alexa If it looks, quacks and walks like a duck, it is the lies about Eurobond - Daily Nation

If it looks, quacks and walks like a duck, it is the lies about Eurobond

Friday December 18 2015

Treasury CS Henry Rotich (right), PS Kamau Thugge (left) during a press conference addressing queries on the Eurobond at Treasury on December 4, 2015. PHOTO | DIANA NGILA | NATION MEDIA GROUP

Treasury CS Henry Rotich (right), PS Kamau Thugge (left) during a press conference addressing queries on the Eurobond at Treasury on December 4, 2015. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

More by this Author

In the aftermath of the infamous “mlolongo” elections of 1988 in which candidates with shorter queues would be declared winners, Mwai Kibaki famously quipped that even rigging required some intelligence.

The joke, however, was on him. Queue-voting was the smartest rigging strategy ever as it left no trail — once the queues were disbanded that was it. And so it is with this Eurobondgate. The only thing we are certain of is that it happened. The rest is smoke and mirrors.

Lets start with the basics: Book keeping. It has been pointed out that the government has published three different accounts of how the Eurobond flowed into the Budget. Two of the accounts do not exhaustively account for all the monies.

The one that does differs from the others in that it adjusts the government’s domestic borrowing downwards by Sh140.5 billion. The National Treasury has put out a public statement that is supposed to explain its accounting.

I have summarised below two different domestic financing accounts, both published by the Treasury, labelled “Central Bank Government Domestic Financing” as it appears in the Quarterly Economic and Budget Review for the fourth quarter of FY2014/15, and the one in the public statement.

What are they telling us?



Let us start with the public statement. This account is telling us that at the close of FY2013/14, the government owed domestic creditors Sh1,226 billion, but it also had deposits of Sh266.3 billion so that its net domestic debt was Sh960 billion.

The deposits comprised Sh140.5 of Euro Bond proceeds and Sh215.8 other deposits. By the end of FY 2014/15, the government owed Sh1,353.5 billion, but it had deposits of Sh140 billion, which nets out to Sh1211.2 billion.

The National Treasury attributes the drop in deposits to having fully drawn down the Sh140.5 billion Eurobond deposit.

The account is problematic. It is a matter of record that the government received the Eurobond money in June but the first draw down was on July 3.

At end of June, the amount sitting in the offshore account was $1.999 (Sh175 billion). This amount is reflected in the Central Bank’s foreign exchange reserves, which shot up from $6.5 billion in May, to $8.5 billion in June.

On July 3, the government withdrew $1 billion from the account in two transactions, $604.6 million (Sh53 billion) to settle the syndicated loan.

The balance of $395.4 million (Sh35 billion) was transferred to the Exchequer account, leaving just under $1 billion (Sh88.5 billion) in the offshore account. How then does the government close the month of June with deposits of Sh140.5 billion Eurobond proceeds?


It couldn’t. How much it had in deposits depends on the accounting treatment of the offshore account. If it counts as a government deposit, then it closed the month of June with Sh175 billion of Eurobond deposits. If only monies transferred to the Exchequer account, then it closed the month with zero Eurobond deposits in its accounts.

We have recently seen Treasury figures showing that of the Sh35 billion transferred to the Exchequer on July 3, only Sh25 billion is reflected in the FY 2013/14 disbursements to ministries.

Even if we were to admit the backdating and we should not, the Eurobond contribution to government deposits would have been Sh150 billion, that is, the full Sh175 billion less Sh25 billion. Where is Sh10 billion? It, too, should still have been in the bank, no?

The problem here is that the Treasury is trying to marry fiscal accounts it has fiddled with to the Central Bank’s monetary accounts that are based on dated transactions. The two cannot reconcile.

Let us now turn to the Central Bank account.

This shows how much the government borrowed on a quarter by quarter basis in FY 2014/15. It includes also two government deposit line items one under the Central Bank and the other under commercial banks. A negative figure is an increase in government deposits which is deducted from the gross borrowing to give the net position.

A positive net position shows by how much government domestic borrowing increased in that period, and a negative position shows by how much the government repaid its creditors.

This account shows the government borrowed Sh201.7 billion in FY 2013/14, net of government deposits of Sh28.4 billion, comprising of Sh9.9 billion in the Central Bank and Sh18.4 billion in commercial banks.

Notably, the government’s overdraft at the Central Bank stood at Sh30.2 billion, which is partly offset by its deposits of Sh9.9 billion and a few other items for a net borrowing of Sh19.4 billion.

During the first quarter of FY2014/15, the government’s deposits in the Central Bank rise, more than offsetting the overdraft, translating to a positive cash position of Sh45 billion.

The government also repays the market to the tune of Sh15 billion translating into a “net lending” of Sh61 billion. Over the second quarter, the government’s cash position with the Central Bank improves further, but its position with the market reverses to a net borrowing of Sh19.8 billion comprising Sh21.7 billion net borrowing from the banks and Sh1.9 repayment to the non-bank public.

This account is telling us that the Eurobond proceeds came in during the first half of the year. It shows the government reverting to heavy domestic borrowing towards the end of the year. It shows that the government’s borrowing of Sh251 billion is net of government deposits.

The figure corresponds with the net borrowing of Sh201 billion the previous year.

We do not see the entire Sh175 billion reflected in government deposits in June, even though the Central Bank includes the amount in its foreign exchange reserves.

The Central Bank’s account does not accord with the Treasury’s public statement, reflecting Sh140.5 billion Eurobond deposits at the end of June 2014, or net domestic borrowing of Sh110 billion. Sh140.5 billion is a fiscal figure, not a banking one. Which one are we to believe? Did it borrow Sh251 billion or Sh110 billion?

In FY2013/14, net domestic borrowing increased by 19 per cent (from Sh169 billion to Sh201 billion) and interest cost by eight per cent, from Sh110 to Sh119 billion. In FY 2014/15, domestic interest costs rose to Sh139 billion, which at 17 per cent, is more than double the previous year’s increase in percentage terms.

The government would have us believe that even as interest rates were declining, its interest costs increased that dramatically despite its domestic borrowing declining by 45 per cent.

Such a sharp increase in domestic interest cost only makes sense if domestic borrowing also increased. Domestic borrowing of Sh251 billion translates to an increase of 25 per cent in which case a 17 per cent increase in interest cost is still high but plausible. And if the government’s net domestic borrowing was Sh251 billion, then the FY2014/15 budget deficit of Sh407 billion is fully financed without the Sh140.5 billion (or Sh150 billion when we include the unexplained Sh10 billion difference).

Several weeks into this melodrama, the government has yet to provide information on the projects funded with the Eurobond proceeds. We been offered excuses galore as to why this information could not be produced immediately. This is patent nonsense.

In FY2014/15 the National government budgeted Sh114 billion for its priority development projects. It only funded projects account for a little under Sh14 billion of the Budget, the other Sh100 billion being externally funded projects.

Even assuming a high government contribution to externally funded projects of 20 per cent, the government’s total outlay for the priority projects for the year is in the order of Sh35 billion.

Development lenders and aid donors disbursed Sh98 billion worth of loans and Sh28 billion in grants, a total of Sh126 billion. This exceeds the total budget for the national priority projects.

Even if we were to accept that the Eurobond proceeds “balance” of Sh140/150 billion as the case may be is included in Sh251 billion domestic financing, the government will still have to explain which other national development projects absorbed the money, given that external financing disbursed exceeded the priority projects’ budget. Is it conceivable that the Treasury broadcasted billions of borrowed money to ministries like confetti to fund non-priority projects of their choice?

In a recent interview, National Treasury CS Henry Rotich gave a hint as to where this might be headed, by saying the Jubilee government inherited pending road construction bills amounting to Sh120 billion. The man may be talking too much.


Many Kenyans understandably have difficulties contemplating that Sh140 billion or more can vanish in thin air. I do, too. Then I think about an anecdote I heard some time ago about investors who approached the government proposing a multi-billion dollar private infrastructure project, who were asked for an up front facilitation fee of $300 million. That is serious appetite by any standards.

The Jubilee administration has two choices, to show the projects or the money. There are no Eurobond financed projects— of that we can be certain. That leaves the money making a mysterious return— like Anglo Leasing, then they’ll have to explain all the lies they’ve told.

If they still think they can politic, intimidate and bluff their way out this one, the joke this time round is on them.