Kenya is set to issue its first sustainability-linked bond by June, targeting to diversify financing sources to cover the annual budget deficit.
Sustainability bonds proceeds are exclusively used to finance or re-finance projects that improve social and environmental sustainability.
The Sh65 billion sustainability-linked bond has been included for the first time under projected changes to the 2024/25 budget which runs to June 30, 2025.
Sustainability-linked bonds are securities whose key performance indicator is linked to the issuer’s achievement of climate or broader sustainable development goals (SDGs).
The progress or lack thereof towards the specified SDG target results in a decrease or increase in the instrument’s coupon.
This means that Kenya could access funding from such a facility and maintain low payment costs by following through on set sustainability targets.
Sustainability-linked bonds are aimed at encouraging issuers who could be countries or firms to make sustainability commitments.
Kenya has been exploring other sources to diversify its budget deficit funding away from traditional instruments such as international sovereign bonds and domestically issued Treasury bills and bonds.
“The government will also explore other sources of financing options if the macroeconomic conditions improve. In addition, the government may explore new markets through issuing Panda, Samurai, and diaspora bonds as part of instrument diversification and deficit financing options,” the National Treasury states in its final Budget Policy Statement published on Thursday.
The exchequer deficit financing policy targets to maximise loans on concessional terms and non-concessional terms as commercial external borrowing is primed to be limited to projects that cannot secure cheap financing but are in line with the government’s development agenda.
The National Treasury is still set on undertaking further reforms in the domestic credit markets including the refurbishment of the retail-centred M-Akiba bonds.
“In promoting financial inclusion and a savings culture, the government has prioritised re-engineering the issuance of the M-Akiba bond. The government will revamp the platform to ensure more retail investors can access government securities,” the Treasury added.
Kenya has also hunted down initiatives such as debt-for-climate swap with the construction of a 300MW Bogoria-Silale geothermal power project for instance being built to settle a Sh8 billion (€60 million) loan to Germany- the first debt-for-climate swap in the country.
The debt was forgiven on condition that Kenya delivers the project which is meant to supply more clean power to the national grid and light up local communities.
The sustainability-linked loan is expected to complement concessional funding sources including expected inflows from the World Bank Group and the International Monetary Fund (IMF) in the same period.
Green bonds have become popular globally to encourage sustainability and to support climate-related or other types of special environmental projects.
These bonds specifically finance projects aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management.
They also finance the cultivation of environmentally friendly technologies and the mitigation of climate change.
