A source of mine from the financial sector has just shared with me a draft term sheet that the National Treasury has circulated to international commercial banks inviting participation in a new syndicated loan that the government is apparently planning to take.
When will this culture of binge external borrowing ever stop? The details in the term sheet are as follows. Amount: US$600 million and €250 million, which may be increased by an equivalent of €250 million. This works to around US$1.5 billion.
Purpose of the facility: Funding development projects and any fees costs and expenses incurred in connection with the finance document. Interest rate: Libor+ 645 basis points, which is about nine per cent per annum. Maturity: 2026.
I will stop there as I do not wish to cram this column with statistics and arcane financial jargon. A related but very interesting development also happened last week.
The National Treasury put up a circular asking all commercial parastatals to surrender all excess cash they are holding in their bank accounts.
From what I gather, the National Treasury is currently holding meetings with large parastatals with the aim of forcing them to trim and rationalise their capital expenditure projects — in a process expected to raise billions in revenues for the government.
There is a third related major development. Apparently, and away from the public limelight — a decision has been taken that all spending on the development budget for the first quarter of the financial year be slowed down.
Clearly, the government is in the middle of a serious cash crunch, made worse by major revenue shortfalls at a time when sources for concessional external financing have dried up.
Indeed, the scope of the spending freeze this time is of a scale likely to precipitate crippling cash flow problems across ministries with negative implications for the quality of government services in the remaining four months of the financial year.
Kenya’s budget has very few opportunities for cuts because a disproportionate share of resources must go to salaries, pensions and debt service. Worse, we have accumulated too many expensive commercial loans in our external debt register within a very short period.
Thus, the only practical option open to the government right now is either to engage in more domestic borrowing or implement huge cuts in development.
Which brings us to the new syndicated loans. In the first place, I think what the government needs right now is to slap a freeze on all new commercial debt until the time we will have developed an accurate and comprehensive register for all the expensive commercial debts we have contracted in recent years.
And, I’m not talking about mere excel sheets and PowerPoint presentations the National Treasury are wont to publish. We have to introduce more transparency around these syndicated loans.
As we have recently seen in Mozambique, the infamous Tuna Bond Scandal originated from a syndicated loan.
It has led to criminal charges being pressed in a London Court on senior banks officials who had participated in arranging the said syndicated loan. I think we should press the National Treasury to publish all syndicated loan agreements on its website. We need to insist that all foreign borrowing is directed towards specific projects.
Mark you, the law of the land prohibits borrowing to service debt or to pay salaries. We honour the law more in breach than in practice.
When you ask the National Treasury to point to you specific projects funded by the external borrowing they made, they will tell you that the money is ‘fungible’ and therefore cannot be traced to specific projects.
My take on the circular ordering parastatals to release excess cash to the Exchequer: It does not make sense to me.
As we all know, the only way a company can give money to its shareholder is either through a dividend from income or a reduction in the capital of the company by reducing retained reserves.
What the government is doing is very clumsy. When as a parastatal — I give you cash that will not come back to me, you have reduced my capital and impaired my service delivery.
In effecting this order, the National Treasury should be careful enough to ensure that it does not impair capital positions of these successful commercial state corporations.
Indeed, some of these corporations have been able — on the strength of their balance sheets and credit ratings — to borrow from capital markets without reference to their shareholder.
The Kenya Pipeline Corporation and KenGen are examples in this regard.
In taking the excess cash from successful commercial state corporations and giving it to the exchequer, we are moving public assets from parastatals with transparent accounting systems and where the money can be tracked, and shipping the money into a black hole — the National Treasury.
As things stand, we will not be able to know whether the money will end up in Arror or Kimwarer dam-type projects. Once the money enters the Treasury, it becomes ‘fungible’.