WHY CELEBRATE PAYING DEBT WITH MORE EXPENSIVE DEBT?
We citizens and institutions working in Kenya are shocked that the government is celebrating buying back Eurobond with another Eurobond at a higher interest rate of 10.7% as per the statement issued by the president on the 21st of February 2024 announcing, “Kenya’s successful settlement of a substantial part of its 2014 $2.0 billion Eurobond” and the issuance of a new Eurobond.
The government’s decision to issue a new 2024 $1.5 billion Eurobond to buy back part of the 2014 $2.0 billion Eurobond pay-out due in June 2024 demands a critical evaluation in light of the country’s challenges and debt management practices. This comes barely a week after another infrastructure bond was issued without clearly indicating what it will be used for at an interest rate of 18.7%.
The President claimed that this financing strategy has reduced Ksh’s overall debt by722 billion. This claim is very difficult to substantiate because the true cost of Kenya’s public debt stock is not stated and the calculation of the alleged reduction, everything points to an increase. We call on fiscal oversight, the media and citizens to scrutinize this allegation.
The economic backdrop against which this decision is made raises questions about its prudence. With Kenya’s debt-to-GDP ratio at over 70% and the country struggling to meet its revenue targets to avoid defaulting on the current Eurobond pay-out due in June 2024, the move to issue a new Eurobond appears to be a short-term fix to a more profound economic challenge.
Considering that the new Eurobond was issued in dollar denominated currency, the cost of servicing this bond would likely to go up should there be further global shocks that would weaken the local currency (shillings) – or should global interest increase via the US Federal Reserve.
Worth noting is that in 2023, the National Treasury, in its attempt to buy back the 2014 Eurobond, was forced to cancel the plan due to investor concern of a significant proportion of the country’s limited foreign exchange reserves. It is also worth noting that the immediate liquidity demand to avoid defaulting the 2014 Eurobond forced the National Treasury to seek multiple lines of credit from the International Monetary Fund (IMF) to shore up investor confidence at International Bond and Capital Markets.
In the past 12-months, the IMF approved close to $1 billion of loans to Kenya through its Extended Fund Facility, Extended Credit Facility, and Resilience and Sustainability Facility arrangements with immediate access to $684.7 million. While Kenya is grappling to repay its current public debt obligations, it is economically scandalous that the IMF continues with its backed economic programs leading to Kenya issuing the most expensive bond at over 10% in the medium term. This does not communicate economic stability. Rather, it reflects the current state of economic despair and distress we are in as a country. This new issuance’s higher interest rate translates to an annual interest payment obligation of $146.25 million from the $137.5 million paid on the 2014 Eurobond, translating to an increase of $8.75 million. This would likely result in increased cost of debt servicing for the country.
The OKOA Uchumi Coalition is concerned that being a dollar-denominated bond, there are higher chances of global economic shock awaiting in the form of increased interest rates and continuous depreciation in local currency, thus making debt more expensive to repay.
We are also perturbed that parliament and the executive find it okay to repay a Eurobond whose acquisition and utility have been questioned by the independent fiscal institutions. The ongoing debt acquisition trend puts Kenya on a dangerous path to destruction, especially due to the continued disregard for the need for debt to have intergenerational equity as per our constitution. Section 50 of the Public Finance Management Act requires that the government ‘In guaranteeing and borrowing money, the national government shall ensure that its financing needs and payment obligations are met at the lowest possible cost in the market, which is consistent with a prudent degree of risk while ensuring that the overall level of public debt is sustainable.’
It is also paradoxical that the government of Kenya is only concerned with the return of the private investors in the refinancing and repayment of the bond rather than looking at the bigger picture of the overall debt burden that is compounded by the pricing of the new Eurobond. Most importantly, we wonder when the Public Finance Management Act Section 15 (2) b on fiscal responsibilities that requires that in the medium term, all borrowing by the government be only for development initiatives and not recurrent is applicable. We also wonder when the law changed to allow for significant medium-term borrowing for debt servicing. The continued acquisition of debt on political and economic whims instead of legal and constitutional foundation is very concerning for a sovereign state. We reiterate that we are a country that is governed by the rule of law and we expect strict adherence to the law including public finance management and management of public debt.
The OKOA Uchumi Coalition notes that the new Eurobond has a ‘B’ rating according to Fitch and S&P with a negative outlook due to Kenya’s external debt refinancing risks amid high external debt service requirements. This is a warning sign that not all is well in Kenya. Even more concerning is that suddenly, credit rating agencies and international markets that previously warned about Kenya’s unsustainable debt have surprisingly expressed confidence in the Kenyan economy. Yet, it is in the public domain that the sole purpose of the new $1.5 billion Eurobond is to repay the $2.0 billion due in June 2024. We see this process as a vicious cycle of Eurobond and debt repayment with no plan to increase economic growth.
In conclusion, the OKOA Uchumi Coalition calls on the Kenya government to look for the best financing strategies that will not result in increased debt distress because of short-term means of 3 financing its development goals. The financing strategies used by the government should reflect the true face of humanity, as highlighted in the Harare Declaration’s call for citizenry and people’s voices.
We call on parliament as per article 211 of the constitution to report to the people of Kenya the analysis conducted in the Eurobond buyback, the setting of the interest rate on the 2024 Eurobond and the February infrastructure debt; the use of the 2 bonds floated and whether it was specifically approved by parliament, and the plans made at ensuring servicing of the said debts optimally and in due regard of the Kenya youth demographic dividend that does not deserve the continued debt burden.
Sincerely, The undersigned Okoa Uchumi Campaign Members and Affiliated partners:
- African Forum on Debt and Development (AFRODAD)
- The Institute for Social Accountability (TISA)
- CRAWN TRUST
- Kenya Human Rights Commission (KHRC)
- Transparency International Kenya
- ActionAid International Kenya
- Christian Aid Kenya
- Inuka ni Sisi