Kenya

Insights into Kenya’s Public Debt Management Shift

Posted on by Mary

The Impact of the Treasury’s Proposal to Withdraw CBK’s Fiscal Agent Status

Kenya’s Treasury introduced a bill, earlier this year that sought to transfer the management of issuance and repayment of Treasury bonds and bills from the Central Bank of Kenya (CBK) to the Public Debt Management Office (PDMO) under the National Treasury. While the bill has since been put on hold, its potential revival remains a subject of debate.[1] If it were to be enacted, how would this shift impact the efficiency, cost, and stability of government borrowing? Could it introduce new risks and uncertainties into Kenya’s financial landscape?

The Current Setup and the Proposed Changes

Currently, the CBK acts as the fiscal agent of the government, handling the issuance and management of Treasury bills and bonds. This role includes setting up borrowing calendars, managing auctions, and determining interest rates in consultation with the National Treasury.

Why Would the Treasury Decide to Go This Route?

Enhancing Fiscal Control

The Treasury has expressed concerns about its lack of direct control over public debt auctions, arguing that this hinders its ability to be fully accountable. By consolidating auction functions under the PDMO, the Treasury aims to improve oversight and ensure that debt issuance aligns with broader fiscal objectives.

What Does This Mean for Kenya Policy-Wise on T-Bills and Bonds?

Under the proposed changes, the PDMO would assume full responsibility for debt issuance, including determining terms, interest rates, and auction schedules. This centralization could lead to more strategic and cost-effective issuance of public debt. By shifting these functions from the CBK to the National Treasury, the government aims to align debt issuance more closely with its fiscal planning. This move could provide greater flexibility in structuring borrowing programs, allowing the Treasury to time bond issuances when market conditions are favourable and potentially reduce reliance on expensive short-term borrowing. However, the effectiveness of this transition will depend on the PDMO’s ability to maintain investor confidence, ensure transparency, and operate independently from political influence.

Advantages

Centralizing debt issuance under the PDMO would enhance fiscal control by giving the Treasury greater oversight and direct accountability in managing public debt. By aligning debt issuance more closely with fiscal policy objectives, the Treasury could better coordinate borrowing strategies with budgetary needs. This shift could also reduce fragmentation in decision-making, enabling more coherent and strategic long-term debt planning.

Disadvantages

Without strong oversight, shifting debt management to the PDMO could increase the risk of fiscal indiscipline, potentially leading to excessive borrowing and long-term debt sustainability issues. The CBK, having managed debt issuance for decades, is likely to resist the move, arguing that it could disrupt the balance between fiscal and monetary policy. Additionally, questions remain about the PDMO’s capacity to handle this expanded role effectively, as well as its vulnerability to political interference, which could undermine transparency and market confidence.

Policy impact on Investors

If the PDMO fails to uphold the credibility that the CBK had established, institutional investors—such as banks, pension funds, and insurance firms—may perceive government securities as riskier. This could lead to higher risk premiums, pushing up borrowing costs instead of lowering them. Additionally, shifting debt issuance to the Treasury could create uncertainty in the market, affecting liquidity and making government securities less attractive to investors.

Foreign investors, who rely on transparent and independent institutions, may reduce their participation in Kenya’s bond market if they view the new setup as politically influenced or inefficient. A decline in foreign capital inflows could weaken Kenya’s fiscal position, increase reliance on domestic borrowing, and put further pressure on interest rates.

Conclusion

While the Treasury’s goal is to enhance efficiency, removing CBK’s oversight could risk weakening investor confidence if not carefully managed. In case the proposal was to pass fiscal discipline will be essential to maintaining credibility and stability in its debt markets.

 

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[1]https://www.businessdailyafrica.com/bd/economy/treasury-drops-bid-to-block-cbk-from-t-bills-bonds-sale-4929364

Public Sector Modelling: Why Does It Matter?

Posted on by InVhestia

The effectiveness and efficiency of a country’s public sector is vital to the success of development activities in that country. To achieve a well oiled and functioning public sector one thing is critical, decisions made need to be driven more by analysis and quantification of intended impact and less by gambles and political agenda.  At InVhestia we are proud to be a pioneer in supporting Governments and parastatals improve the quality of their decision making through financial modelling. While the majority of our work is private facing, we have realized that it can also inform the public sector. Financial modelling which sits at the core of what we do develops tools that can be used to remove the gamble from complex decisions, be they business choices or public policy.  Over the last couple of years we have been involved in a number of assignments which show how modellling can support the public sector to improve effectiveness and efficiency.

Support for the Government of Zambia in Fiscal Regime Review and Setting

Zambia is highly dependent on mining as its major productive industry contributing to 68% of the countrys foreign exchange earnings, anything that affects their extractive sector significantly affects the countrys economy. Since 2018, through the Zambia Extractives Industries Transparency Initiative, InVhestia has been offering support to the Government of Zambia through capacity building in financial modelling focused on fiscal regime setting and in consultancy services. The consulting services have been geared towards reviewing the impact of changes in fiscal regime on Zambia’s earnings from the extractives sector and the impact on company returns.  Whenever a Government is thinking about changing its taxes in the extractives sector, two factors need to be balanced, how the government take (total earning to the state) will change compared to company returns (these can be measured using the Net Present Value, Internal Rate of Return etc).

Through this work, we have seen improved skills in model build and review and in better engagement between the Government of Zambia and mining companies.

Benchmarking of Kenyan Mineral Royalty Rates with Peer Economies

According to the economic survey, the mining sector in Kenya contributes 0.8% to the country’s GDP. The State Department for Mining is mandated to provide regulatory oversight through the implementation of the Mining Act, 2016. In 2017 InVhestia was enaged to offer financial modelling support in seeking to establish whether royalties charged for gold, coal and titanium under the Act and accompanying regulations and gazette notices were adequate. Our report, as commissioned by the Extractives Hub and written in conjunction with Open Oil was presented to the then Cabinet Minister, Ministry of Mining. The high-level benchmarking exercise showed that Kenya’s fiscal regime falls broadly within norms observed in peer countries.

In preparation of the report we modelled out sample mines for the three resources under the Kenyan fiscal regime and compared the earnings to the Government to what other leading countries were charging and earning from similar resources.

Turkana Oil, should Kenyans be excited?

In 2018, InVhestia published an analysis on one of the oil blocks in Turkana which you can download here. In the report we sought to answer questions such as, how much Kenya will earn from exploiting the resource, how this will be split between the National and County Government and the community, the returns to the Contractor on the project among others.

The report and the accompanying model had critical analysis which at the time was useful in the debate around what formula should have been used to split the earnings from Oil. It also shed light on the feasibility of the project under different price scenarios.

Conclusion

The public sector requires financial models to inform strategic decisions. This is an effort that is also supported by the African Development Bank (AfDB) who launched a project on strengthening domestic resource mobilization through financial modelling for the extractive sector in transitional countries. One key objective is to enhance the capacity of state agencies to forecast and monitor revenues from projects and investments. While it would appear that the focus is largely in the mining sector, public policy in oil and gas, energy, transport and infrastructure, health, housing, planning, industrialization among other sectors can also benefit from the analysis of data through financial modelling.

More and more, financial modelling is proving useful to contribute to pertinent debates which in most cases, have a bearing on livelihoods of millions of persons. Johnny West from Open Oil put it well when he said, “Models can be great ‘rumour killers’, they may show that a country’s offshore sector is not going to save the entire economy, public finances, or end poverty. Or, they may demonstrate that a deal was actually OK.”

We are pleased to be pioneers in this space. We plan to share an update on our Turkana Report before the end of year. To join the mailing list, fill the form on our website.

Stephen Gugu, David Ndungu, Nyambura Ngumba

Musings from an Angel Investor: What can we learn from Nigeria?

Posted on by InVhestia

I was in Lagos for three days attending the African Angel Investment Summit 2016. This was my third visit to Africa’s most populous country and I must say, with each visit, I get to learn more and see why it’s a force to be reckoned with. Estimates indicate that Nigeria has a population of over 200 million with Lagos, its largest city, having a population of more than 20 million. To put this into perspective, the East African countries (Kenya, Uganda, Tanzania, Rwanda and Burundi) have a combined population of just above 120 million; the largest cities in East Africa have a population of around 4 million.

Nigeria is a bit threatening if you are visiting for the first time. At the airport, what greets you is the hot humid air. Once you acclimatize to this, you go through passport control which is eventful in its own way. While in most airports you expect to find immigration officials in official clothing, in Nigeria a number of them wear plain clothes. For an outsider this is a bit confusing as you really don’t know who to trust and who to follow. As a Kenyan I can get a visa on arrival. Theoretically speaking the process of getting one is meant to be straight forward: land, get the visa and off you go.

Once you land, one of the officials collects passports of those who need visas upon arrival; this may take some time depending on the number of arrivals requiring visas. You are then required to collect your luggage, walk across the airport to the ‘Visa on Arrival’ offices, pay for your visa, then head back to immigration for your passport to be stamped. When visiting Lagos and require a visa when you land, plan at least an hour and half for this process.

This brings me to my point; Nigeria looks threatening from the outside; this perception has worked both negatively and positively for the country especially with regards to the growth of the early stage entrepreneurial ecosystem.

In this article I discuss the Nigerian entrepreneurial ecosystem and draw out lessons that Kenya, my country, would do well to learn and adopt.

Kenya prides itself in having one of the most open economies in Africa for an ‘outsider’ looking to set up operations in Africa. A couple of things contribute to this- the weather in Nairobi is quite moderate and most Kenyans speak English making for easy communication. Most public utilities work fairly well; you are guaranteed electricity and water (depending on where you settle of course), and for the most part, the road network works well sans the traffic. The World Bank Index puts Kenya at position 5 while Nigeria ranks at 36 in Africa on the ease of doing business index.

This has meant that Kenya has seen a significant number of foreign based organizations in non-governmental, private sectors and entrepreneurs out to curve out a niche. While on the one end this is a good thing, it has also had a number of negative implications on the ecosystem. Donor money, foreign based investors and foreign entrepreneurs (mostly from the Silicon Valley) have all combined to make the ecosystem substantially different from what you see in Nigeria.

How?

First, valuations in Nairobi are rather high. Foreign based investors, especially angels and venture capitalists investing in Nairobi, come in with anchors based on what is happening in the West. As a result, they are willing to value start-ups which have attained paltry revenues and traction at valuations not grounded in reality. A week ago at the Angel Fair in Nairobi, I met a start up with total revenues of around $60,000 since its inception two years ago that raised funding at a valuation of $7,000,000! The surprising thing is that the company had already secured funding from foreign investors on the basis of that valuation. Nigeria has not faced similar price inflations; in the absence of many Western investors, the ecosystem has grown organically and entrepreneurs are more grounded on their valuation.

Secondly, the Lagos Angel Network remains one of the best case studies in Africa of an angel network that has grown organically and closes deals. While in Nigeria I attended a session where five start-ups were pitching to the LAN angel investors. It was fascinating to see a room of local angels most of whom were Nigerians taking on start-ups on the question of funding. Please note that Nigerians could alternatively invest in real estate, treasury bills and bonds, stock markets etc. but the angels have chosen to risk a part of their portfolios in angel investing given they believe it’s the only way to build their country- creating businesses that will create employment and contribute toward solving the problems they face as a country. (This is borrowed from the African Business Angels President, Harry Tomi Davies).

In Kenya, attempts to form angel groups have not been very successful; there are angel investors, some of them in exclusive groups where investing requires significant capital outlays. In LAN, you only need to put in $3,000 per round of investing.

The third point is how the absence of donor money in the ecosystem in Lagos has helped create a number of sustainable businesses grounded in reality. In Kenya, donor money channelled in through competition, grants, soft loans etc. has resulted in business models out to win one grant after the other for sustenance. Some of the entrepreneurs exist for as long as they can attract more grants. This has to some extent hampered the growth of the ecosystem by making entrepreneurs grant-dependant and thus reducing their ability to scale up.

Nigerian entrepreneurs have relatively fewer sources which has given them the entrepreneurial spine. A month ago, I interacted with a Nigerian entrepreneur in the private security industry at the Strathmore Business School in Nairobi where I teach the Owner Managers Program. He lamented over the multiple levels of taxes he has to contend with and the challenging operating environment with regards to infrastructure. He was visiting as part of an exchange program in partnership with Lagos Business School. His view of Kenya is that we have it very easy given the government allows entrepreneurs to be, well, entrepreneurs. He felt that the Nigerian government in most cases acts as an impediment rather than as a facilitator.

To conclude, while we have been lucky to have an open environment that has made it easy to set up and do business, we need to look at ways to turn this to our advantage. One of the key thoughts that came up from the angel conference is that in the next 5 – 10 years a number of investing opportunities in Africa will be too expensive for angel investors- this is the time to dive into angel investing despite the challenges being faced. With the openness of Kenya, a wait and see approach will lead to a case where investors will be too late for the ‘party’.

Entrepreneurs on the other hand need to realize that this is Africa, not in Silicon Valley! While there are significant opportunities for entrepreneurs to scale their businesses, the growth will be slower, taking more resources and require a lot of the local based knowledge and experience. This should push entrepreneurs to have more reasonable discussions with angels and even actively seek them for their businesses.