The government has issued another infrastructure bond (IFB) worth Sh50 billion, with a maturity period of 6.5 years at market determined rates, in a bid to secure much-needed revenue.

This comes at a time when Treasury Bill interest rates soared above 15 per cent, leaving the government in a tight place, even as undersubscription of long-term bonds becomes more pronounced.

“The bond will be tax free as is the case for Infrastructure Bonds as provided for under the income Tax Act,” said CBK.

Government’s decision to turn to infrastructure bonds is motivated by its inability to access international financial markets due to exorbitant interest rates. The steep borrowing costs and economic headwinds have made infrastructure bonds an attractive alternative for a cash-strapped Treasury.

Notably, the last issuance of infrastructure bonds earlier this year made history by standing as an outlier in the financial markets. With a nominal issuance target of Sh60 billion, the subscription reached a high of Sh220 billion, underscoring the strong investor appetite for these bonds.

The coupon rate was set at a competitive 15.83 per cent, which is a reflecting of growing investor confidence in the government’s ability to repay its debt.

Infrastructure bonds play a vital role in financing essential projects that drive economic growth and development. These funds are typically directed towards key sectors such as roads, railways, energy, and telecommunications, and they facilitate the expansion and maintenance of the nation’s infrastructure.

It is however not clear whether the funds will finance infrastructure given that this appears to be the only access to a pull of funds.

“The Central Bank will rediscount the bond as a last resort at 3 per cent above the prevailing market yield or coupon rate whichever is higher, upon written confirmation to do so from the Nairobi Securities Exchange,” CBK said in the offer document.

The bonds are essential to help improve overall competitiveness and productivity of the economy, fostering job creation, and enhancing the quality of life for the citizens.

However, the timing of this infrastructure bond issuance is significant. The rise in Treasury bill interest rates to over 15 per cent has raised concerns among investors who are facing a challenging investment environment.

Treasury bills are considered a relatively safer investment option, but the increase in their interest rates may not be sufficient to compensate for the growing economic risks and inflationary pressures.

The under subscription of long-term bonds is another notable concern. While infrastructure bonds have been met with robust demand, long-term bonds, which play a pivotal role in extending the maturity profile of the government’s debt, are witnessing subdued investor interest. 

This underscores the importance of effective communication and marketing strategies to attract investors to the longer-dated debt instruments.

The success of this infrastructure bond issuance will be closely monitored, not only for the government’s ability to secure funding but also for the broader economic implications. A well-subscribed issuance would be a positive signal, demonstrating investor confidence in the Kenyan economy despite the challenges posed by the high interest rate environment.

The successful execution of this bond issuance is expected to contribute significantly to sealing the government’s yawning budget holes