Treasury accused of diverting development cash to pay debt

A currency dealer counts Kenya shillings at a money exchange counter in Nairobi October 23, 2008. The Kenya shilling breached the important 80.00 level on Thursday reaching a near four-year low, despite assurances by the Central Bank, due to demand for dollars. At 0800 GMT, commercial banks traded the unit at 80.10/20 against the dollar compared with 79.40/50 at the close of trade on Wednesday. [Photo: Reuters]

The National Treasury may have misled investors by borrowing under the guise of funding mega infrastructure projects while the money was instead meant for paying off mounting loans.

A new report released yesterday claims Treasury may have formed an unholy alliance with the Central Bank of Kenya (CBK) in adopting an unsustainable policy of using debt to support the shilling.

Investment firm Genghis Capital said during the release of its 2019 capital markets and macroeconomic outlook it noted a peculiar trend where Treasury issued an infrastructure bond in November, which attracts dollars due to its tax-free nature, with no intention of funding any infrastructure projects.

Instead, the funds may have been diverted to pay for a maturing bond, helping Treasury meet its obligations while dollar inflows helped CBK offset pressure on the shilling that would have arisen from making a huge repayment.

The firm said the Government received Sh27.59 billion but only used 2.8 per cent of the proceeds on development.

“The IFB (infrastructure bond) coincided with a five-year bond and when we looked from November, absorption of funds by infrastructure projects in roads, water and energy sector was about Sh793 million, meaning funds were not directed towards this sector,” said Genghis Capital research analyst Churchill Ogutu at a briefing in Nairobi.

The Government had issued a Sh50 billion 20-year bond which received bids worth Sh40 billion.

At the time, the shilling had declined for six straight days of trading to a low of 103.05 against the dollar.

CBK accepted bids worth Sh27 billion and later tapped the sale for an additional Sh8.7 billion.

Genghis warned that diverting the proceeds borrowed for infrastructure to paying bonds will have a dampening effect on future issues.

“We are likely to see heightened scrutiny of the proceeds of infrastructure bonds issued this year,” said Mr Ogutu.

Besides misallocating receipts from debt, there has been growing concern that buffers of the shilling are built on the quicksand of dollar debt receipts and not the organic revenues raised from exports.

Analysts have warned that Kenya’s reserves are mostly driven by debt instead of trading activities.

Ideally, the country should be selling more goods than what it imports to retain dollars yet it has a negative balance of trade, meaning more dollars leave the country than what come in.

“We should be looking at import cover in relation to trade but what we see are spikes whenever we get a Eurobond or a syndicated loan coming in,” an economist who declined to be named told The Standard.

This means that if Kenya were to pay off a Sh200 billion debt in the next few months from forex reserves, the shilling would be exposed, especially without the International Monetary Fund facility.

In March, Kenya needs to settle a commercial loan to Britain’s Standard Chartered Bank amounting to $766 million (Sh76.6 billion) as well as a $750 million (Sh75 billion) five-year Eurobond by June.

Before the end of June, another Sh37.1 billion syndicated loan arranged by the Trade and Development Bank, formerly PTA Bank, is due.