THE EUROBOND HOW ALL THE EUROBOND MONEY WAS RECEIVED IN THE CONSOLIDATED FUND What is the Eurobond and why was it issued The Eurobond is just like any domestically issued Bond except it is issued abroad to foreign investors such as foreign banks, insurance companies, fund managers etc. To issue a Eurobond, a country is required to be rated by an international rating firm. Kenya had a rating of B+ from Standard and Poors and from Fitch. The bond was issued in order to: Diversify our sources of foreign borrowing away from bilateral countries and multilateral institutions Stabilize inflation and interest rates Build-up international reserves Reduce depreciation pressures. HOW MUCH WAS RAISED THROUGH THE BOND For the initial Bond issue, the total raised was US$ 2 billion (or US$1.999 bn excluding commissions and other expenses). When interest rates on the initial issue declined we went for Tap sales amounting to US$750 million. But since our bonds were trading at a premium we received a bonus of $65.4 million, which is not part of our debt. This brought the total for the Tap sales to US$ million. The total amount raised was $2.815 billion which translated to Ksh 250 billion. However, after paying for commissions and other expenses and the syndicated loan of $604.6 million (Kshs billion), the total amount that came to Kenya for development expenditure was about US$2.2 billion equivalent to Ksh billion. WHAT WERE THE TERMS OF THE EUROBOND There were two tranches of 10 years (US$1.5 billion) and 5 years (US$.5 billion). For the 10 year tranche the interest rate was 6.875% and for the five year tranche the rate was 5.875% For the Tap sales the rates were 5.875% for the 10 year tranche and 5% for the 5 year tranche. Other countries that are Kenyas peers issued Eurobonds as follows; Ghana (10.75%), Zambia (8.97%), Gabon (6.95%), Cameron (9.5%) and Angola (9.5%). HOW DID THE MONEY COME TO KENYA It is standard international practice to open an international bank account to receive the bond proceeds. As the banker to Government, the CBK opened both accountsJPMorgan Chase and Citibank, both in New York. JPMorgan and Citibank were our advisors on the transactions: others included Barclays Bank, Standard Chartered and Qatar National Bank. The local Co-Manager was Dyer and Blair. THE FLOW OF FUNDS From the various investors, the money was deposited into the accounts of our advisorsthe joint lead managers; from there, the $2 billion (excluding commissions) was transferred to the CBK/GoK account at JPMorgan (the SWIFT messages have been provided) see flow chart. From the JPMorgan account, the money was transferred to the CBKs account at the Federal Reserve Bank of New YorkBank statements showing the transfer have been availed on our website. The same process was followed in regard to the Tap sales where the receiving bank was Citibank, New York. Even theTap Sales were deposited at the CBKs account at the Federal Reserve Bank of New York. Simultaneously as dollars were transferred to the CBKs account in New York, the CBK credited Government with equivalent shillings. FLOW OF FUNDS BANK STATEMENTS FROM JPMORGAN/CITIBANK We have received bank statement from both JPMorgan Chase and Citibank showing bank balance from the time deposits were made to the time they were transferred to the CBKs Account at the FED. These have been posted on Treasury website. TRANSFER OF BOND PROCEEDS INTO THE CONSOLIDATED FUND TRANSFERS INTO THE EXCHEQUER ACCOUNT CONTROLLER OF BUDGET, THE AUDITOR GENERAL, AND CBK In her submission to the PAC the CoB confirmed independently that all proceeds were received at the CBK and that she authorized withdrawals as per the Constitutional provisions. The Auditor General noted in his report for 2013/14 that he did not: qualify my audit opinion on the basis of this matter due to the fact that the balance of actual net proceeds from the Sovereign Bond is correctly reflected in the Off-Shore Account and in the Central Bank of Kenya Special Account. The CBK has also confirmed to the Senate Finance Committee that all the money came to the CBK. THE ETHICS AND ANTI-CORRUPTION COMMISSION Following the allegations made by the Hon. Raila Odinga, the Director of Public Prosecution directed the EACC and DCI to investigate this matter. These independent institutions completed their investigations and: found no evidence of criminal culpability on the part of any government official and therefore recommended that the file be closed; and recommended that the matter be referred to the office of the Auditor General to carry out a special audit on the development projects that were implemented by Ministries/ Departments and Agencies during the 2013/14 and 2014/15 financial years to ascertain the utilization of the funds and whether there was value for money. WHAT WERE THE PROCEEDS OF THE BOND USED FOR? The use of the bond proceeds totaling Kshs billion was spread over two years: Ksh 34.6 bn in 2013/14 and Ksh bn in 2014/15. For FY2014/15 total exchequer releases (i.e. cash releases to MDAs) for development expenditure amounted to Ksh 270 bn. of which Ksh 36.5 bn came from development partners and the remaining amount of Ksh bn came from GoK. Of the GoKs contribution, Ksh 171 bn was from the Sovereign Bond deposits at the CBK, and Ksh 63 bn was the GOKs own revenues. This means that the Sovereign bond proceeds covered almost 75% of our development budget (cash based). The withdrawal of funds from the Consolidated Fund (amounting to Ksh 270 bn) was authorized by the CoB as noted earlier. IS THERE KSHS 140 BILLION THAT IS MISSING? Absolutely not. The gist of Mr. Ndiis argument is that in the Budget Review and Outlook Paper (BROP) we presented the following two columns which have different numbers for the same year: IS THERE KSHS 140 BILLION THAT IS MISSING? It is alleged that the second column above, showing Ksh billion is deliberately understating domestic borrowing which should be Ksh billion. It is first of all important to note that for the two columns the figures add up to the deficit financing figure of Ksh billion. All we did in moving from the first to the second column is to disaggregate the figure of Ksh billion into Ksh billion for sovereign bond and Ksh billion of other domestic borrowing. This is for purposes of clarity and to demonstrate the use of the sovereign bond proceeds. WHAT IS THE BREAKDOWN OF DOMESTIC FINANCING Information from the CBK show the following as net domestic financing: IS THERE KSHS 140 BILLION THAT IS MISSING? From CBK data above, it is clear that net domestic Financing includes the sovereign bond. That is why Mr. Ndiis financing figures add-up to Ksh bn. Instead of the deficit of Ksh bn.he has counted the Eurobond proceeds twice. Double counting of the bond proceeds Another way to see the double counting by Mr. Ndii can be seen below where there is an unexplained residual figure of Ksh. 141 bn. Clearly the Former Prime Minister has been misledbecause these numbers do not balance. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK (Cont.) The former PM has claimed that US$999 mn. Went missing after being deposited in the Federal Reserve Bank of New York: Its crystal clear that after the money is moved to the Federal Reserve Bank of New York from the Bank account at JP Morgan Chase New York, everything goes blank, as there are no Bank statements or third party documentary evidence to show how, when and where the US$999,052,872.97, equivalent to Ksh 87,766,528,223.47, moved. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK (Cont.) The Federal Reserve Bank is the Central Bank for the US. Therefore, it is a banker for banks in the US as well as for central banks across the world. Private citizens and companies are not allowed to hold Federal Reserve Deposits. Since no private citizens can have deposits there they similarly cannot withdraw funds. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK (Cont.) How do borrowed dollars become shillings. To understand why the Former PMs statement is incorrect, it is important to understand how government funds it projects using foreign generated resourcessuch as the Eurobond. GoK payments are made in shillings and not dollars. Therefore, the borrowed Eurobonds must be converted to shillings to facilitate the Government spending on projects/programs. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK (Cont.) The normal process of obtaining shillings is to sell the dollars to the CBK in exchange for shillings. In the particular case of the US$999 mn the GoK sold the dollars to the CBK and received Ksh bn in shillings. The CBK banked its dollars in the Federal Reserve Bank of New York and simultaneoulsy credited the government account at the CBK with the shilling equivalent. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK (Cont.) It should be noted that the Former PM does not question the other two transactions of US$395 mn on July 3, 2014 and the US$815 mn on December 17, It appears that the Former PMs advisers wrongly believe that actual dollars from JP Morgan Chase were transferred to the Consolidated fund: For example regarding the Tap Sales, the adviser says that the statements show clearly that the proceeds of the tap sales were transferred promptly to the consolidated Fund. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK (Cont.) This clearly is not the way the international financial markets work. In the same documents we have posted on Treasury Website the flow of funds of these other two transactions can be seen. Low and behold, the dollars are moved from the JP Morgan Account to the CBKs account at the Federal Reserve Bank of New york. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK (Cont.) Indeed one can see it is the same account: the US$999 mn was banked in the CBKs account Kenya/ on Sept. 8, The US$395 mn was banked in the CBKs bank account Kenya/ on July 3, and US$815 mn was also banked in the CBKs bank account Kenya/ on December 17, In return the CBK provided a total of Ksh bn in Kenyan shillings which was used on development expediture. IS THERE US$999 MILLION FROM THE FEDERAL RESERVE BANK OF NEW YORK So in response to the statement that everything goes blankthe reason there are no further transactions related to the Treasury once the dollars are deposited with the Federal reserve Bank is because the dollars no longer belong to the Treasury. They are now owned by the CBK as part of the international reserves. To expect them to come to the Treasury is akin to selling dollars to a bank and then returning a few days latter to demand the bank to give your dollars bank without you paying for them!! CBK International ReservesSource CBK Foreign Exchange Reserves, US$ Million CBKS BANK RESERVES Clearly the movement in CBKs international reserves confirms that all the Eurobond money (i.e. comprising the three transactions) was deposited at the FED where the CBK deposits its international reserves. THEREFORE NO MISSING MONEY. CONCLUSION: There is no missing Ksh 140 billion. It has been demonstrated that the domestic financing of Ksh bn already includes the sovereign bond. You cannot, therefore, separate the sovereign bond without adjusting net domestic financing by the same amount. Otherwise double counting. Similalry, the US$ 999 mn is not missing. It was sold to the CBK and formed part of CBKs international reserves. GoK got the shilling equivalent in the Consolidate Fund.