Kenya needs to explore the issuance of social-linked bonds to ensure greater accountability over domestic and foreign commercial borrowing. Writes Cuba Houghton, a Kenyan economist and public finance practitioner.
The recent string of refinancing decisions by the National Treasury confirms that Kenya firmly remains in Eurobondage.
The now decade-old practice of issuing opaque foreign bonds to pay back older bonds demonstrates the indefinite cycle of repayment that Kenya has been chained to since 2014. It also highlights a fundamental flaw in Kenya's public debt management- the inability to connect borrowing decisions to tangible improvements in the lives of Kenyans across generations.
The use of proceeds from domestic and foreign bonds remains a black box within Kenya’s budget framework.
In Kenya’s case, Eurobondage refers to the current toxic cycle of expensive foreign commercial borrowing for the purposes of paying back older, expensive, foreign commercial borrowing. It is a short-sighted, billion-dollar game of fiscal hot-potato being played across administrations, with the hope that the potato gets cooler over time.
Ultimately, it is ordinary citizens across generations who feel the heat. Kenya now spends more on debt servicing than on health, education, social protection, and agricultural spending combined. Where the National Treasury claims opportunity in Eurobonds, Kenyans experience their opportunity cost in the form of poor roads and unfinished classrooms.
The Eurobond Age
Kenya’s Eurobond age began in 2014, when it lost access to cheaper finance offered by institutions like the World Bank and the IMF after transitioning from a low-income to a lower middle-income country. At the time, it was in need of significant capital to finance infrastructure projects set out in its Vision 2030, such as the Standard Gauge Railway (SGR).
High levels of domestic borrowing were already strangling credit flows to the private sector, so Kenya turned outwards, where global prospects were favorable, and issued its maiden Eurobond worth US$ 2 billion (approximately KShs 345 billion).
Since 2014, Kenya has issued 9 individual Eurobonds worth over KShs 11 trillion, equivalent to roughly 38% of Kenya’s cumulative national budget over the same period. Most of these commercial bonds have been issued for the purposes of ‘general budgetary support’ or refinancing existing loans.
Source: African Debt Database, National Treasury
Eurobonds are attractive to governments because they leverage the wealth of private investors abroad and, where successful, provide a large, sudden capital injection into state coffers. However, their commercial nature also makes them more expensive than other foreign loans, and a hassle to repay, as they have to be settled in large bullet payments.
For example, when the final US$ 1.5 billion tranche of the Eurobond I was due in February of 2024, Kenya’s weak economy could not generate sufficient tax revenue for repayment despite aggressive tax reforms. In keeping with tradition, a 7th Eurobond was issued to settle the bullet payment and avoid an official default.
Eurobondage
Kenya's Eurobondage stems from an underlying challenge in the National Treasury’s inability to connect debt decisions to measurable improvements in socio-economic outcomes over time. While Kenya’s public finance law demands that public borrowing be used only for development spending, weak public financial management processes obscure debt-driven development outcomes.
Instruments like Eurobonds lack the transparency needed to ensure that they are being used for the benefit of those who ultimately repay them. While some external loans can be traced to specific sectors and projects, government borrowing through bond issuances still cannot be directly traced to particular services or projects in Kenya’s national budget.
This lack of transparency limits adequate oversight over debt decisions, which have multigenerational implications. Much progress has been made in publicly availing information on public debt management via the National Treasury website. However, the use of proceeds from domestic and foreign bonds remains a black box within Kenya’s budget framework.
Escaping Eurobondage
Kenya cannot afford to borrow in ways that cannot guarantee economic development. Recent research by Bajeti Hub shows that the social cost of public debt is significant. A 30-year analysis shows that a 1% increase in Kenya’s debt stock decreases social spending on education, social protection and health by 2.3%. Read More >>>
Kenya needs to explore the issuance of social-linked bonds to ensure greater accountability over domestic and foreign commercial borrowing. Such instruments have shown promising signs of success in South Africa and India, where sub-national governments have issued social bonds aimed at specifically improving maternal health in low income communities.
Driven by the need to ensure bonds build progress, Kenya could pilot a bond proceeds report showing the purposes for which debt raised from domestic issuances and Eurobonds has been used within Kenya’s national budget.
Debt decisions need to be designed to maximise impact and benefit those most in need. Given that all Kenyans pay for public debt through taxes, public debt must benefit all Kenyans. Kenya needs mechanisms in place to ensure the equitable distribution of debt-funded projects across the country.
This could be effected through the simple geotagging of debt-financed development projects in Kenya's national budget to better visualize decision making.
