We are shooting ourselves in the foot over Eurobond matter

Politicians and commentators have accused the Kenya Government and international banks of conniving to swindle the Eurobond money.

JP Morgan and the Federal Reserve Bank of New York have been fingered as entities of great interest in explaining the alleged loss of Eurobond proceeds.

The government has consistently denied loss of Eurobond funds but the barrage of accusations has effectively drowned government explanation. If the accusations are to be believed, thieves in government walked away with Sh140 billion in broad daylight.

Yet there are safeguards that ensure you cannot withdraw such a large sum from the CBK and deposit it in your bank account. These accusations appear to be oblivious of not just local, but also international safeguards.

The accusations also tend to assume that international investors who put their money in Eurobond are as gullible as Wanjiku. Yet such investors assess risk as a matter of habit. They rely on indicators such as money market behaviour, macroeconomic stability or instability, and political risk.

If they suspect that a risk like corruption threatens the return on their investment, they quickly cut their losses and redeem their investment even at great discount. So far, nothing suggests that foreign investors are listless. If that happened, there would be an immediate reaction, with the value of the shilling tumbling against international currencies.

It is almost three months since noise about the alleged impropriety in the issuance of the Eurobond emerged. Curiously, there has not been any reaction from the international financial markets, and there is no selloff in the price of the Kenyan Eurobonds.

MONITORS FINANCIAL DEVELOPMENTS

This means that international organisations are satisfied with the way Kenya has utilised the Eurobond money and believes Kenya’s basic microeconomic assumptions. Further, the International Monetary Fund (IMF) strictly follows and monitors economic and financial developments in the world.

IMF officials were in town last month and didn’t report anything amiss. In fact, IMF’s twin Bretton Woods institution, the World Bank, is projecting an economic expansion of more than six per cent this year. The World Bank also closely monitors the economy and releases the annual Kenya Economic Update.

Against the US dollar, the shilling is still strong and is outperforming the rand, the naira, the cedi and the kwacha. Kenya has also not been downgraded by international credit rating agencies like Moodys and Standard and Poors, among others. Clearly, there is a strong dissonance between the views of some Kenyans and the understanding of more informed international partners. All indications are that the government has been telling the truth all along.

The money was received in Kenya as has been confirmed by the Governor of the Central Bank of Kenya and the Controller of Budget, as well as the National Treasury, according to their websites. In mature democracies, citizens take such institutions very seriously and technocrats working there are not subjected to political games.

Our problem is that we have undermined the authority of our institutions to a dangerous extent. We have done that through constant haranguing, and we are now hell-bent on undermining the authority of foreign institutions. The Federal Reserve Bank has been dragged into this mudslinging, and the US Attorney-General has been asked to intervene.

Fortunately, American institutions are not easily swayed by political noise. The documents posted by the Treasury on their website are self-evident. The US banks are probably perplexed that financially suave Kenyans could fail to understand these international transactions.

The Federal Reserve System (FRS) is the central bank of the United States, and no American doubts it. I find it absurd that Kenyans are petitioning President Obama to come clean on the Eurobond, as if he has something to hide. In so doing, we expose our ignorance and querulous nature.

President Obama spoke unequivocally against corruption during his visit to Kenya last year. How do we then turn around to accuse his government of complicity in corruption?

DETECT AN ANOMALY

Logically, it is impossible for so many informed players and watchdogs to fail to detect an anomaly in the financial systems that serve the entire world. After the 2007-2009 financial crisis, the FRS started to act as the bank of virtually all other central banks globally in facilitating dollar clearing, sometimes referred to as clearing of the Fed Wire, perhaps the best and safest system in the world.

The Central Bank of Kenya maintains an account just like other central banks to facilitate dollar clearing. All dollar -denominated transactions that clear through Fed Wire must go through the FRS mainly in New York, the financial capital of the World. The Eurobond is a dollar-denominated international bond (loan) that is issued to a borrowing country like Kenya.

Naturally, the transaction was handled through the FRS. Its integrity is beyond reproach. Trying to drag it into our myopic ways of dealing with issues is an exercise in futility. When a Eurobond is issued, leading banks such as JP Morgan, receive funds from institutional investors on behalf of the borrowing entity.

The funds are transferred to the FRS account of the borrower. Unlike the syndicated loan, the Eurobond public disclosure requirement is high and closely monitored by the Securities and Exchange Commission (SEC) in the US.

Many banks, including JP Morgan and Citi, have at some point been penalized for even the slightest irregularity.
If there were any irregularities with the Kenyan Eurobond, SEC would have acted by now.

The fact that these banks have been fined before does not mean that it is a common practice.

The penalties are both exemplary and punitive so that there is no incentive whatsoever for any bank to act improperly.

Such penalties are a testament that US systems work. They are the reason why New York remains the global financial capital.

We shall continue to be confused if we do not strengthen our institutions and have faith in them.

Right now, the prudent thing would be to accept the CBK and Controller of Budget explanation and begin to ask the Auditor General to explain how the resources were used.

This is the system followed in the civilized world. Any verification of expenditure is the work of auditors, not politicians.

Finally, we must remember that the financial system thrives on confidence, which, if eroded, can result in disastrous consequences.

The writer is an associate professor at University of Nairobi’s School of Business