When he appeared before Parliament in June, National Treasury Cabinet Secretary John Mbadi lamented the high public debt service costs incurred in January, February, May and July, stating that they were causing cash flow constraints for the exchequer.
January and July have stood out in terms of debt servicing for the last six years due to repayments of about Sh60 billion for the standard gauge railway loan to China.
However, rising debt service costs for February that are now in excess of Sh100 billion have also become a concern for the Treasury, mainly tied to large outstanding stocks of Eurobonds and domestic bonds totalling Sh1.66 trillion.
These debt charges, according to the National Treasury, put the government in a tight fiscal spot, given that it also needs to fund other recurrent costs, such as salaries for public servants amid persistent revenue collection shortfalls.
“There are some months which are very bad, especially where we are repaying loans. We have challenges in January and February, and May and July because we repay debt, capitation to schools of more than Sh50 billion in January…and remember every month we pay Sh80 billion in salaries, yet revenue collection in a month is averaging about Sh200 billion,” Mr Mbadi told MPs in June.
“Constraints would be on cash flow challenges especially where funding is from the government and where we fail to meet revenue targets by Kenya Revenue Authority.”
The February issuances are now emerging as key targets for the Treasury’s early refinancing plans through bond buybacks and switch bonds, in order to spread the service costs to other months.
Last week, the Treasury completed the buyback of a $1 billion (Sh129.23 billion), 10-year Eurobond issued in February 2018. The bond was sold as part of a $2 billion issuance, which also included a 30-year tranche maturing in 2048.
The buyback is being financed using the proceeds from the sale of another $1.5 billion paper sold on Friday at an average rate of 8.7 percent on two tranches.
Overall, the government has $5 billion (Sh646.2 billion) worth of Eurobonds on its books that were issued in February, meaning that their semi-annual coupons are paid out in February and August of every year until maturity.
These papers, which account for two thirds of the country’s total stock of $7.41 billion outstanding Eurobonds, cost the government $221.9 million (Sh28.7 billion) in semi-annual interest charges.
World Bank data shows that other external debt obligations that fell due in February this year totalled $290 million (Sh37.5 billion). They included payments of about Sh21 billion to the Trade and Development Bank (TDB), Sh9.3 billion to the World Bank, Sh2.6 billion to the African Development Bank (AfDB) and Sh2.2 billion to the International Monetary Fund (IMF).
At the same time, the State is spending Sh70.9 billion every February and August in interest payments to holders of Sh1.013 trillion Treasury bonds that were issued in the two months.
The securities include an 8.5-year infrastructure bond (IFB) issued in February 2024 at a rate of 18.46 percent, that has an outstanding value of Sh240.3 billion, a 19-year IFB sold in February 2022 at 12.97 percent with an outstanding value of Sh194 billion, and a Sh103.4 billion 10-year bond that was issued in August 2016 at an interest rate of 15.04 percent.
According to its recently published annual borrowing plan, the Treasury has lined up the 10-year 2016 paper for a switch bond issuance on October 13. If successful, this will transfer the outstanding value to a new bond with a maturity period of between 10 and 15 years, thereby sparing the government from making a bullet payment of Sh103.4 billion in August 2026.
