Bankers spin a most unseemly yarn on Eurobond cash

Saturday February 13 2016

National Treasury Cabinet Secretary Henry Rotich.  PHOTO | SALATON NJAU | NATION MEDIA GROUP

National Treasury Cabinet Secretary Henry Rotich. PHOTO | SALATON NJAU | NATION MEDIA GROUP 

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Two weeks ago, I was invited to debate the Eurobond scandal at the University of Nairobi. I declined, explaining to the organisers that the fate of the proceeds of the Eurobond was to the best of my knowledge still the subject of a criminal investigation and the Government officials I was to debate with were potential suspects in the investigation.

The forum turned out to be part of a public relations campaign in support of the Governments claim that “no money was lost.”

The forum was followed by a paper published in the newspapers titled “The Eurobond Debate: Following the Funds Trail”. It carries the logo of the business umbrella body Kepsa and the name of the CEO of the Kenya Bankers Association.

As there is no person opinion disclaimer, it is reasonable to conclude that it represents the position of Kepsa and KBA.

It is a depressing read. Its primary purpose is to distance banks from whatever may have happened to the Eurobond proceeds even as it acknowledges that the Government has not been able to account for the money.

But it goes ahead to spin a most unseemly yarn, claiming that the authors have managed to “wring” and “coax” explanations from the Treasury that lend credence to the claim that no money was lost.

I will comment on three of its claims, namely, what became of the Sh10 billion missing from the books, why money was not remitted to the Consolidated Fund promptly as the law requires and a claim that we got some free money from the financial markets.

It is helpful to preface this with a summary of the scandal as it now stands.

There are two sides to it, a budget side and a banking side that have so far evolved in parallel. I have been focusing exclusively on the budget side, while opposition leader Raila Odinga has pursued the banking side. Here, I bring the two together.


On the budget side, Government borrowed Sh250 billion, paid off a Sh53 billion loan, leaving Sh197 billion for spending. It claims that that all of it financed development projects.

The budget accounts reflect Sh176 billion borrowed in FY 2013/14, Sh25 billion spent in the same year, a balance of Sh141 billion carried forward, and Sh75 billion as borrowed in FY 2014/15. The balance carried forward should be Sh151 billion — what became of the Sh10 billion is one of the mysteries.

So far so good. The problem arises when you ask the question as to how much the Government borrowed domestically. Central Bank data reported by the Treasury shows a figure of Sh251 billion. If this is correct, then the budget becomes fully financed without the Eurobond proceeds that were carried over.

To fit the Sh141 billion carried forward in the FY 2014/15 budget, the Treasury adjusts the net domestic borrowing figure downward to Sh110 billion, so that when it is added to Sh141 billion it totals Sh251 billion. This adjustment fails to add up with at least three other accounts.

First, the Controller of Budget’s account of Government revenues shows a domestic borrowing figure of Sh293 billion as well as a separate line of Sh141 billion, which corresponds to the Eurobond proceeds carried forward.

Second, domestic interest cost a very significant 17 per cent which is not inconsistent with decline in domestic borrowing, an anomaly that is easily confirmed by trend analysis.

Third, records show the Government sold securities (bills and bonds) worth Sh641 billion and redeemed securities worth Sh477 billion, which nets to Sh164 billion borrowed from the domestic market.

The Central Bank data cited above shows that Government closed the year owing the Central Bank Sh119 billion for total domestic borrowing of Sh283 billion, an amount of the same order of magnitude as the Controller of Budget’s figure. The money borrowed from the domestic market alone overshoots the Sh110 billion figure by a country mile.


The banking side follows the money trail. The money was raised in two tranches of $2 billion “primary issue” in June 2014 and $815 million “tap sales” towards the end of the year.

The Government received the primary issue proceeds, less commissions, of a little under a million dollars on June 26 and kept it in an account opened for the purpose with JP Morgan Chase Bank in New York.

Half of it, i.e. $1 billion, is properly accounted for, this being $604 million that paid off a loan and $396 million that was transferred directly to the exchequer account. Both transactions were done on July 4, a week after receipt of the money.

The other half, a little over $999 million, was kept in the JP Morgan Chase account for no apparent reason until September 8 when Treasury, prompted by the Central Bank, closed the account and transferred the money to the Federal Reserve Bank of New York. What happened to this money thereafter is contentious.

The “tap sales” was remitted to the Government through an account with Citibank. This was repatriated on December 17.

Treasury sold the dollars to the Central Bank for Sh73.8 billion. Unlike the first transfer of Sh35 billion that was promptly put into the Exchequer account, this money was put in another account designated “sovereign bond account” at the Central Bank. These details are contained in a credit advice written to the Treasury by the Central Bank’s Director of Financial Markets.

The Treasury, and latterly the Central Bank, claim that the $999 million balance of the primary issue was treated likewise i.e. the Central Bank bought the dollars from the Treasury, and credited Sh88.5 billion to the same “sovereign bond account”.

There is no banking documentation to support this claim. The two amounts supposedly deposited in the sovereign bond account add up to Sh162 billion.


Suspicion that the $999 million was not remitted as claimed is based on three observations. First, the copy of the document showing the transfer of money from JP Morgan Chase to the New York Federal Reserve appears to be “redacted”— the contents of the bottom half were covered up in the copying process.

This claim has not been denied. Indeed, the bankers paper acknowledges that this may be the case. Second, there was no justifiable reason for keeping it in the US for more than two months.

Third, the authenticity of seven letters presented by the Government as evidence that Sh162 billion was transferred from the sovereign bond account to the Exchequer account has been questioned.

We can now put the two sides together. On the budget side we have Sh151 billion unaccounted for, comprising Sh141 billion “carried forward” and the Sh9.6 billion that disappeared from the books. Both the syndicated loan and tap sales are reflected in the FY 2014/15.

On the banking side we have Sh162 billion without verifiable evidence of transfer to the exchequer. But given that the tap sale proceeds are reflected in the FY2014/15 budget, it seems reasonable to conclude that this money was remitted to the Exchequer.

The plausible reason for dubious letters purporting to transfer the entire Sh162 billion from the sovereign bond account to the Exchequer is to cover up for the $999 million without a proper paper trail.

We can now derive one figure of missing money. It is Sh98.5 billion comprising of $999 million (Sh88.5 billion) and Sh10 billion.

Another way of arriving at the same figure is to deduct the syndicated loan payment (Sh53 billion) from the correct figure of proceeds that should have been carried forward (Sh151 billion) — Sh98 billion (the small difference is a rounding error).

Their explanation for the Sh10 billion missing from the books is that Treasury had “borrowed” this money for recurrent spending and has since returned it. This is patent nonsense. The Government does not maintain separate recurrent and development accounts.

All disbursements, referred to as ‘exchequer issues” are paid out of the same account. There is no such thing as a development kitty where the Government can illegally dip its hand to finance recurrent expenditures.


On the reason for keeping public monies offshore, they claim that this was to ring fence the funds for development projects. Nonsense on stilts. There was a perfectly simple transparent constitutional way of doing this, namely to establish a fund by law.

We have several of them — the Road Levy Fund, CDF, Equalisation Fund to name a few.

The Treasury sought and secured an amendment to the law of doubtful constitutionality enabling it to operate the offshore account responsible for this mess.

It could have, at the same time, tabled the establishment of a Sovereign Bond Fund or Infrastructure Fund, whatever. What about the “free money” from the financial markets? This is propaganda.

The Government sold bonds with a face value of $750 million for $815 million, that is at a premium $65 million or 8.7 per cent. This, the bankers claim, amounts to the Government getting free money from the market for which it deserves a pat on the back.

Markets don’t give money away. The premium tells us that the bond was underpriced, that is, the market was willing to accept a lower interest rate than offered.

Specifically, it tells us (in theory) that the market would have bought the bond at 6 per cent as compared to the 6.875 per cent offered. The 6.875 per cent interest works out to $51.5 million per year, while 6 per cent interest cost would be $45 million. The difference over the life of the bond is the $65 million premium.

It is conceivable, but doubtful, that the authors of the article do not know this. It is more likely that they are being plain dishonest assuming that everyone reading is the gullible public that they cheat regularly on interest charges and other hidden costs of loans.

Why are they doing this? Banks are untrustworthy enough as it is, so why are they going out of their way to reinforce that reputation?

What is in it for them? At least three things. First, the Treasury wants to go back to the market, and that means transaction advisory services and fees. It is awkward for the bankers to sell another sovereign bond when the previous one is still mired in controversy.


Second, it is their clients, as well as themselves, who bought the bond so they are taking losses from the fall in the value of the bond — about 10 per cent.

They would benefit from shoring the value up. Third, if the money is not hidden somewhere in the Government’s bank accounts at the Central Bank, there are banks which know where it went. This is called money laundering. It is a very strong motive to want to kill and bury the story.

What we owe Shakespeare for his timeless illumination of the corrosive effect of money lending on morality is incalculable.

The one bank that should be talking about the Eurobond is the Central Bank of Kenya. If there was no theft, the CBK would have cleared this up a long time ago.

All it has done is to issue an evasive public relations statement in response to the naming of the chairman of its board as a “person of interest”. Like the bankers, the CBK press statement does not categorically aver that money was not lost — it only absolves its officers of involvement in “any misappropriation of these funds.”

The CBK has neither repudiated its net domestic borrowing figure of Sh251 billion, or challenged the Treasury’s adjustment of it downward.

The CBK has not explained why it did not acknowledge the purchase of the contentious $999 million and crediting of the shilling equivalent to the so-called sovereign bond account as it did with the tap sale proceeds. The CBK has not challenged the claim that the seven letters with funny folio numbers are fraudulent.

The CBK is hiding the truth. It is a partner in the crime. As we say in Gikuyu, “gutiri muici na mucuuthiriria” (there is no difference between the thief and the lookout).