Investors are saving Sh30.7 billion in taxes every year on interest earnings from infrastructure bonds (IFBs) following the recent surge in subscriptions to the tax free securities.
The IFBs now account for 41 percent of the government’s total stock of Treasury bonds from 30 percent at the end of 2022.
Analysis of Central Bank of Kenya (CBK) data on outstanding bond issuances shows that the value of IFB’s now stands at Sh2.2 trillion, up from Sh1.11 trillion in December 2022. In the period, the total volume of Treasury bonds in issue has gone up from Sh3.71 trillion to Sh5.37 trillion.
Treasury bonds normally attract a withholding tax of 10 percent for issuances of a tenor above five years, and 15 percent for those of five years and below.
The IFBs on the CBK’s books have tenors of between six and 25 years, and coupons (interest rates) of between 10.2 and 18.46 percent.
Overall, the government pays Sh307.4 billion in annual interest on the bonds, which would yield a tax of 30.7 billion were the IFBs to be taxed like ordinary issuances.
The growing prominence of IFBs on the government’s domestic debt portfolio has coincided with the opening up of the primary bonds market to the wider market after the launch of the CBK’s DhowCSD platform in June 2023.
The tax free status of the bonds and their higher coupons compared to ordinary bonds has added to their attractiveness to investors, with the government also finding them a convenient avenue to raise large amounts of funds quickly due to the oversized demand.
“All the recent auctions have flown off the shelf due amid high investor demand. The government has in turn taken advantage of the guaranteed takers, who include foreign investors, in its efforts to ramp up borrowing on the front end of the fiscal year,” said Churchill Ogutu, an economist at IC Capital (Mauritius).
“The lower frequency of IFB issuances compared to ordinary bonds creates a fear of missing out among investors, hence the rush to buy them whenever they are floated.”
All the IFBs issued or reopened since the beginning of 2023 now have outstanding amounts of at least Sh100 billion each. Three of the bonds have raised in excess of Sh200 billion each, raising concerns about their refinancing when they fall due, although they have an amortised repayment structure that will stagger the maturities.
The 8.5-year IFB sold in February 2024 remains the largest outstanding bond on the government’s books at Sh240.3 billion, and also the most lucrative with a coupon (interest rate) of 18.46 percent.
A 15-yerar IFB that was initially sold in January 2018 at a coupon of 12.5 percent and reopened last month is next with an outstanding volume of Sh219.8 billion, the bulk of which (Sh178.6 billion) was raised in the reopening amid record investor bids of Sh346 billion.
The third bond in the Sh200 billion club is a seven-year paper sold in June 2023, which raised Sh213.4 billion at am interest rate of 15.83 percent.
Other large issuances are a 19-year paper sold in 2022 that has a face value of Sh194.5 billion and a coupon of 12.96 percent, and a 6.5-year bond sold in 2023 at 17.93 percent that has an outstanding value of Sh186.9 billion, with one reopening done in August 2024.
A 17-year issuance floated in March 2023 has a face value of Sh186.02 billion, while the 14-year bond issued in November 2022 has an outstanding value of Sh159.5 billion.
For retail investors, the IFBs have provided an attractive alternative investment option at a time when other asset classes have experienced volatile returns.
These investors, who include individuals, private companies, self-help groups, Saccos among others now hold Sh888.5 billion worth of government debt, an increase ofSh600 billion from Sh288 billion holdings in December 2022.
The money market funds, which account for more than 60 percent of unit trust assets, largely invest in short term government paper and fixed cash deposits.
By the end of June 2025, the assets under management of the collective investment scheme sector stood at Sh596.3 billion, up from Sh145.8 billion in June 2022.
