Why you’ll never know all the truth about Eurobond

Sunday April 21 2019

Auditor-General Edward Ouko. A staggering Sh725 billion was spent outside the government’s expenditure system in 2014 when Kenya took its first Eurobond. PHOTO | FILE | NATION MEDIA GROUP


A staggering Sh725 billion was spent outside the government’s expenditure system in 2014 when Kenya took its first Eurobond, making it impossible to prove how the loan was spent.

A special report prepared by Auditor-General Edward Ouko, which has finally cleared the controversial loan, states that, while all the Sh280 billion borrowed was received in the country after payment of a syndicated loan of Sh53.2 billion and other transaction fees, six ministries that received part of the loan spent billions of shillings outside the government Integrated Financial Management System (Ifmis).

Ifmis is a government expenditure platform that was expected to bring transparency and stop leakages in government expenditure.


In the audit report, Mr Ouko says, the money from the loan “came into one pot” and was mixed with the rest of government money, which would be sent to various ministries as approved in the budget.

“The special audit revealed that utilisation of the proceeds of the Eurobond could not be traced to specific development projects. The National Treasury explained that these funds were fungible,” Mr Ouko says in the 13-page report he has dispatched to Parliament, a copy of which has been obtained by the Nation. This is where his audit went cold. The report is dated April 2019.


The Eurobond saga has been hanging over the head of the Jubilee administration for nearly five years after the auditor-general raised questions over the expenditure of the proceeds. The decision by Mr Ouko to clear the deal is, therefore, music to the ears of the National Treasury as the report agrees with its explanations.

The clearance comes as Treasury bosses are preparing to go to the financial markets for a third Eurobond.

“The special audit, therefore, confirmed that the Eurobond proceeds were received, and were fungible (came into one pot), at the National Exchequer Accounts in Central Bank of Kenya and are, therefore, not identifiable to any particular infrastructure project,” the report says.

Consequently, the proof in total for the fiscal year 2014/2015 was necessary and thus required a delay to allow for an audit trail through to utilisation in order to be conclusive, the report adds.


Mr Ouko noted that mixing the money with other funds and sending it in bulk to ministries which expended outside Ifmis made it impossible for his team to track every coin to its final usage.

Some of the ministries and government departments that spent money outside the Ifmis platform are Ministry of Defence (Sh80.1 billion), the National Intelligence Service (Sh19.2 billion), the Teachers Service Commission (S170.9 billion), Public Debt (Sh416.2 billion), Pension (Sh35.2 billion) and salaries and allowances for the National Treasury (Sh3.4 billion).

Inside these expenditures were portions of monies received from the Eurobond loan. “Based on the understanding that expenditure is initiated by the user through the budgetary and appropriation process, the special audit noted that these expenditures, especially for the Ministry of Defence and the National Intelligence Service, were under the rubric of confidential expenditure, as they were utilised outside of the Government Integrated Financial Management System (Ifmis),” the report says.

Mr Ouko notes that at a global level, the records of government receipts at the CBK reconciled with the records of the National Exchequer Accounts at the National Treasury.

The report says the National Treasury first raised $2 billion (Sh200 billion) through the international sovereign bond issuance. This amount was broken down into an aggregate principal amount of Sh50 billion ($500 million) at the rate of 5.875 per cent. This loan comes due this year.

The second tranche was a principal amount of Sh150 billion ($1.5 billion). This was issued at a rate of 6.875 per cent and it was to fall due in June 2024. Both transactions happened in June 2014.

But from this gross amount of Sh200 billion, the receiving bank deducted Sh100 million to pay legal fees, legal lead managers’ fees, roadshow expenses and other transaction expenses associated with the initial issuance.


Mr Ouko recommends that subsequent issuance of international sovereign bonds should be earmarked and be identifiable to specific development projects.

Last week, the Nation exclusively reported that investigators had returned home empty-handed, leaving the auditor-general with no choice but to give the process a clean bill of health.

Six months after the initial issue, the Treasury returned to the debt market for a top-up, known as the tap sale, riding on the success of the Sh200 billion fundraising.

The tap sale saw the government borrow an additional Sh75 billion ($750,000), also broken into two parts. The first Sh25 billion ($250,000) was received at a rate of 5.875 per cent and the second, Sh50 billion ($500,000) was given at a rate of 6.875 per cent.

On securing the second loan, the government booked a premium of Sh6.5 billion ($65.6 million) that added up to Sh81.5 billion ($815 million).

Collectively, the two loans now amounted to Sh281.5 billion ($2.81 billion). This loan was known as the Eurobond. The second loan also attracted some costs that added to Sh24.7 million to secure it.

JP Morgan Chase Bank of New York and Citibank N.A New York were appointed the receiving banks of the proceeds of the Eurobond during the initial issuance.

“The scope on verification of funds flow was to the extent that the special audit did not proceed further to ascertain the actual receipts from investors at the receiving banks,” the report reads.

It adds that the money was collected by the receiving banks and subsequently transferred in three batches in bulk to JP Morgan Chase Bank New York – GOK/CBK Sovereign Bond Account Number 60314998.


The three amounts were received in batches of Sh87.5 billion ($875 million), Sh84.6 billion ($846 million) and Sh27.7 billion ($277 million) on the same day on June 26, 2014.

The report says the net receipts into the JP Morgan Chase Bank New York earned interest of Sh24.5 million ($245,956), which was reflected on the ban account.

Tracking down the movement of this funds, Mr Ouko says the money moved from the JP Morgan Chase Bank in New York to the GoK/CBK Sovereign Bond Account 60314998.

A federal tax of Sh2.1 million was charged on the money once it landed in the account on June 30, 2014. Three days later, on July 30, the government made a repayment of Sh60.4 billion ($604 million) to the Standard Chartered Bank New York for a syndicate loan. This amount was equal to Sh53.2 billion at the exchange rates that were prevailing at that time.

On the same day this payment was done, the government made another transfer of Sh39.5 billion ($395 million) to the Federal Reserve Bank in New York.

On the second last day of July that year — July 30, 2014 — the money was charged another federal tax of Sh4.7 million ($47,436). The remaining amount of Sh99.9 billion sat in the JP Morgan Chase Bank account in the US till September 10, 2014 when it was transferred to the Federal Reserve Bank of New York, living nothing in the account after the bank took out its operation charges.

“There was no fund balance at the JP Morgan Chase Bank New York,” the report says.