Payback time for Kenya as first Eurobond due in June

Kenyan Debt
Kenyan Debt

Taxpayers should prepare for a tough 2019 as government starts paying huge maturing debts amid low revenue collection.

Among debts lined up for repayment includes $2.8 billion (Sh280 billion) debut Eurobond that Kenya issued in June 2014 to retire a $600 million (Sh61.2 billion) syndicated loan taken in 2012.

The loan from international commercial lenders was due in August that year. The balance was to be pumped into infrastructure development.

Kenya borrowed $2 billion (Sh202 billion) from international investors in June 2014 comprising a five-year issue of $500 million (Sh50.50 billion) at an interest of 5.875 per cent and $1.5 billion (Sh151.50 billion) for 6.875 per cent to be repaid in 10 years.

It went back to the market in December of the same year for a further $750 million under similar terms, a transaction technically known as tap sale, in which $250 million went into the five-year tranche.

In June, National Treasury CS Henry Rotich budgeted for $750 million (Sh76.5. billion) to repay the first tranche of the debut Eurobond bond, which matures in mid-June, attracting an interest of Sh22.95 billion towards interest servicing of the entire facility.

However, there has been disputed opinion on how the government spent proceeds from the sovereign bond, with the Auditor General Edward Ouko saying that Sh215 billion of the Sh280 billion could not be clearly accounted for.

‘’The receipt of net proceeds from sovereign bond of Sh215,469,626,035.75 accounted for in the 2014/15 financial year could not be ascertained as investigations into the receipts, issues, accounting and utilisation of the funds was still ongoing,’’ Ouko said in 2016/17 audit report.

Local leaders and economic experts including opposition Chief Raila Odinga have also questioned how the money was used.

Treasury has however maintained that the money was used diligently for intended purposes.

The first external debt to mature this year will however be the $800 million syndicated loan that Kenya obtained from four international commercial lenders including Standard Chartered, Standard Bank, Citi and Rand Merchant Bank in March 2017.

This was part of Kenya’s planned $1.5 billion (Sh153 billion) syndicated loan partly to plug a fiscal deficit equal to 9.7 percent of gross domestic product in its budget for the fiscal year to June 2017.

The facility which had a two year maturity will expire in March attracting up to eight percent

interest per year.

This means that Kenya will have to remit the total principal of Sh81.6 billion and accumulated interest

of Sh13 billion.

Others due before June include $214 million (Sh21.8 billion) bilateral loans from China, Japan and France.

According to Treasury’s Annual Public Debt Management Report 2018, projected interest of domestic debt was to hit Sh285.6 billion or 2.9 percent of GDP in current financial year up from Sh239.4 billion or 2.7 percent GDP in 2017/18.

Interests on external loans on the other hand were to grow to Sh 114.3 billion up from Sh 81.6 billion the previous financial year.

Low Revenues

Despite Kenya’s high debt obligation in 2019, revenue collection is narrowing with the Kenya Revenue Authority (KRA) likely to miss it’s target for the year by nearly Sh300 billion if the current collection trend persists.

This is despite revising the target for this fiscal year by 5.03 per cent to Sh1.605 trillion from

Sh1.69 trillion.

The taxman managed to collect Sh555.65 billion in five months to November, averaging Sh111.1 billion per month.

This means, Sh1.33 trillion will be collected the whole year if the trend continues, falling below target that has been revised twice in the year so far.

Last fiscal year, Sh1.37 trillion was collected, missing the Sh1.415 trillion target that had also been revised twice.

The low collection is piling pressure on Treasury which has to meet Sh870.6 billion debt budget for the year. According to the Statement of Actual Revenues and Net Exchequer Issue at November 30, 2018, the National Treasury had spent Sh254.1 billion in first five months of the financial year to pay debts against the total budget of Sh870.6 billion for 2018/19.

This means it has to spend an average of Sh102.8 billion per month to meet outstanding budget of Sh616.5 billion by June.

Standard Chartered Bank chief economist for Africa and the Middle East Razia Khan last year said that Kenya will have to float another sovereign bond to pay maturing debts or postpone some payments.

“Once a country issues a Eurobond, it makes sense to come back to the market to refinance especially when faced with narrow options to meet its obligations,” Khan said.

Kenya was forced to issue the second sovereign bond in February last year to settle $646 million (Sh66 billion) from the two-year $750 million (Sh76 billion) loan taken in October 2015, whose maturity had been extended to April.

Last October, Treasury PS Kamau Thugge told Bloomberg that Kenya was considering issuing a third Eurobond and seek a syndicated loan to raise the $2.8 billion (Sh285.6 billion) net external financing it planned this fiscal year.

Even so, other experts including David Ndii and the Institute of Economic Affairs chief executive Kwame Owino have criticised the government’s policy of ‘borrowing from Tom to pay Peter’.

Together with International Monetary Fund, they want the government to go slow on over ambitious budgets and avoid

external debt.

Early this month, the government introduced 15 per cent Presumptive Tax on business permits to rope informal sector into

the tax bracket.

According to the Institute of Public Finance CEO James Muraguri, the new tax is going to raise overheads for small businesses and eventually raise the cost of living for households.

This was part of revenue raising measures announced by Rotich in the 2018/19 budget and adds to other tax policies in the Finance Act 2018 that are eating into household budgets.