Loan: How Kenya got hooked on Eurobond

Treasury Cs Henry Rotich (right) and Principal Secretary Department of Planning Julius Muiya during the launch of 2019-2022 Economic Survey at KICC. [Beverlyne Musili/Standard]

The 'Eurobond' has become a cliché after Kenya issued a dollar-denominated sovereign debt for the third time in five years.

A combination of factors has led to Kenya’s heavy reliance on debt from American and European investors, but significant of all was the graduation of the country’s economy into a low middle income country (LMIC) after the country’s gross domestic product was recalibrated to include other sectors.

In one of its documents, Treasury said the graduation of Kenya to a lower middle income country in 2015 resulted in a shift from concessional (cheap) funding to blend financing from both the World Bank and African Development Bank.

“Graduation to LMIC means a move into the “blend” window, with financial terms that are hard compared to the soft terms in the concessional window,” said the Treasury.

Besides high interest rates, non-concessional external financing such as the Eurobond carries an inherent foreign exchange risk, according to Treasury.

In other words, should US dollar - under which the Eurobond is denominated - strengthen against the shilling, the debt becomes expensive.

The Henry Rotich-headed Treasury also noted that some countries provide credit on commercial terms, a situation that has seen Kenya’s stock of expensive debt surge.

The result has been an increase in the amount of debt repayment, with the country paying Sh89.9 billion in interest for the first and second Eurobond issuance.

Delicate situation

The International Monetary Fund (IMF), which has in the past warned against Kenya’s ballooning public debt, saying the country’s external debt has left it in a delicate situation where any slight external disturbance such as drought or increase in global oil prices could plunge it into a financial crisis.

“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one-fifth of revenue,” said IMF in a review of Kenya’s economy.

Already, Kenya has paid Sh73.5 billion in interest for its Sh275 billion debut sovereign bond issued in 2014. Part of the Sh210 billion it raised this week will be used to refinance the five-year tranche that is maturing in June.

With the issuance of the third Eurobond, Kenya has effectively become part of the market and it needs to grow its revenues to comfortably repay the loans.