The question of how the $2.81 billion (about Sh285 billion) Eurobond proceeds were used or whether the entire loan borrowed from international lenders was actually received in the Kenya government’s bank accounts has hang over the Treasury for the better part of this year.
The other vexing issue has been whether the amount received was actually spent for the intended purposes.
The Business Daily talked to Treasury secretary Henry Rotich about the matter:
There are discrepancies on the actual date the first tranche of the Eurobond proceeds were received at the consolidated fund. While Treasury documents show transfer of $395,439,262.50 (Sh34,648,388,180.25) on June 30, 2014 hence part of fiscal year 2013/2014; the entry as per JP Morgan Bank statement is dated July 3, 2014 — which makes it part of the 2014/2015 fiscal year. What is the correct position?
In our fiscal presentation, we match the expenditure with financing. Since the expenditure commitments were made in 2013/14 (which is the record in our books) we showed the corresponding financing for those expenditure in the same year — although they arrived on July 3. We are just matching the expenditure commitments made and the financing into one financial year.
The alternative would have been to shift the expenditure commitments to the following year which is not the correct practice. At the end of the year, it is frequently the case that commitments occur in the previous year (maybe even on last day of the financial year), but financing is completed in the new financial year.
Therefore, in order to eliminate the mismatch of expenditure and financing, both were recorded in the 2013/14. Without doing this, you would have expenditures that do not have financing in one year and financing that does not have corresponding expenditure. This creates huge errors and omissions which is contrary to good fiscal reporting.
A balance of $999 million remained idle in the JP Morgan account for two months, until September 8, 2014, when the account was closed and the money seemingly transferred to the Federal Reserve Bank of New York. Why did this cash stay in an offshore account for two months yet government was experiencing a cash crunch? There is no paper trail to show when this money was deposited in the consolidated fund.
There were only three payments from this account; $604 million (July 3) for payment of the syndicated loan, US$ 395 million (July 3) transferred directly to the Consolidated Fund and the balance of $999 million (September 8) transfer to the CBK Sovereign Bond Account (Kshs) held at Central Bank of Kenya, Nairobi.
The bank statements of the GOK/CBK Sovereign Bond Account held with JP Morgan Chase Bank, New York are posted on the National Treasury website. It is important to appreciate the Federal Interest withheld refers to withholding taxes by JPMorgan on interest earned.
The government did not experience any cash crunch last year Q1 (July-September) 2014. The GoK/CBK dollar account abroad is similar to GoK/Sovereign Bond deposit account (in Kenya shilling terms) at the central bank.
The CBK is the official government fiscal agent as provided for in the CBK Act and can open an account for a government entity locally or abroad. The funds were awaiting MDAs (ministries, departments and government agencies) to provide funding requests for their development budgets for FY 2014/15. Indeed, the government earned about Sh1.2 billion in exchange rate gains at the time of transfer to the shilling account at the CBK from the dollar account abroad.
It is not true to say there is no paper trail that the $999m was deposited in the consolidated account. The bank statement on our website… clearly shows the money going straight to the CBK. The central bank also confirms this. There is no mention of the Federal Reserve Bank of New York. The Federal Interest Withheld refers to withholding taxes by JPMorgan on interest earned.
Why were the proceeds of Eurobond classified as domestic borrowing?
Once the bond proceeds were received in the CBK Sovereign Account (Nairobi) they became part of government deposits like any other deposits from domestic taxes or domestic borrowing — it is also the same way that the IMF treats the transaction (see their recent report on their website). We have already addressed this matter on our website.
In essence the domestic borrowing for 2014/15 was Sh251.1 billion (including the Eurobond) it is the same figure the IMF uses.
You gave ministries three weeks to show the infrastructure projects funded by the Eurobond. Isn’t it standard practice that money leaves the Treasury clearly designated in specific vote heads?
The line ministries are the custodians of their projects and are accountable to Parliament on their expenditure that has been approved by Parliament. They would have the details on the projects funded by exchequer releases.
However, since the Controller of Budget releases monies to ministries in a lump sum, the ministries cannot differentiate whether the money they have received from the exchequer came from VAT, income taxes, customs duties, excise taxes, domestic borrowing or the Eurobond.
They simply get a lump sum to build the road. The role of the Treasury is to disburse funds to ministries as per their request and in line with the approved budget by Parliament.