Kenya has turned to a United Arab Emirates (UAE) backed $1.5 billion (Sh193.8 billion) bond in the wake of the International Monetary Fund (IMF) funding hitch to plug the country’s financing shortfall as the royal Emiratis seek a wider influence in Africa.
The UAE will guarantee the bond as Kenya expands the range of financing available after withdrawal of the Financing Bill, 2024 and delays in the disbursement of $600 million (Sh77.5 billion) from the IMF that have left the country in dire need of funds.
Treasury Cabinet Secretary John Mbadi yesterday said the country was seeking transaction advisers for the UAE debt that is expected to carry an interest rate of less than 8.2 percent and viewed as an alternative to the Eurobond.
The Treasury is walking a financing tightrope after deadly protests forced President William Ruto’s administration to abandon tax measures that would have collected Sh346 billion this year.
The UAE cash could mark Kenya’s debut Islamic law-compliant bond, also known as a Sukuk, as the country eyes moneyed investors and wealth funds from the Middle East.
Pursuit of cash from UAE emerges in a period Abu Dhabi is increasing its dealings with Kenya as part of its efforts to build influence on the continent through a series of bailouts extended to African countries — including $35 billion to Egypt earlier this year.
Abu Dhabi offered Kenya a Sh2 billion gift after floods and landslides hit Kenya and paid for the private plane that took President William Ruto to the US in May amid criticism of extravagance.
Abu Dhabi royal Tahnoon bin Zayed Al Nahyan, UAE President’s brother, has association with a firm that formed a consortium with Safaricom for the rollout of the controversial Universal Health Coverage (UHC) programme.
“We are exploring and diversifying options of borrowing for budget support,” Mr Mbadi told the Business Daily in a phone interview.
“It’s a bond that the UAE will guarantee, not a loan. It will certainly be cheaper than the Eurobonds. We have a rate of 8.2 percent that we are discussing to bring it down,” added Mr Mbadi without divulging further details, including whether the bond is Sukuk.
Islamic finance caters for investors who want to follow Islamic rules on avoiding direct payment or earning of interest, which is viewed as usury or immoral under Islamic law.
The Islamic bonds are structured to bring in a fixed return from a tangible asset or service, and without charging interest, in accordance with Islamic financial principles.
The UAE bond is under the Sh168.8 billion that the government is targeting borrowing on commercial terms from in the current fiscal year, effectively acting as a substitute for a Eurobond issuance.
At below 8.2 percent, it will trade lower than prevailing yields for Kenya’s sovereign bonds.
In seeking the loan guarantee from the UAE, the government is mainly taking cover against a potential budget funding hole should the delay in unlocking up to $1.4 billion (Sh180.9 billion) from the IMF’s four-year $3.6 billion funding programme continue.
The government was looking for an immediate drawdown of $600 million (Sh77.5 billion) from the IMF.
The delay in disbursement—which is pending approval by the IMF’s executive boardhas been attributed to the collapse of the Finance Bill after deadly youth-led protests.
The IMF told the Business Daily last week that discussions were ongoing to firm up policies and reforms that could support the completion of the reviews under the funding programme, adding that no date had been confirmed for the board’s deliberation.
The delay in funding has compounded the Treasury’s already strained fiscal position, given that the withdrawn Finance Bill was meant to raise an additional Sh346 billion in taxes.
As a result, Kenya has widened its budget deficit to 4.3 percent of gross domestic product for the current fiscal year through June from an initial 3.3 percent, potentially breaching IMF-programme targets.
The effects of foregone revenue was also narrowed by budget cuts and additional borrowing of Sh171.6 billion via a supplementary budget, with the budget deficit going up to Sh768.8 billion from the original Sh597 billion.
To cover the deficit, the government is targeting a net of Sh413 billion from domestic lenders and Sh355.5 billion in external loans.
Kenya also needs to repay Sh330.7 billion in principal amounts owed to external lenders before the end of June, hence the Treasury’s urgency in unlocking new loan sources from Kenya’s bilateral partners.
Speaking last month, Central Bank of Kenya (CBK) governor Kamau Thugge disclosed that the government had met most of the review targets, save for those touching on revenue performance.
“The one that has been problematic has been on the revenue side. We missed targets in December 2023 and June 2024… having said that, targets were very high,” said Dr Thugge.
The difficulty in hitting the targets under present conditions has seen the IMF and the government return to the table to seek a consensus on new revenue targets due to the collapse of the Finance Bill.
