Bridging the revenue deficit: Kenya’s quest to explore diverse international markets

  • 9 Feb 2024
  • 2 Mins Read
  • 〜 by Brian Otieno

Kenya’s economy was hit by global shocks, including the COVID-19 pandemic and geo-political issues, such as the Ukraine-Russia conflict, over the past two years. This has been exacerbated by the ballooning debt obligations owing to the downward trajectory of the shilling against the dollar. As a result, the country faced significant constraints and had to develop new strategies to adjust its fiscal model. This resulted in spending cuts, affecting areas such as infrastructure and exacerbating the crisis.

Amid these revenue deficits and the concerns around ballooning public debt, the government under the Medium-Term Revenue Strategy (MTRS) 2023-2027 hinted at pursuing other options in the international market, including Samurai bonds. Fast forward to President Ruto’s visit to Japan, the National Treasury has announced that Kenya has signed a Memorandum of Understanding (MoU) with the Nippon Export and Investment Insurance (NEXI) for the issuance of a Samurai bond totalling USD 500 million.

Facing  East: The Samurai bonds

Inaugurated in 1970, after the Japanese Ministry of Finance granted authorisation for supranational organisations and highly rated foreign government entities to issue bonds in Japan, Samurai bonds have grown in leaps and bounds.

The Samurai bond is a unique financial instrument representing yen-denominated bonds issued by foreign entities within Japan’s capital market. They serve as a gateway for non-Japanese governments, supranational organisations, and corporations to secure capital from Japanese investors. Distinctively, Samurai bonds are denominated in Japanese yen, facilitating access to the Japanese market while averting currency conversion risks.

As a result, the appeal of Samurai bonds extends beyond mere capital raising, encompassing features such as competitive pricing, lower borrowing costs compared to domestic markets, and an opportunity for issuers to diversify their funding sources.

While Samurai bonds present an exciting opportunity, they portend risks due to less flexibility on issuance terms compared to other markets, exchange rate fluctuations, high tax rates, and an unclear fiscal environment likely to be counterproductive for cross-border trade.

Wooing Kenyans in diaspora: The Kenya diaspora bond

Following a discussion between the Prime Cabinet Secretary and Foreign Affairs CS, Hon. Musalia Mudavadi, and the World Bank’s Multilateral Investment Guarantee Agency (MIGA) Executive Vice President Hiroshi Matano, Kenyans in the diaspora will have an opportunity to contribute to Kenya’s economic transformation through an innovative dollar bond.

The structuring of this innovative bond will be modelled by the National Treasury and MIGA and tailored to tap into the yet-to-be fully exploited diaspora minefield. With estimates showing Kenyans abroad remit more than Sh650 billion ($4.3 billion) back home annually, it is plausible that their savings in foreign financial institutions could be even more.

Sentiments from the Prime CS give a pointer that the mooted diaspora bond will offer better returns than interest rates in the source markets for our diaspora remittance. He further posited that through this bond, the government aims to diversify its public debt mix, reducing the country’s exposure to costly commercial debt.

Questions to ponder

In conclusion, the government seems very deliberate about tackling the fiscal deficit. Through the robust fiscal consolidation measures outlined in the MTRS, diversification in the international markets is a very potent tool. However, fundamental questions beg: Is Kenya finally coming to terms with the need to be proactive and explore the diverse international market? What would be the motivation? Is it part of the desire to reduce liability, more so the risk exposure due to the USD, owing to the feral dwindling of the shilling against the dollar? 

Time, perhaps, will tell whether the diversification strategy will take the country out of this situation of fiscal deficit.