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Dark holes in foreign debt show need for clear borrowing policy

Tuesday January 15 2019

Treasury Cabinet Secretary Henry Rotich. We

Treasury Cabinet Secretary Henry Rotich. We don’t have a comprehensive on-lending policy with clear guidelines on loan monitoring, recovery, accounting and reporting the on-lending activities. FILE PHOTO | NMG 

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The current issue of Sunday Nation, the largest newspaper in the region in terms of circulation, has just published the details of the terms and conditions of the loan agreements under which Kenya borrowed money from China to build the standard gauge railway.
As you go through the agreement, the inescapable conclusion you arrive at is that people who negotiate these loans routinely allow foreigners to tie their fellow Kenyans to lopsided deals, even as they give away our national interests.

Still, the story left out the most important part of the deal — the pricing of the Chinese loan. Truth be told, we are going to pay these loans through the teeth because, while we borrowed during benign times, we will repay them in turbulent times.
With trends beginning to show that the US Fed will continue to tighten monetary policy in 2019, all indications are that we will be finding ourselves operating in a hostile international economic environment defined by the end of cheap money in international markets, global trade wars and Brexit.
Mark you, the loan from the Chinese is pegged to the London Inter-Bank Offering Rate (Libor), which has been rising steadily ever since we signed up for the debt in 2014 and the US Fed started raising interest rates.
But, perhaps, the most important lesson highlighted by the Sunday Nation story is the need for extra transparency on the terms and conditions of foreign loans. As things stand, public disclosures and reporting on external debt is very poor.
Under the Public Finance Management Act, the Cabinet Secretary for The National Treasury is supposed to provide to Parliament a report every four months on all new loans obtained from outside Kenya or denominated in a foreign currency.
It does not happen.

Yet regularity in reporting and the lack of disclosure of the terms and conditions of these loans is but a minor problem. The quality of the information which the Treasury publishes on public debt is so opaque as to leave huge dark holes.
Indeed, the darkest hole in terms of public disclosure of the stock of foreign loans is in the reporting on loans that are borrowed by the government and then extended to parastatals — the so-called on-lent loans.
We don’t have a comprehensive on-lending policy with clear guidelines on loan monitoring, recovery, accounting and reporting the on-lending activities.
As I was going through the prospectus we put out for the London Eurobond borrowing, I was surprised to discover a revealing disclosure about external loans.
This is how the prospectus purported to disclose the external loans that were apparently extended to parastatals in the energy sector, and that caught my attention: “During 2017, various ministries and corporations such as the Ministry of Energy and Kenya Power entered into a series of loans with China Exim Bank amounting to $1.2 billion and Yuan 3.4 billion.”
It continued: “Such loans mature between 2030 and 2040 and were to be used for funding certain infrastructure and electricity projects.”
Just how vague can somebody be while reporting and disclosing such important information?
And when an external loan is contracted and on-lent to a parastatal, shouldn’t it be reported in its balance sheet” Shouldn’t it sit on the books of the government as a contingent liability when the said parastatal fails to pay the money?

Parliament should insist on regular disclosure and tabling of actual loan agreements before the National Assembly.
I picked up the latest disclosure on public debt that covers up to July 2018.
What you will find there is generic information derived from Excel spreadsheets. The information is not from a general ledger maintained on the principles and practices of double-entry bookkeeping.
Worse, the stock of all on-lent external debts are reported by industry — making it difficult to see even rudimentary information such as who the borrower is and the terms of the borrowing.
We must all the time bear in mind the fact that, as we have seen in the case of the SGR, these external loan agreements contain conditions that are hidden in the fine print but which expose taxpayers to huge contingent liabilities.
How did we end up here?
You have to go back to 2014, when the Treasury sought Parliament’s approval to increase the ceiling on the stock of external debt from $14 billion to $28 billion.
The PFM Act gives Parliament authority to set limits, or ceilings, on external borrowing by the national government. But by raising the ceiling, we opened the floodgates and set the stage for an unprecedented spike in commercial loans in the government’s books.