State urged to continue cost-cutting despite bond’s success

Money Markets

Liaison Group managing director Tom Mulwa. He says the government should work towards reducing the spiralling recurrent expenditure. Photo/FILE 

By JOHN GACHIRI

In Summary

• The government plans to use the proceeds to fund infrastructure development as well as pay off a $600 million syndicated loan borrowed in 2012.

The government should continue with cost-cutting measures even after the successful sovereign bond issue instead of taking it as a licence for reckless spending, risk analysts say.

 

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The managing director of risk and pension management firm Liaison Group Tom Mulwa said the $2 billion (Sh176 billion) raised should not distract the government from reducing the spiralling recurrent expenditure, which takes at least 70 per cent of the Budget.

“If we still keep a very high appetite for spending it is going to erode the anticipated gains from the Eurobond,” said Mr Mulwa in a statement.

READ: Ministers, MPs defy austerity to spend Sh7.4bn on travel, cars

The Treasury managed to raise $2 billion through the sale of a five-year $500 million bond that has a coupon rate of 5.875 per cent and a 10-year $1.5 billion bond that carries a 6.875 per cent rate.

The government initially planned to borrow $1.5 billion but following the oversubscription that saw it get bids worth $8.8 billion (Sh771 billion) it accepted $500 million more.

READ: Eurobond attracts Sh702bn bids, shows investor confidence in Kenya

Debt

The government plans to use the proceeds to fund infrastructure development as well as pay off a $600 million syndicated loan borrowed in 2012.

Mr Mulwa added that the Treasury should not fall into temptation of paying pending non-urgent bills using the money.

Analysts said the decision to borrow more and at a lower rate should enable the government to roll out more infrastructure projects that will have a bigger impact on the economy.

Moses Waireri, head of research at Sterling Capital, said the larger amount of money borrowed by the government would have a bigger impact since $600 million would be used to repay the syndicated loan.

“If funds are directed to the intended sectors then development shall surely follow. They can achieve way more with the $2 billion less the $600 million in syndicated loan, that is $1.4 billion (Sh123 billion),” said Mr Waireri.

He, however, said that a major achievement would if the money is used to pay off government contractors who are contributing to the rise in bad loans in the commercial banking industry currently.

The Central Bank of Kenya has cited that the rise in bad loans is partly due to government contractors struggling to pay their loans following delayed payments from the State.