The Eurobond debate: Following the funds’ trail to the final destination

Wednesday February 3 2016

ODM Secretary for Political Affairs Opiyo Wandayi (left) and Homa Bay Woman Rep Gladys Wanga addressing journalists in Nairobi on November 2, 2015. The Cord MPs threatened to impeach Treasury CS Henry Rotich over the Eurobond cash. PHOTO | DIANA NGILA | NATION MEDIA GROUP

ODM Secretary for Political Affairs Opiyo Wandayi (left) and Homa Bay Woman Rep Gladys Wanga addressing journalists in Nairobi on November 2, 2015. The Cord MPs threatened to impeach Treasury CS Henry Rotich over the Eurobond cash. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

On June 24, 2014, Kenya raised US$2 billion. On December 17, 2014, it raised US$815 million. Why raise funds in two lots?

In June 2014, Kenya received offers totalling US$8.8 billion but only took US$2 billion. Surely the country could have taken more?

Yes, it could, but that would have been at the risk of interest rates moving sharply upwards.

US$2 billion was determined by the National Treasury and its transaction advisers as the optimal amount to take at that time.

Remember that this US$2 billion was raised on the same day that news of the attack on Mpeketoni was announced and was the lead story globally all that day.

In the circumstances it was remarkable that any money was raised at all.

Then in November 2014, Kenya returned to the market. Why? Because like any company or, indeed, you and I, if interest rates fall we take advantage and borrow more, or we refinance existing loans.

What actually happens in the Eurobond market is that the fall in interest rates is reflected in higher market prices for the country’s bonds, exactly as happens in the domestic Treasury Bond market. There is an old and very accurate truism in the financial markets: If interest rates rise, prices of bonds fall, and if interest rates fall, prices of bonds rise.


In November 2014, market rates globally fell, the price of Kenya’s Eurobonds rose and Kenya took immediate advantage of this favourable movement in the prices of its existing Eurobond to raise another US$750 million. Actually this is not quite true: Kenya raised US$815.4 million because it sold its bonds at these new higher bond prices.

Put another way, Kenya got a bonus of US$65.4 million which the country does not have to pay back!

Did I hear three cheers for our National Treasury officials for engineering what was in effect a gift of US$65.4 million for the country? No, I thought not.

Pity, because this was brilliant timing, brilliant work.

Let’s now turn to the US$2 billion Eurobond issue in June 2014, since no one seems overly concerned with the fate of the November 2014 US$815.4 million issue.

Everyone seems happy all went well in the November fund raising.

Here we are then, we’ve raised US$2 billion. What happened next?

Our reading of the sequence of events is:

1. US$1.999 billion (i.e. US$2 billion minus fees and expenses payable to bankers, lawyers, regulators etc) was transferred to an account opened by the Central Bank of Kenya on behalf of the National Treasury at JP Morgan Chase on June 30, 2014 with the sole purpose of receiving the Eurobond proceeds.

Questions which have arisen is why the account was opened at all, whether it was opened legally and why there was a delay in designating signatories.

On the first, this is because it is customary to open Receiving Bank accounts for any Eurobond issues.

This is the practice and I am afraid no one is going to change this to accommodate any Kenya-specific special need.

Put it another way, the Eurobond market turns over in excess of US$20 trillion annually (I don’t even know how much this mid-boggling amount is in Kenya shillings); US$2 billion is not much in this context and Kenya has to play by existing rules.

To expect Kenya to change the rules is pie-in-the-sky thinking. 

You may well ask: Kenya may have had to accept this market practice, but did Kenyan law allow it? Contrary to the most recent writing on this question, the answer is an unequivocal yes.

Section 28 of the Public Finance Management Act states that “the National Treasury shall authorise the opening, operating and closing of bank accounts and sub-accounts for all national entities in accordance with regulations made under this Act”. 


Section 45 of the Central Bank of Kenya Act states that “the Bank (CBK in this case) in its capacity as the fiscal agent and banker to any entity may, subject to the instruction of the public, have power to:

(a) Be the official depository of the public entity concerned and accept deposits and effect payments for the account of the public entity: provided that the Bank may after consultation with the minister, select any specific bank to act in its name and for its account as the official depository of that public entity in places where the Bank has no office or branch;

(b) Pay, remit, collect or accept for deposits of funds in Kenya or abroad.”

But even if the Central Bank had the legal right to open accounts on behalf of the National Treasury, why the apparent dilatoriness in completing the account opening documentation, including signatories? Why wasn’t all this done earlier?

I am afraid I have no idea and rather than attribute ill motives to officials I will leave it to the National Treasury to address this point.

2. On July 3, 2014 US$604 million was debited from this account at JP Morgan and used to retire the US$600 million syndicated loan (remember it?) plus interest.

There has been debate about the legality of this action. Was it authorised by the Controller of Budget? Was there legal authority to pay it out of the account at JP Morgan or should the loan have been paid out of the Consolidated Fund?

The Controller of Budget and the National Treasury are best placed to answer these questions.

But let’s not forget the essential and critical fact: Kenya owed this money, and Kenya had committed in the loan agreement to repay it from, among others, any Eurobond issuance.

Therefore, from a “was the US$604 million stolen” perspective, the answer is an emphatic no. This was a loan legitimately contracted and repayable. 

A new element has recently been introduced into the Eurobond debate that, because JP Morgan had been fined nearly US$2 billion by the US authorities on money laundering charges, that bank is suspect, the insinuation being that it could have conspired with Kenyan officials to defraud Kenya.

With due respect to the authors of this argument this doesn’t make sense.

True, JP Morgan and a whole host of other major international banks, the ones which dominate international trade and capital flows, have been fined heavily since the 2008 global financial crash for money laundering, sanctions breaking and financial markets manipulation.

Should Kenya stop dealing with all these banks and isolate itself from the world?

Indeed, shouldn’t the authors of this line of thought, many of whom live, work or have bank accounts overseas and more likely than not bank with these entities, close their accounts if they cannot stand Kenya dealing with these horrid, sinful institutions?

International banking has had its share of wrongdoing and this has been punished when uncovered.

To insinuate that this calls into question such banks’ abilities to perform what amounts to basic banking is to stretch credulity, and adds zero to our understanding of this issue

3. Again on July 3, 2014, $395 million was transferred from the JP Morgan account directly to the Consolidated Fund, which resulted in a Sh34.6 billion credit to the Consolidated Fund.

Why was this amount transferred and why on July 3?

We have engaged the National Treasury on this and their answer is that there was a need to meet a Sh25 billion development expenditure amount invoiced for payment on June 30 2014, the last day of the Government’s financial year.

And what happened to the other Sh9.6 billion (the aforementioned “missing” Sh10 billion)? After much throat clearing, the National Treasury has admitted that they “borrowed” this Sh9.6 billion from the development budget to meet urgent non-development budget expenses, also falling due on June 30, 2014, but that the Sh9.6 billion was “repaid” to support the development budget in the 2014 / 2015 financial year.

The National Treasury’s previous reticence on this Sh9.6 billion, which coyness led to much speculation that the money disappeared, is driven by the fact that using the Sh9.6 billion to meet recurrent expenses violated regulations that stipulate recurrent expenditure must not be financed by borrowing.

We are not in a position to comment on the appropriateness of this decision to use funds meant for one purpose for another.

The National Treasury has given its explanation and now it’s over to the Auditor-General to verify and take appropriate action.

4. So far, we have accounted for $1 billion. Where on earth was the balance $999 million all this time?

Sitting pretty at the JP Morgan Chase account until September 8, 2014 when the entire amount was transferred to the Central Bank’s account at the Federal Reserve Bank of New York. 

And why was this amount lying at JP Morgan Chase Bank instead of being transferred to Kenya?

Once more we wrung an answer out of the National Treasury — they were determined to keep this amount segregated from the Government’s other funds for precisely the reason that its critics have been accusing the Government of not doing.

That the funds were to be used only to finance the development budget. Again it would need the Auditor General to determine why the funds could only be segregated offshore and not in Kenya.

The writer, Habil Olaka, is the chairman of the Public Finance Sector Board of the Kenya Private Sector Alliance and Chief Executive of Kenya Bankers Association.This is the second instalment of a three-part article on Eurobond.The last part runs Thursday.