends on the terms and conditions of this loan,” he said.
According to Thomas Kibua, a former long-serving deputy governor of Central Bank, the Government’s financial health is not good.
“I think the crude term is you (Government) are running broke. Your programming is not right and something is not right,” said Dr Kibua who is currently a senior economist with African Development and Economic Consultants.
“Our national debt has become an issue. They want to buy more time to repay this loan, which is not a good thing becau2se the shilling is slightly depreciating against the international currencies,” he added.
Part of the money from the planned sovereign bond issue will be used to retire the loan. The syndicated loan was mainly designed to substitute part of what Government had planned to borrow from the domestic market during the period under review.
During the 2011/2012 financial year, the National Treasury planned to borrow Sh119.5 billion from the Kenyan market, but high interest and exchange rates volatility made investors jittery, causing them to demand higher yields in order to compensate for risk.
Treasury auctions experienced lower subscription rates mainly due to tighter liquidity, more attractive commercial bank rates and increased uncertainty over the direction of interest rates. Higher yields led to lower bond valuations with listed Treasury bonds losing approximately 20 per cent of their value in 2011.
By December 2011, the Government had raised only Sh14 billion from the domestic market, implying that a further Sh105.5 billion was to be borrowed before the closure of the 2011/12 fiscal year.