In need of a new deal

Bold, Roosevelt-like measures required to restore confidence in country’s economic management structures



Jane Wachira

A Eurobond, according to Financial Times lexicon, is a bond that is sold outside the country of the currency in which it is denominated. The “euro” part of the name derives from the fact that Europe was the first place where such bonds (nominally denominated in dollars) were sold. It is not to be confused with bonds denominated in Euro.

It is also an international bond issued in Europe or elsewhere outside the country in whose currency its value is stated (usually the US and Japan). The term euro is also used to simply refer to the international aspect of the bonds; the currency in which it is issued determines its name e.g. Eurodollar (US dollar) or Euro yen (Japanese yen). Kenya’s is a Eurodollar bond. Eurobonds are free of withholding tax and are traded electronically in the secondary markets across international financial centres.

In April 2014, Rwanda became the first East African nation to sell a Eurobond, raising $400 million (Sh41 billion) of 10-year notes at a rate of 6.92 per cent. In July 2013, Nigeria had sold $500 million (Sh51 billion) of similar maturity securities at a yield of 6.60 pc. In June this year, Kenya acquired the Eurobond as well; it had been in the pipeline for seven years.

Initially the country sought to raise $1.5 billion (Sh153 billion), but eventually raised $2 billion (Sh205 billion), breaking a record in the whole of Africa’s history. This is after it attracted bids four times its target. US investors bought about two thirds of the bonds, with British investors taking one quarter. It is to be paid back in five and ten years with interest on an annual basis and the principle amount at maturity i.e. $500 million five-year securities that will price to yield 5.875 pc, and $1.5 billion of a ten-year bond at 6.875 pc.

The government, through the Central Bank of Kenya (CBK) gave the private investors a piece of paper known as a bond, and in return CBK collected on the government’s behalf $2 billion cash in the form of a loan. The proceeds of the transaction were to be used for general budgetary purposes, funding of infrastructure projects, which included geothermal development, road and rail link to quell the huge infrastructure deficit, and the repayment of $600 million (Sh61 billion) syndicated loan in 2011/2012 that was to mature later in August that year.

Only good things
Among others the Eurobond was aimed at accelerating economic growth and aiding poverty reduction. Infrastructure projects would increase revenue earnings and create employment opportunities. It would lower the interest rates in the country and stop the government from borrowing from domestic markets. As President Uhuru Kenyatta put it, “it will stop government borrowing from domestic markets thereby helping drive down interest rates, which will boost investment and spur economic growth and provide growth to our people.”

The President further promised that the money would be put into good use in ways that would bring about positive momentum to the country’s economy. It would also elevate Kenya’s credit worthiness in capital markets, thereby attracting more foreign investors.

The challenges that accompanied the uptake of the Eurobond included, one, whether the money would be put into effective and efficient use; two, we faced the risk referred to by economists as the “original sin” – this doctrine warns against borrowing in a foreign currency, when you do not have sufficient earnings in that currency that will service the debt. The bond was issued in dollars yet Kenya spends and collects taxes in shillings, hence high foreign exchange risks. In a situation where the shilling substantially depreciates against the US dollar, which is what the Eurobond is denominated in, the cost of servicing and repaying the bond becomes much higher and could impact on debt sustainability.

One year down the line, we are experiencing all the anticipated negative effects, with bank interest rates going haywire – Standard Chartered Bank interest rates rose from 17.5 pc to 27 pc. The value of the shilling in relation to the dollar has dropped significantly with the dollar trading at more than Sh100. Further, the Eurobond billions cannot be accounted for in infrastructural developments, energy, transport and agricultural projects.

Auditor-General Edward Ouko expressed his fears in his report that the $2 billion received in June 24, 2014, could have been stolen since it was not deposited in the Consolidated Fund. Rather, it was deposited in an offshore account contrary to Article 206 of the Constitution, and Section 17(2) of Public Finance and Management Act 2012, which requires that all money raised or received by or on behalf of the National government be paid into the Consolidated Fund. In July, out of the Sh210 billion raised, Sh34.6 billion was moved to the exchequer to fund infrastructural projects, while Sh53.2 billion was withdrawn to repay the syndicated loan.

His counterpart, the Controller of Budget Agnes Odhiambo concurred with him and raised questions on the use and whereabouts of the Sh176 billion. She also testified that the money was deposited in an offshore account over which she had no power. But that is not all; there was a substantial deficit of Sh600 billion which was to be funded through domestic borrowing. Earlier, in May 2014, the government had received from China a loan of $5 billion (Sh512 billion), to fund the standard gauge railway.

In 1987, Kenya’s total debt stood at $5.9 billion (Sh605 billion) which represented 77 pc of the gross national product (GNP); in 2008 the public debt stood at Sh867 billion.

Fast-forward to 2015 and, according to National Treasury data dated March 2015, the Jubilee government had borrowed Sh874 billion between 2013 and 2015, overtaking former President Kibaki’s regime, which borrowed Sh738 billion. In August 2008, with a population of 36 million people, each Kenyan wore a debt tag of Sh24,083 of public debt. In July 2014 with a population of at least 40 million people, each Kenyan owed Sh75,000. Kenya is currently saddled by debt, foreign as well as domestic. The country is experiencing a cash crunch and could be headed the way of Greece.

The Greek debt crisis, or the Greek sovereign ‘great depression’, saw the European country go broke. Kenya could be exhibiting early signs of the same. Greece has often been depicted as the cradle of political democracy and the birthplace of western civilisation. It is the land of Plato, Socrates and Aristotle, men whose thoughts define philosophies that influence much thought on social economic, political, spiritual and cultural life today. Greece, unable to pay off its debts and live within its means, is indebted to fellow Europeans.

The Greek debt crisis of 2010 was triggered by high budget deficits that reached 13.6 pc of the GDP, four times the amount allowed by the EU, and high national debt levels reaching €300 billion (Sh32 trillion), representing 124 pc of GDP. This high spending, mainly funded by other European counterparts, was done to heighten the luxurious life of Greeks, causing furore throughout the region when the Greek debt crisis threatened to collapse the entire Euro Zone. A highlight of the events that led to the crisis includes macro-economic developments characterised by weak economic activity, hyper inflation, very high real and nominal rates, and low fixed developments.

Fiscal developments included high general government deficits and fast accumulation of debt – the ratio increased from 69 pc in 1989 to 110 pc of GDP in 1993 and with very high interest payments. Upon securing the EMU (European Monetary Union) membership, the general government deficit declined even further and interest rates skyrocketed. Greece had entered the EMU with two key weaknesses: one, the debt-to-GDP ratio was too high, exceeding 100 pc of the GDP and, two, the institutional framework which determined fiscal outcomes was extremely weak; actually, it was non-existent. When the financial crisis began in 2009, the Greek economy had contracted by 0.3 pc; national debt had risen to €262 billion (Sh28 trillion) from €168 billion (Sh18 trillion) in 2004 and was projected to rise to 124 pc of GDP in 2010. Its deficit reached 12.7 pc of GDP more than four times the stipulated EU amount. They ruled out bilateral loans and instead announced a wider austerity package including a freeze on public sector pay and higher taxes for low and middle income households.

The debt further ballooned to €300 billion, as interest on the same continued to rise. Germany opposed a quick bailout of Greece citing the Maastricht Treaty, which states that there will be no bilateral assistance for other economies. Greece then got a subscription for their first bond of €5 billion, a ten-year bond issue; however the second bond received a weak response as financial markets started to lose faith in her ability to service debts.

Later the Euro Zone agreed to a €30 billion rescue package; a further aid of €118 billion was granted to avert a meltdown. Wages, pensions and benefits in the public sector were cut, while higher VAT and other tax rises were imposed. Austerity measures included hiking VAT to between 23 pc and 25 pc from 21 pc, cuts in the bonuses and wage supplements on offer to state workers, and a 10 pc hike in taxes was imposed on petrol, tobacco products and alcohol.

These traps could have been avoided, through increased fiscal discipline and increased competitiveness of the economy. Greece did neither. Long-term problems included continuous deficits for the last 36 years, and high and rising public debt. There were plenty of warnings but Greece took no action. The same is happening and has been happening to Kenya. There have been successive debts from regime to regime since independence, corruption scandals with highlights being the Goldenberg scandal, Anglo-leasing, the Grand Regency Hotel (now Laico Regency) scandal, and the current NYS scandal where Sh791 million is missing. We have a government that is spending well above its means, and which is characterised by heavy borrowing with no accountability for utilisation. The country is experiencing a rate high of inflation with the prices of basic commodities skyrocketing.

During the Great Depression in the USA, President Theodore Roosevelt initiated the New Deal for his first hundred days in office. This saw congress pass fifteen major acts to meet the economic crisis. Inter-alia, these were the Emergency Banking Relief Act, which restored the people’s confidence in banks, and the National Industrial Recovery Act, which was a blue print for industrial recovery through controlling industrial production and prices, with industry created codes of fair competition. The positive effect of these Acts is felt to date.

This is what Kenya needs: a new deal.
Currently, government has the discretion to borrow from foreign finance markets without consulting the Central Bank, yet it is the CBK that is expected to pay back the loan. There is a need to put in place stringent measures that ensure a loan is used for its targeted purpose and that the same is realised. The increasing appetite for debt has to be tamed. We are not in Greece’s place yet, but we are headed there, especially if we fail to sustain, manage and service our debts.

As Theodore Roosevelt put it when he introduced the New Deal, “the country needs and, unless I mistake its temper, the country demands bold and persistent experimentation. Its common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something.”


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