The Eurobond debate: Following the funds’ trail

By Habil Olaka

The furious debate on the Eurobond has been characterised by two extreme positions. On one side we have those whose strong views range from the argument that the bond proceeds have been “stolen”, to asserting that, even of the proceeds were received, since the National Treasury is apparently unable to give a proper account, there must have been some form of fraud perpetrated.

On the other side is the National Treasury’s narrative, which posits that there was no money stolen, that all was done procedurally and legally, and that those stating anything to the contrary are either misinformed or malicious.

In between sits an increasingly bemused public, unable to make head or sense of all these banking and accounting terms being bandied merrily about, inclined to believe the latest they read, and wondering why Kenya ever dared venture into these dangerous international financial waters, in which apparently our National Treasury were either fools, easily taken for a ride by smooth international bankers; or that they were knaves out to fleece Kenyan taxpayers through malevolent and diabolically clever schemes, all at the behest of shadowy figures.

So which is which: was our money stolen, or not? If it was stolen, how much was taken; was it Kshs 10 billion, Kshs 100 billion, Kshs 140 billion or US$ 999 million or some other figure yet to be disclosed? And why should the Chief Executive of the Kenya Bankers Association (KBA) go to the trouble of penning what hopefully is a beam of light upon an increasingly murky picture?

The last question is easiest to answer. The KBA exists, among other things, to ensure that Kenya’s banking system (which includes three of the six international banks mentioned in the various accounts of what happened on the Eurobond) plays a full and active role in Kenya’s engagement with international markets.

The fog being generated by the debate we are having has the potential not only to damage our sovereign reputation, but also to inflict real harm upon our banking system’s ability to engage with counterparts overseas. And if anyone thinks that this is just bankers’ self-interest talking, please think again: the very petrol you are using to move from A to B; the computers, tablets and laptops Kenya’s admirable army of bloggers are using to generate this very Eurobond debate; the ability of Kenyans to travel, trade and otherwise interact with the outside world: all these depend on our having a trusted linkage to the international financial system, and the KBA is disturbed at the potential damage being done to our banking system’s credibility, and to its ability to facilitate Kenya’s engagement with the world, by the confusion being generated by this Eurobond debate. We owe it to Kenyans to speak out on this critical issue.

Let’s now turn to the Big Question: what happened, was money stolen or not stolen, and if stolen, how much?

Let’s start from the beginning, as it were: why go for a Eurobond? While various accounts have been given, there has been remarkably little information about why Kenya decided to go for; consequently it has been easy to paint the Eurobond issuance as part of a clever, murky scheme to rip off Kenyans. The answer to this question goes back to the Grand Coalition Government, which sensibly concluded that relying solely on domestic financing to fund the Government’s debt needs was neither wise, nor sustainable. And why this conclusion? Because inevitably lenders are only human; if the only lenders in town are local banks and investors, then they will use their effective monopoly over lending to the Government to extract excess returns. That’s a fact, not theory, and it applies to you and I, just as it applies to Government. That’s why we have competition rules to stop one bank, or a few banks, being too dominant. Likewise with Government: it is important that borrowing options exist, beyond local lenders and investors.

A second and equally important reason for Government opting diversify its sources of borrowing was to create room for Kenyan corporates and individuals to borrow. Once again, this is plain common sense: if you ask lenders to choose between on the one hand lending to Government, which can raise money taxes or print money to repay its loans: and on the other hand and corporates and individuals, the reality is that lenders will prioritise Government, and penalize companies and individuals. Technically this is called crowding out, and Government was keen to reduce this negative phenomenon.

The Government’s alternative to borrowing locally is to borrow offshore, either from the likes of the World Bank (i.e. Development Finance Institutions), and Western and other governments, or from international lenders and investors. We already borrow from the World Bank and donors, and the Mwai Kibaki-led governments of 2003 – 2012 were, quite rightly in my view, determined to reduce reliance on donor funding. Which leaves international lenders and investors.

Our first foray into the international lending markets was via the US$ 600 million 2-year syndicated loan the Coalition Government raised in 2012, whose purposes were expressly to introduce Kenya to international lenders, to increase our foreign exchange reserves (which is why no Kenyan based banks were allowed to participate in the loan, since their foreign currency deposits are already in the national statistics) and to provide national budget support, including funding infrastructure and the rollout of devolution.

This loan was a successful issue and it bore some of the hallmarks now being hotly contested: an offshore account was opened to receive the funds from lenders; the loan proceeds were sold by the National Treasury to the Central Bank of Kenya, and in return the National Treasury receives the Kenya Shilling equivalent amount; and Central Bank proceeded to deposit the US$ 600 million into its account at the Federal Reserve Bank of New York.

The syndicated loan was to be repaid either from the Government’s general revenues, or from a Eurobond or other financing. This was explicitly stated in the loan agreement and is not an instance of “after the fact” arguing; right from the outset the end game of this initial foray into the international capital markets was expected to be the issuance of a Eurobond. To imply that the Eurobond was some sort of afterthought by a panicked government desperate to repay the syndicated loan is utter nonsense.

Indeed one can only marvel at how quickly our memories fade: Kenya had first contemplated a Eurobond issue in 2007 for the very purposes enumerated in the 2014 Eurobond Prospectus, had gone so far as to appoint advisers (Deutsche Bank of Germany and Barclays Bank), and it was only in the aftermath of the 2008 global financial crash that Kenya abandoned this first Eurobond issuance. Come 2011 and the Government judged that international conditions had improved sufficiently to re-approach the market, but that in the wake of changed market conditions post the 2008 crash, it was better to try a toe-in-the-water approach to test international lenders’ appetite by first going for a shorter term 2-year international syndicated loan before issuing a longer term Eurobond. The strategy worked: the syndicated loan was a huge success, and the Grand Coalition Government, rightly in my view, took credit for a very successful international loan debut by Kenya.

With me so far?

Second question: how much was raised by the Eurobond, and how was it raised?

On June 24, 2014, Kenya raised US$ 2 billion. On December 17, 2014, Kenya raised US$ 815 million. Why raise in two lots? In June 2014, Kenya received offers totaling US$ 8.8 billion, but only took US$ 2 billion. Surely the country could have taken more? Yes, it could, but that would have been at the risk of interest rates moving sharply upwards. US$ 2 billion was determined by the National Treasury and its transaction advisers as the optimal amount to take at that time. Remember that this US$ 2 billion was raised on the same day that news of the attack on Mpeketoni was announced and was the lead story globally all that day; in the circumstances it was remarkable that any money was raised at all.

Then in November 2014 Kenya returned to the market. Why? Because like any company or, indeed, you and I, if interest rates fall we take advantage and borrow more, or we refinance existing loans. What actually happens in the Eurobond market is that the fall in interest rates is reflected in higher market prices for the country’s bonds, exactly as happens in the domestic Treasury Bond market. There is an old and very accurate truism in the financial markets: if interest rates rise, prices of bonds fall, and if interest rates fall, prices of bonds rise.

In November 2014, market rates globally fell, the price of Kenya’s Eurobonds rose and Kenya took immediate advantage of this favourable movement in the prices of its existing Eurobond to raise another US$ 750 million. Actually this is not quite true: Kenya raised US$ 815.4 million because it sold its bonds at these new higher bond prices.

Put another way: Kenya got a bonus of US$ 65.4 million WHICH THE COUNTRY DOES NOT HAVE TO PAY BACK! Did I hear three cheers for our National Treasury officials for engineering what was in effect a gift of US$ 65.4 million for the country? No, I thought not. Pity, because this was brilliant timing, brilliant work

Let’s now turn to the US$ 2 billion Eurobond issue in June 2014, since no one seems overly concerned with the fate of the November 2014 US$ 815.4 million issue; everyone seems happy all went well on this November fund raising. Here we are then, we’ve raised US$ 2 billion. What happened next? Our reading of the sequence of events is:

1. US$ 1.99 billion (i.e. US$ 2 billion minus fees and expenses payable to bankers, lawyers, regulators etc.) was transferred to an account opened by the Central Bank of Kenya on behalf of the National Treasury at JP Morgan Chase on June 30 2014 with the sole purpose of receiving the Eurobond proceeds. Questions which have arisen is why the account was opened at all, whether it was opened legally and why there was a delay in designating signatories. On the first: this is because it is customary to open Receiving Bank accounts for any Eurobond issues. This is the practice and I am afraid no one is going to change this practice to accommodate any Kenya-specific special need. Put it another way: the Eurobond market turns over in excess of USD 20 trillion annually (I don’t even know how much this mid-boggling amount is in Kenya Shillings); US$ 2 billion is not much in this context and Kenya has to play by existing rules; to expect Kenya to change the rules is pie-in-the-sky thinking.

Ah, you may well ask: Kenya may have had to accept this market practice, but did Kenyan law allow it? Answer, contrary to the most recent writing on this question, is an unequivocal YES

Section 28 of the Public Finance Management Act states that “the National Treasury shall authorise the opening, operating and closing of bank accounts and sub- accounts for all national entities in accordance with regulations made under this Act”.

Section 45 of the Central Bank of Kenya Act states that “the Bank (CBK in this case) in its capacity as the fiscal agent and banker to any entity may, subject to the instruction of the public, have power to:

a. Be the official depository of the public entity concerned and accept deposits and effect payments for the account of the public entity: provided that the Bank may after consultation with the Minister, select any specific bank to act in its name and for its account as the official depository of
that public entity in places where the Bank has no office or branch;

b. Pay, remit, collect or accept for deposits of funds in Kenya or abroad.”

But even if Central Bank had the legal right to open accounts on behalf of the National Treasury, why the apparent dilatoriness in completing the account opening documentation, including signatories? Why wasn’t all this done earlier? I am afraid I have no idea and rather than attribute ill motives to officials I will leave it to the National Treasury to address this point.

2. On July 3 2014 US$ 604 million was debited from this account at JP Morgan and used to retire the US$600 million syndicated loan (remember it?) plus interest. There has been debate about the legality of this action: was it authorised by the Controller of Budget? Was there legal authority to pay it out of the account at JP Morgan or should the loan have been paid out of the Consolidated Fund? The Controller of Budget and the National Treasury are best placed to answer these questions. But let’s not forget the essential and critical fact: Kenya owed this money, and Kenya had committed in the loan agreement to repay it from, among others, any Eurobond issuance; therefore, from a “was the US$ 604 million stolen” perspective the answer is an emphatic NO. This was a loan legitimately contracted and repayable.

A new element has recently been introduced into the Eurobond debate that, because JP Morgan had been fined nearly US$ 2 billion by the US authorities on money laundering charges, that bank is suspect, the insinuation being that it could have conspired with Kenyan officials to defraud Kenya. With due respect to the authors of this argument this doesn’t make sense. True, JP Morgan and whole host of other major international banks, the ones which dominate international trade and capital flows, have been fined heavily since the 2008 global financial crash for money laundering, sanctions breaking and financial markets’ manipulation.

Should Kenya stop dealing with all these banks and isolate itself from the world? Indeed shouldn’t the authors of this line of thought, many of whom live, work or have bank accounts overseas and more likely than not bank with these entities, close their accounts if they cannot stand Kenya dealing with these horrid, sinful institutions? Let’s get serious: international banking has had its share of wrong doing, and such wrongdoing has been punished when uncovered. To insinuate that this calls into question such banks’ abilities to perform what amounts to basic banking is to stretch credulity, and adds zero to our understanding of this issue

3. Again on July 3 2014, US$ 395 million was transferred from the JP Morgan account directly to the Consolidated Fund, which resulted in a Kshs 34.6 billion credit to the Consolidated Fund. Why was this amount transferred and why on July 3? We have engaged the National Treasury on this and their answer is that there was a need to meet a Kshs 25 billion development expenditure amount invoiced for payment on June 30 2014, the last day of the Government’s financial year. And what happened to the other Kshs 9.4 billion (the aforementioned “missing” Kshs 10 billion)? After much throat clearing, the National Treasury have admitted that they “borrowed” this Kshs 9.4 billion from the development budget to meet urgent non-development budget expenses, also falling due on June 30 2014, but that the Kshs 9.4 billion was “repaid” to support the development budget in the 2014 / 2015 financial year.

The National Treasury’s previous reticence on this Kshs 9.4 billion, which coyness has led to much speculation that the money disappeared, is driven by the fact that using the Kshs 9.4 billion to meet recurrent expenses violated PFMA’s rules that stipulate recurrent expenditure must not be financed by borrowing. We are not in a position to comment on the appropriateness of this decision to use funds meant for one purpose for another; the National Treasury have given their explanation, and now it’s over to the Auditor General to verify and take the appropriate action

4. So far, we have accounted for US$ 1 billion. Where on earth was the balance US$ 999 million all this time? Sitting pretty at the JP Morgan Chase Bank account until September 8 2014, when the entire amount was transferred to the Central Bank’s account at the Federal Reserve Bank of New York. And why was this amount lying at JP Morgan Chase Bank instead of being transferred to Kenya? Once more we have wrung an answer out of the National Treasury: they were determined to keep this amount segregated from the Government’s other funds for precisely the reason that its critics have been accusing the Government of NOT doing: that the funds were to be used only to finance for the development budget. Again it would need the Auditor General to determine why the funds could only be segregated offshore and not in Kenya. During this period up to September 8 2014, the funds at JP Morgan Chase Bank earned US$ 245,957 in interest revenue, and Kshs 2.4 billion in exchange gains, at a time when the US prime rate, the main borrowing rate in the USA was under 1%.

One may agree or not with these actions; what concerns us is whether the money was stolen. What is clear is that no money was stolen at JP Morgan Chase, and that interest was earned while the money was there. It may not have been the most efficient way of doing this, but to jump from this to allege theft is preposterous.

Another twist has been brought in; that the JP Morgan statements which support the National Treasury’s case were “redacted” statements, thereby lending an air of mystery as to what was being hidden. This conundrum is easily resolved: both the Auditor General and the EACC must insist on seeing the full statements, which the National Treasury, as the client of JP Morgan Chase, must have. If the redaction is to protect e.g. bank security coding, then let these two institutions confirm the full details under confidential cover, which they do anyway for a whole host of Government entities. The National Treasury has unnecessarily allowed this this redaction to create suspicion: this is plain silly, incredibly dumb, and should be corrected post haste

Yet another allegation is that because JP Morgan’s documents also mention other offices, then the Kenya Eurobond proceeds must have been routed to South Africa, or so it is alleged. I am not even sure how to start addressing this one. Why should any bank in its right mind send money to South Africa, whose currency is depreciating vis-à-vis the US$, thereby risking a certain exchange loss, only to bring this back to the US intact in US$? The mind boggles

5. On September 8, US$ 999 million was transferred to the Federal Reserve Bank of New York (the “New York Fed”). Once more lots of heat has been generated by this: how and why did this money end up at the New York Fed?

Some background is in order here. The US Central Bank is called the Federal Reserve System. It consists of a Board of Governors sitting in Washington, D.C., and 12 regional reserve banks, of which the Federal Reserve Bank of New York is by far the most crucial, since it sits alongside Wall Street, the world’s largest financial market. This federation structure is why the U.S. Central Bank is called the Federal Reserve SYSTEM. But make no mistake: the New York arm of the Federal Reserve System is a 100% U.S. Government entity.

Among many of the New York Fed’s functions is to act as banker to central banks. The New York Fed does not accept any other customer accounts other than from the banks it regulates and central banks. Since its foundation in the mid-1960s, the Central Bank of Kenya has had an account at the New York Fed, and that account is the Central Bank’s main US$ operating account, responsible for more than 60% of all US$ activities by the Central Bank of Kenya. An example: whenever you read of the Central Bank having bought dollars from Kenyan banks, those dollars end up at its account at the New York Fed. Note that in the UK, the Central Bank of Kenya has similar accounts with the Bank of England for £ accounts and in Europe the Central Bank has € accounts with European Central Bank. Translated: central banks prefer having their main offshore accounts with other central banks

So why did the US$ 999 million end up in the New York Fed? Because the Central Bank of Kenya BOUGHT the US$ 999 million from the National Treasury and in return credited the National Treasury’s Kshs denominated Sovereign Bond account at the Central Bank with Kshs 88.46 billion. In other words, the US$999 million ceased being the property of the Kenya Government, through the National Treasury, on September 8. That is why the US$ 999 million “disappeared”; it was sold, and now belongs to the Central Bank of Kenya as part of our reserves. You still doubt it? Check the Kenya Foreign Exchange Reserve Movement at

Those who want to know what happened to the US$ 999 million are best advised to ask the Central Bank, or to request the Auditor General to audit the Central Bank of Kenya. If, on the other hand, you are genuinely truly interested in what happened to the Kshs 88.46 billion, then forget that red herring called the New York Fed and instead follow the Sovereign Bond Account at the Central Bank of Kenya and the movements thereon. Unless, of course, you want to tell President Obama that the New York Fed, the main operating arm of the US Central Bank, consists of a bunch of thieves.

6. The immediate key movements, which should now concern us are the debits from the Sovereign Bond Account to the Consolidated Fund. Why was the KShs 87.7 billion left in this Sovereign Bond account instead of being transferred to the Consolidated Fund? Again we have asked the National Treasury, and again have been advised that funds were released to the Consolidated Fund only upon request – see also the National Treasury’s website On the face of it this makes sense, but we will have to await the proper institutions conclusions once they have delved into this account.

There are, of course, questions to be asked of the National Treasury, and we have set out some of these in this article. What we are confident about, though, is that Kenya received the entire US$ 2,815,000,000 minus the syndicated loan repayment and bond issuance expenses. Whether these monies were used wisely and productively, or whether they were stolen in our “usual” budgetary shenanigans through procurement and other devious routes is another matter altogether, which we must debate. But to accuse individuals and institutions of wholesale theft of the money before receipt is unfair, unjustified and must be proven by those who claim it was.

(Habil Olaka is the Chairman of the Public Finance Sector Board of the Kenya Private Sector Alliance (KEPSA) and Chief Executive of Kenya Bankers Association)

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