Concerns are mounting over Kenya’s public debt management after fresh audit findings raised questions about the utilisation of proceeds from a major Eurobond issued under President William Ruto’s administration.

Kenya, like many emerging economies, has increasingly leaned on external and domestic borrowing to bridge budget deficits and manage rising debt obligations.

With maturing loans exerting pressure on the exchequer, the government has turned to international capital markets, including sovereign bonds, to refinance existing liabilities and stabilise its fiscal position.

However, the latest audit now casts doubt on how effectively some of these funds were deployed.

The concerns stem from the Auditor-General’s performance audit report on management of cash and domestic debt by the National Treasury, which scrutinises the handling of proceeds from a 2025 Eurobond issuance.

According to the report, Kenya raised about Ksh188.35 billion through the international sovereign bond at a time when the country faced mounting pressure from maturing public debt.

The bond, priced at 9.5 per cent, was largely intended to support a liability management operation, including the buyback of a Ksh117 billion Eurobond. This strategy was meant to ease repayment pressures and restructure expensive external debt.

However, Auditor General Nancy Gathungu found that only Ksh78.3 billion of the proceeds were actually used for the intended buyback. A further Ksh30 billion was redirected to address shortfalls in domestic borrowing, specifically Treasury bond proceeds, pending the disbursement of expected external financing.

In total, the audit questions the regularity and effectiveness of Ksh110 billion from the Eurobond proceeds, raising serious accountability concerns.

“In the circumstances, the regularity and effectiveness in the utilisation of the Ksh110 billion proceeds of the Eurobond could not be confirmed,” the auditor states in the report.

Breach of terms?

The findings suggest that the diversion of funds may have breached the terms under which the bond was issued. According to the report, the sovereign bond proceeds were strictly meant for buying back existing Eurobonds or refinancing external debt, not for supporting domestic borrowing gaps.

“The utilisation of the sovereign bond proceeds to cover for shortfalls arising from Treasury Bond was a breach of the subscription agreement,” the report states.

Gathungu notes that the contractual framework governing the bond issuance, including the subscription agreement and deed of covenant, explicitly restricted how the funds could be used.

A legal opinion presented to the National Treasury had also warned against any material deviation from the agreed application of proceeds.

Despite these safeguards, the audit indicates that a significant portion of the funds was used outside the permitted scope, raising the risk of contractual breaches with international investors.

The report further flags uncertainty over whether the Ksh30 billion diverted to domestic debt support was ever reimbursed after the anticipated external resources were received.

“The audit could also not establish whether the proceeds that were used to cover the Treasury Bond were reimbursed after receipt of the external resources,” the report notes.

These revelations are likely to reignite debate over Kenya’s public debt strategy, particularly the reliance on costly commercial loans to manage existing obligations. The country’s total public debt has already surpassed Ksh12 trillion, amplifying concerns about sustainability and fiscal discipline.

The National Treasury

The audit also draws parallels with past controversies surrounding Eurobond proceeds, where questions over transparency and accountability remained unresolved for years. Such historical concerns continue to shape public perception and investor confidence.

While the National Treasury had initially justified the Eurobond issuance as part of a broader strategy to smooth out repayment pressures, the audit findings suggest that part of the funds may have been used for short-term fiscal support rather than strictly for debt restructuring.

The report does not indicate whether any corrective measures or sanctions have been taken following the identified breaches.

However, Gathungu warns of potential legal and financial risks arising from non-compliance with bond terms.

Any violation of agreed conditions, the audit cautions, could expose the government to disputes with noteholders and potentially undermine investor confidence in future sovereign bond issuances, an outcome that could complicate Kenya’s access to international capital markets at a time when it is most needed.