Move cautiously on new Eurobond plan

Thursday November 9 2017

By EDITORIAL
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Three years since it issued its debut Eurobond, the government is again seeking to float another one on the international market.

Questions abound as to the wisdom of this, given the unpleasant experience with the first one, amounting to Sh280 billion, which generated so much heat and has to date not been properly accounted for.

Treasury Cabinet Secretary Henry Rotich has come out to defend the new Eurobond, arguing that it is not anything outlandish.

LOANS

True, borrowing is a normal business practice for governments the world over. The concern here is prudence.

First, when borrowed funds are not properly accounted for, its becomes problematic to justify any new sovereign loans.

Not when the economy is looking uncertain with growth projected to decline to 5.1 per cent from 5.8 per cent.

To be sure, Auditor-General Edward Ouko has reported that out of the Sh280 billion borrowed in 2014, some Sh215 billion could not be accounted for.

Second, international rating agencies and local economists have warned that continued borrowing is raising the debt burden to unsustainable levels. Already, the public debt portfolio of Sh4.4 trillion, about four times the annual tax collections, is scary.

DISTRESS

International institutional lenders such as the International Monetary Fund have warned that the national debt is nearing distress levels.

Since loan repayments take precedence over any other financial obligations, it means tax revenues are first used to settle pending debts, raising the danger of crowding out capital development.

This is what throws a country into a vicious cycle, often digging a hole to fill a pitch. Third, the experience from a dozen African countries that have gone for Eurobond is quite depressing.

Mozambique, which obtained $850 million sovereign bonds in 2013, has found itself trapped — it cannot pay the debt while concessionary lenders such as the IMF have pulled out, leaving the economy on the verge of a free-fall. Ghana, Zambia and Ethiopia have gotten into treadmill borrowing — all calling for caution on this front.

It would be more prudent to move cautiously even as we tap into these markets.