Kenyan taxpayers paid $1.53 billion (Sh197.4 billion) in interest on the 2014 Eurobond whose last instalment was repaid last Friday, underlining the heavy cost of reliance on commercial debt to fund the budget.
The interest paid is the equivalent of 55.6 percent of the $2.75 billion (Sh354 billion in Monday’s rate) that the Treasury borrowed in the debut sovereign bond in June 2014.
This bond was sold in two tranches of five and 10 years, split at $750 million (Sh96.5 billion) and $2 billion (Sh257.4 billion) and paying interest at rates of 5.875 percent and 6.875 percent respectively.
Eurobonds attract a fixed rate of interest during the life of the loan, and the principal is repaid in a bullet payment upon maturity, rather than on a reducing balance basis.
This is unlike the concessional loans whose principal amount is paid down progressively alongside interest, sparing the borrower having to pay high interest throughout the life of a loan.
Eurobond loans also pose a repayment problem upon maturity as the borrower is required to settle the principal in one go, causing foreign currency liquidity pressure on the exchequer.
For the five-year bond—which the government repaid in June 2019—the interest charge totalled $214.2 million (Sh27.6 billion). On the 10-year paper, the total interest amounted to $1.32 billion (Sh169.8 billion), owing to its higher quantum and longer tenor.
The 10-year bond was partially repaid ahead of time in February through a buyback that was financed by a new Eurobond sale. The buyback saw the State retire $1.44 billion worth of notes early, with the balance being repaid last Friday using the proceeds of a $1.2 billion loan contracted from the World Bank.
“Payment was settled on June 21. Bondholders have received their due (and) the matter is behind us,” Public Debt Management Office director-general Haron Sirima said.
At the time of issuance, the debut Eurobond was seen as a relatively cheap option for development financing owing to the prevailing low international interest rates, and therefore an alternative for domestic borrowing in order to reduce competition for credit with the private sector.
The government identified a number of infrastructure projects in agriculture, transport and energy for funding using the proceeds of the bond, although subsequent audits did not show direct allocation to the projects as had been planned.
In the energy sector, the Treasury indicated that the money would go to expanding transmission lines, and exploration and drilling of geothermal wells.
In the transport sector, the Treasury identified the dredging of the Lamu Port, which was in its initial stages of development at the time, and an urban commuter rail linking the Nairobi city centre the Jomo Kenyatta International Airport as priorities for fund allocation.
In agriculture, funding was earmarked for the Galana-Kulalu irrigation project. These projects were supposed to generate income to help service the loan, according to the initial plans by the government.
A special audit done in 2019 by the Office of the Auditor-General, however, found that the funds were likely put into general budgetary use by ministries after being transferred to the exchequer account.
This made it difficult to identify whether the proceeds of the bond were put into the specific projects that had been earmarked for funding.
Subsequent Eurobond sales have tended to go towards general funding of the budget, or repaying other maturing debt.
In February 2018, part of the proceeds of the second Eurobond sale, which raised Sh202 billion, was used to retire syndicated loans contracted in 2015 and 2017.
In June 2019, the Treasury settled the principal of the 2014 five-year paper using part of the proceeds of its third Eurobond, which was issued the previous month and which raised Sh210 billion.
