Questions over use of Eurobond billions as state borrowing sends rates through the roof

At the height of the Anglo Leasing scandal payment controversy, President Uhuru Kenyatta stood on the steps of State House and made an impassioned case for the Sh289 billion ($2.75 billion) Eurobond that was about to be floated by the Kenya Government on the Irish Stock Exchange.

President Kenyatta declared that the Eurobond will “stop government borrowing from domestic markets, thereby helping drive down interest rates which will boost investment, spur economic growth and provide growth to our people”.

One year down the line, bank interest rates are at their highest in more than a decade, inflation has gone haywire, the government is broke and the story of Eurobond funds being invested in “infrastructure projects, energy, transport and agriculture” has gone silent.

Saddled with huge project loans and with few borrowing options, the government has resorted to its old bad habits of borrowing locally to fund its conspicuous consumption.

The Sunday Nation has established that the government is contemplating borrowing Sh78.8 billion ($750 million) syndicated loans from local banks to plug a Sh600 billion hole in the budget in order to pay salaries for civil servants and generally run its affairs that risk grinding to a halt.

Yesterday, Public Accounts Committee (PAC) chairman Nicholas Gumbo said the economic situation is grim. He said PAC will summon senior National Treasury officials to explain how the country has found itself in such a position.

“The cash crunch is complex. We have been spending money that we do not have and when the government starts having problems with non-discretionary expenditure such as civil servants’ salaries (then) we have a crisis,” said Mr Gumbo. An economist and lecturer at the University of Nairobi, Dr Samuel Nyandemo, says the government is broke because of bad economic habits by the National Treasury and the Central Bank.

“We have been borrowing to consume and service loans. We spend more on consumption. This is suicidal for any government because there is no productive investment.  The government is broke because the National Treasury has lost ideas and this does not augur well for the country. We will now have to use GDP to service loans,” says Dr Nyandemo.

He argues that the government will resort to borrowing locally, which will crowd out private sector players. He also attributed the depreciation of the Kenya shilling against the dollar to “weak and weird monetary policies by CBK”.

“The Kenya shilling is jumping up and down ... This is as a result of poor monetary policies. This means we will pay more on foreign loans and probably bankrupt the country,” said the lecturer.

On Thursday, a report tabled before the Budget Committee in Parliament showed low revenue collection, high interest rates and an unfavourable exchange rate as the main reasons why Treasury has no money to pay for essential expenditure. The report was prepared by a team of economic and budget experts employed by Parliament to advise MPs.

The cash crunch has affected the country’s 47 counties, delayed cash for the Free Primary Education and secondary school education funds as well as pay for civil servants and teachers.

The Constituency Development Fund, rural electricity connection and some commissions, including the Independent Electoral and Boundaries Commission (IEBC), have also been affected.

Borrowing from local banks is what the Eurobond had sought to stop. It was meant to lower the cost of borrowing for Kenyans by reducing interest rates and generally tackle inflation. When government borrows from local banks, it raises the cost of loans through increased interest rates.

The reason being that government and citizens are competing for the same funds locally and financial institutions would prefer lending to the government. High interest rates translate into high inflation.

According to the Eurobond prospectus obtained from the Irish Stock Exchange, the government received Sh289 billion from the venture. The prospectus shows that the government sought 5.5 per cent annual interest on the loan. However, the interest was increased to 7 per cent and the repayment mode was fixed at semi-annual.

We established the government pays close to Sh40-Sh45 billion in quarterly instalments since, when it borrowed the funds, the shilling was trading at Sh88 to the US dollar which is now around Sh103.

Yesterday, we established that out of the Sh289 billion, Sh78.8 billion ($750 million) was paid to rescheduled syndicated loans and infrastructure development. The rest (Sh210 billion) could have been injected into the budget to fund government spending.

“We are in a debt trap. The funds from Eurobond were injected into the budget to plug close to a Sh600 billion hole. We are borrowing expensive money locally to pay debts, fund lavish spending by government and pay salaries,” says a top Treasury official who cannot be named because he is not authorised to speak to the media.

Questions have been raised as to why the funds were deposited and spent from an offshore account contrary to the law.

According to the Auditor-General, Mr Edward Ouko’s report, $2 billion was received on June 24, 2014. He expressed fear that the cash could be stolen since it was not deposited in the Consolidated Fund account.

“It was deposited in an offshore account, contrary to Article 206 of the Constitution of Kenya and Section 17(2) of Public Finance and Management Act, 2012, which requires that all money raised or received by or on behalf of the national government be paid into the Consolidated Fund.

There is the risk of the proceeds being appropriated without the authority of the Controller of Budget and also being applied for other purposes other than those the Sovereign Bond was floated for.”

Mr Ouko says some money was withdrawn from the offshore account on July 2/3 2014. Out of Sh210 billion, Sh34.6 billion was moved to the Exchequer to fund infrastructure development while Sh53.2 billion was withdrawn to pay syndicated loans.

“The authority of the Controller of Budget to incur expenditure was, however, not obtained.  The Statement of Receipts into and issues from the Exchequer Account for 2013/2014 therefore reflects only actual receipts from commercial loans of Sh 34,648,388,180.25 out of the net proceeds from the Sovereign Bond as a result of failure to pay the full amount of the net proceeds from the Sovereign Bond of $ 1,999,052,872.97 into the Consolidated Fund during the year,” says Mr Ouko.

Yesterday, Mr Gumbo said that despite National Treasury Principal Secretary Dr Kamau Thugge and Cabinet Secretary Rotich appearing before PAC on the issue, the deposits are still shrouded in mystery.

“Up to now there is still a mystery on the Eurobond deposits. We do not know who the signatories of the offshore account where the Eurobond funds were deposited are. We do not know whether it was an individual’s account because the expenditure was not authorised by Parliament which is a clear violation of the Constitution. Since it is not authorised, the application of the funds is not clear. There is no clarity which projects the bond money funded,” says Mr Gumbo.

Mr Gumbo says that the reason Kenya sought the Eurobond was to lower interest rates.

“This has not been achieved and there is a substantial deficit of Sh600 billion which now has to be funded through domestic borrowing. The rates have gone haywire because of government entry into the market,” says Mr Gumbo.