Infrastructure bond defeats purpose of external borrowing

 

 The Central Bank of Kenya has set up supervisory colleges for KCB, Equity and Diamond Trust banks and plans to establish two more by year end. PHOTO | FILE

By GEORGE BODO

This week the Central Bank of Kenya (CBK), on behalf of National Treasury, sold the country’s third Sh15 billion infrastructure bond, with the coupon rate pre-fixed at 11 per cent.

The bond was well received in the market and attracted applications worth Sh39 billion. The CBK accepted Sh15.8 billion only.

But the sale of an infrastructure bond at this time is a puzzle given the fact that the government still continues to deepen its borrowings from the local debt market to finance infrastructure programmes.

Yet it raised $2 billion (Sh178 billion) through Eurobond from international debt markets to partly finance critical infrastructure projects.

In fact, in the Eurobond Prospectus the government said proceeds from the issue were to be used for budgetary purposes, including funding of infrastructure projects and repayment of a $600 million (Sh53.3bn) loan incurred in the fiscal year 2011/12 that matured in August.

So far, going by CBK’s weekly disclosure of official usable foreign reserves, it seems only around $1 billion (Sh88.8bn) could be left of the Eurobond proceeds (after about $900 million (Sh80bn) was used to settle the government’s foreign currency obligations, bulk of it being repayment of external foreign currency-denominated debts.

In the fiscal year 2013/14, the government gross total borrowings through the issuance of monthly Treasury bonds totalled Sh203 billion at an average cost of 11.44 per cent — against a borrowing target of Sh107 billion as was outlined in the budgetary statement.

Since the fiscal year 2014/15 began, the government has borrowed a Sh54 billion from the domestic debt market at an average cost of 11.41 per cent through Treasury bonds.

And if the current borrowing momentum is sustained into the coming months, then there is a strong possibility the government could again surpass the fiscal 2014/15 domestic debt market borrowing target of Sh190 billion.

This then will defeat the whole purpose of Kenya tapping into the international debt markets.

First, it was meant to reduce the government’s deepening of domestic borrowing. Secondly, and tied to the first, reducing domestic borrowing would have positive impacts on lending rates and this is premised on the fact that government’s heightened domestic borrowing has been a major contributor to prevailing high lending rates.

But given that the government itself continues to borrow at double-digit rates, an era of single-digit borrowing rates may not be achieved.

So it will be imperative for the government to put the remaining Eurobond proceeds into the intended use before the end of the current fiscal year 2014/15.

And this could entail the Treasury providing breakdown of the usage so far and also a clear plan of usage for the remaining funds, including a pipeline of the projects to be financed, because there is a cost to the Eurobond, which will ultimately be borne by the taxpayer.

Otherwise, continued domestic borrowing alongside existing Eurobond proceeds look very unsustainable, from a debt management perspective.