Auditor-general raises red flag on Eurobond addiction

Kenya’s increasing reliance on Eurobonds has raised concerns about the sustainability of its debt portfolio. According to Auditor General Nancy Gathungu, the country’s vulnerability to debt has heightened in 2024, coinciding with the maturity of several Eurobonds.

 “While Eurobonds offer access to funds for developing projects, managing repayment obligations remains a crucial challenge, especially because of shorter maturity periods and increasing coupon rates,” she said. Gathungu made the remarks in her presentation to the public debt and privatisation committee of the National Assembly on the 2024 Medium Term Debt Management Strategy in Nairobi.

She observed that while Eurobonds offer access to funds for development projects, managing repayment obligations remains a crucial challenge due to shorter maturity periods and increasing coupon rates. She further explained that Kenya has issued four Eurobonds to date, each with a higher coupon rate, reflecting the likely unsustainability of the current debt portfolio.

The first Eurobond was issued in 2014 in two tranches and matures in June 2024, with a coupon rate of 6.875 per cent and an initial value of $2 billion (Sh293 billion). The second was issued in 2018 and matures in May 2027, with a coupon rate of 7 per cent and an initial value of $900 million (Sh131.4 million).

The third was issued in 2019 and matures in February 2028, with a coupon rate of 8.500 per cent and an initial value of $2 billion (Sh293 billion).

The newest Eurobond was issued early this month and matures in 2031, with a coupon rate of 10.375 per cent and a value of $1.5 billion (Sh219.8 billion). Gathungu expressed misgivings about the government’s handling of its debt situation, stating that the practice of taking on debt to pay debt is unsustainable. She suggested that Kenya should devise new strategies centered on debt sustainability.

 Similar sentiments were echoed by University of Nairobi Economics don, Samuel Nyandemo, who said, said that Kenya is still in debt distress.

Debt repayments

He lamented that the current government has raised Sh3.5 trillion in debt since it came to power and expressed concern that most of the money is not going into development but debt repayments and recurrent expenditures.

 “In January, we spent 89.8 per cent of total revenue to service foreign debt. That doesn’t augur well in any standards,” he said and wondered how much Kenya Kwanza administration will gobble up by the time it leaves office. But despite these concerns, National Treasury still maintains that their diversified financing approach aims to maintain a relatively low weighted average interest rate in the overall public debt portfolio, ensuring Kenya’s debt sustainability over the medium term.

However, the persistent revenue shortfall and increased cost of funding could undermine the country’s implementation of key government projects.On Wednesday, President William Ruto reiterated that his administration was pursuing a turnaround strategy focused on increasing tax revenues and reducing both spending and the rate of debt accumulation.

“Throughout this process, we have been guided by the principles and values of equity, fairness, and prudence in public spending without sacrificing priority social and development funding,” he said.

Ruto said in the interest of sound debt management, his administration is implementing a combination of strategies, including the diversification of financing sources, smoothening the maturity profiles and proactively managing the country’s debt liabilities in general.

The strategy, he added also involves maintaining a low cost of debt and ensuring that debt is sustainable at all times.