Eurobond saga is all about the politics of corruption

In the land of the blind, the one-eyed man truly is king. And once again, Dr David Ndii’s article the other Saturday, “Eurobond billions: The anatomy of a grand heist”, sought to pull wool over our eyes on the Eurobond issue; the dodgy math notwithstanding.

It behooves the question as to why a renowned and respected economist would stake his reputation week after week in doggedly insisting on a “scandal” that he has been defeated to convincingly prove even with his shifting claims and analysis. What is really going on here? First, let’s start with ghosts.

Initially, we were told that Sh140 billion was missing with evidence to follow in short order.

The amount missing then changed to Sh10 billion, then Sh87 billion, and now it is Sh150 billion.

Along the way, the word “missing” has uncannily transformed to “not accounted for”. And depending on the audience, these words are used interchangeably to achieve very different objectives.

Government borrowing for financial year 2014/2015.

The whole of Ndii’s theory of a grand heist stands on the amount of domestic government borrowing in FY 2014/2015.

According to him, the government borrowed Sh251 billion in FY 2014/2015.

He guesses this is the correct number given the Sh20 billion rise in domestic interest cost in FY 2014/2015 to Sh139 billion on the back of a “drop” in the actual stock of domestic debt from Sh200 billion to Sh110 billion. On the face of it, this looks like a logical argument.

But let’s take a closer look. Did the actual domestic debt really fall by Sh90 billion in FY 2014/2015? The answer is a resounding no.

What the good doctor is doing is confusing the Treasury presentation of the net domestic deficit financing for FY 2014/2015 of Sh110 billion and the amount of outstanding domestic debt needed to credibly sustain a domestic interest expense of Sh139 billion.

He is comparing apples to oranges. The correct way to determine whether a domestic interest cost of Sh139 billion makes sense is to look at the actual outstanding domestic debt for the period.

As per the CBK statistical bulletin of June 2015, gross domestic government debt increased by Sh136 billion from FY 2013/2014 to FY 2014/2015.

This gross number includes certain special items like Repos, which the Central Bank uses for open market operations.

So Treasury’s presentation of a net increase in domestic debt of Sh126 billion is reasonable.

An increase of domestic debt of Sh126 billion can very reasonably accommodate an increase in interest expense by Sh20 billion.

GHOST INVESTOR

To follow Ndii’s argument to its logical conclusion would mean adding his assumed domestic borrowing of Sh140 billion to the actual domestic debt amount of Sh126 billion for a total domestic borrowing of Sh256 billion.

This turns his argument on its head. This massive amount of debt cannot be supported by a mere increase of interest expense of Sh20 billion.

More importantly, who invested in this mythical Sh140 billion?

An objective independent test that we can use to assess the increase in the amount of domestic debt is to understand the amount by which commercial banks increased their investments in these securities as they routinely invest the largest proportion of all domestic investors.

Commercial banks invested in 63 per cent of Treasury bills and 49 per cent of Treasury bonds as expected.

These securities increased by Sh139 billion in FY 2014/2015 (Treasury securities are part of the Sh136 billion domestic debt).

It appears we have a convenient ghost investor for a ghost domestic borrowing of Sh140 billion.

Amount of deposit in the GoK Central Bank account
The government did indeed raise $2 billion (Sh176 billion) in the last week of June 2014.

This means that the financing was secured in FY 2013/2014. Treasury, therefore, had a basis to match expenditure commitments for FY 2013/2014 to financing raised in the same period to the extent that there was no mismatch between expenditures and financing.

Hence the transfer to the Consolidated Fund of $304 billion (Sh35 billion) made on July 3, 2014 leaving a balance of $1.604 billion net of fees.

Ndii’s contention here is that the Sh140 billion presented by Treasury as a domestic bank deposit could not have been in fact the actual position given the existing funds of Sh204 billion.

He goes on to add that this is corroborated by the Central Bank, which did not reflect the offshore account as domestic deposits but as foreign reserves.

By his own admission, the funds aren’t missing.

Rather they are accounted and presented differently by Treasury and the Central Bank, so technically while at the beginning of FY 2014/2015 the Treasury had the amount in an offshore account, the actual funds available for use in the financial year was Sh140 billion.

It is similar to a pending debit/credit card charge from your account or a pending deposit transaction into your account.

The actual balance will be different from the available balance for your use. Actual balance Vs Available balance. This is the supposed scandal.

Please note that irrespective of the preferred treatment or presentation, the net domestic outstanding debt still remains at Sh126.2 billion.

The net domestic borrowing does, however, reduce to Sh110.6 billion due to netting of government deposits of Sh15.5 billion, which excludes the Eurobond proceeds.

Utilisation of the Eurobond proceeds FY 2014/2015

In other words, Treasury does not need the Sh140 billion deposit to arrive at the net domestic borrowing number of sh110 billion.

That said, the CBK’s Audited Financial Statements for FY 2014/2015, audited by the Auditor General, presents Special Project Accounts for amounts received by the government for specific purposes.

The decrease in this account by approximately Sh174 billion is mainly attributed to the drawdown by the government of the Eurobond proceeds.

The problem with the Eurobond is its roaring success. And people only throw stones at trees laden with fruit.

Yes we are paying interest on the Eurobond and it’s important to know what projects the money was spent on.

It’s equally important to know what projects our domestic debt is spent on.

The stock of domestic debt was Sh1.35 trillion in FY 2014/FY 2015, with a net increment of Sh126 billion, compared to Eurobond proceeds of Sh196 billion.

And we are paying much higher interest rates on domestic debt currently even allowing for exchange rate depreciation.

So why the dogged insistence on a “scandal”? For that, we have to look no further than the politics of corruption. Let’s exercise prudent debate and prudent reporting until after we have the Auditor General’s report.

Nthuku is currently the Director of Structured Finance at Standard and Mutual, a corporate finance advisory firm in Nairobi.