Tough questions for government on the dollar-denominated bond plan


Kenyans were holding onto a record Sh905 billion worth of dollar deposits in local banks as at July. FILE PHOTO | NMG

A few days ago, President William Ruto announced plans by his government to issue dollar-denominated bonds in the domestic market to raise financing for government projects.

There has been punditry suggesting the issuance of this bond is meant to target idle dollars held in local bank accounts. This is erroneous because there are no idle dollars. What is being referred to as idle money are fixed deposits chasing returns from banks.

The new administration has not made its motivation to issue the dollar-denominated bond clear, but the plan may be part of its fiscal restructuring efforts.

Currently, liquidity in the global market is tightening, with the Federal Reserve acting aggressively on interest rates and is expected to continue hiking in November and January 2023. The jittery now is about the refinancing of Kenya’s 2024 Eurobond amid the rising interest rates that make refinancing an expensive adventure.

So, the local bond market is one of the avenues the new government may be considering by issuing a dollar-denominated bond to repurchase its international debt like the 2024 Eurobond.

The question is whether the local bond market is a safer option for government to offer a dollar-denominated bond to repurchase the 2024 Eurobond. To start with, do we have enough liquidity for the uptake of the bond by local investors?

According to the latest figures from the Central Bank of Kenya, foreign currency deposits was worth Sh892 billion only, with the greenback forming a large part of the deposits. So, for example, if the government targets issuing dollar-denominated bonds worth Sh500 billion, it will exhaust all the dollars held in fixed deposits.

And, it will have to offer returns higher than 4-5 percent margin that banks are offering investors. Consequently, the government will be crowding out banks from accessing the dollar and raising the cost of borrowing.

Dollars are not domiciled in Kenya therefore the government will be in competition with banks (who offer returns to fixed depositors so they can have enough dollars to provide dollar loan facilities to their customers) for available dollars in the local market because both are dollar takers.

If the government is targeting foreign investors as well with the bond issuance, it will have to offer returns much higher than what the US Treasury bonds will be offering so as to convince them to diversify their investments in a market like Kenya. In that case, the rates of the bond will come close to the rates of what investors will ask in the Eurobond market.

Lastly, the government will have to improve its fiscal status to make the bond attractive. It has already committed to reducing the budget by Sh300 billion. The Treasury Cabinet Secretary nominee has talked about the new government planning to substitute commercial loans with concessionary loans, which are soft loans with below-market rates and favourable terms.

 The writer is an economist.

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