News Analysis: Kenya’s Eurobond - More Debt Same Governance Challenges?
Monday, 09 June 2014
Kenya is looking to raise USD1.5bn to USD2bn with its first Eurobond. USD600m of this are intended to retire a syndicated loan, and the Government of Kenya states that it will use the remainder for ‘general budgetary purposes, including for the funding of infrastructure projects’.
Compared to other countries in sub Saharan Africa like Zambia and Rwanda and that have recently issued Eurobonds, Kenya certainly has a far more diversified, less donor-dependent economy and has also never been eligible for the Heavily Indebted Poor Countries (HIPC) debt forgiveness initiative. However, there are several concerns with what will be a sizeable chunk of additional external debt, mostly related to Kenya’s notoriously high corruption and therefore the quality of spending:
  • Rapidly rising external debt: The eurobond will add to a planned financing offered by China for the proposed standard gauge railways. According to Henry Rotich, the cabinet secretary for the treasury, China offers to finance 90% of the USD3.8bn total cost for this project, of which more than half will be a concessionary loan at 4% p.a. over a period of 12 years, with a five-year grace period, and the remainder will incur a concessionary 2% p.a. over 20 years, with a grace period of seven years. The standard gauge railway has been criticised as an unnecessary investment, given that Kenya already has a narrow gauge railway that is currently being rehabilitated, and there have been concerns over the single sourcing and corruption in the tender.
  • The Kenyan government defended paying a ‘negotiated amount’ on some of the disputed AngloLeasing contracts as necessary in order to be able to proceed with the Eurobond. An unconvincing argument: investors would most certainly have more confidence in Kenya’s public finance management if the treasury were not making payments on what by the president’s own admission are overpriced, under-fulfilled contracts. The Financial Times quotes Fitch Ratings to that effect: ‘Nonetheless, Fitch, the rating agency, says Nairobi could have legally issued the bond without paying the commercial debt – even its credit rating would have been unaffected.’
  • How will the Eurobond cash be spent? Borrowed funds should be directed to investments rather than recurrent spending. In the run up to the roadshow launch, under pressure over the AngloLeasing payments, the government argued that it had to clear the AngloLeasing debt, however, questionable, to be able to issue the Eurobond and avoid a cash crunch. The deadline for the repayment of the syndicated loan has now been pushed to August 2014. Still: delays in the Eurobond should not affect ordinary recurrent spending – that is not what such funds should be directed at.
  • Development spending generally lags behind schedule – this is likely to be the saving grace for public finances, even if not ideal for the quality of spending: especially the decentralization of government to county levels has created another layer of unproductive recurrent spending. Absorptive capacity has long been a challenge for Kenya in large, long-term and complex projects, of which several are lined up, including the Lamu Port complex.
  • Kenya’s notorious corruption and the perennial jostling for contracts of course affect the overall quality of spending. For such massive medium to long term debt, this will be a concern: the debt repayments should, in principle, be made from the returns of investment projects.
There is no doubt that sound infrastructure investments would be beneficial to the economy – but the big question is how much of this surge in external debt will actually go to such productive investments.

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