What will be the greatest challenges to financing the government’s spending plans?
HENRY ROTICH: Our budget structure is fairly balanced as we normally fund our entire current budget, leaving about 5% for development partners and borrowing the rest. The KSh1.8trn ($20.5bn) budget includes some domestic debt, and we collect about KSh1.2trn ($13.7bn) in domestic revenue, including support from development partners and foreign-financed project funds. Of the eurobond money introduced at the end of fiscal year 2013/14, most will be used to fund expenditures in the current budget, and obviously we will revise down our domestic borrowing to reflect the deposit from that bond issue. In short, domestic revenues are doing well, and we are on track to meet our target. Domestic borrowing will be reduced along with interest rates, and the eurobond will help finance some critical infrastructure projects we have budgeted for the year.
What drove investor appetite for Kenya’s eurobond?
ROTICH: We made sure to be prepared for the eurobond debut. At the time we announced preparations to begin pricing, many factors in the market were favourable, such as the US Federal Reserve’s announcement of tapering. There was a lot of interest in the market, and the timing was right. We also did a very robust road show in the US and Europe where we met a large number of investors, explained the structure of our economy and how we are financing the projects the eurobond is to be used for, and investors realised to what extent Kenya’s economy is resilient and diversified. That and the sustainable debt situation were strong credentials that led to a lot of interest. By the time we began launching the eurobond, we already had an oversubscription.
How likely is it that Kenya will return to the international debt market in the next three years?
ROTICH: We are turning into an emerging market or what is called a frontier economy, so we are preparing to enter the emerging market index and want to be subjected to market discipline. The visibility we will get as a frontier economy encourages us to continue managing our debt and balancing domestic and external borrowing in order to have more options for raising funds in future. Having diversified the sources of funding in the budget gave us more flexibility, and we are now looking at launching sukuk (Islamic bonds), entering the yen market, launching a diaspora bond in Kenyan shillings, and other options are currently on the table.
What can be done to attract more private investors for public infrastructure projects?
ROTICH: We chose a pro-active approach by setting up a public-private partnership unit and centralising it at the National Treasury to review proposals, identify priority projects from all sectors and prepare them for private sector investments. As we speak, we have published 59 high-priority projects in energy, roads, ports, health and so on. We have the support and the capacity to speed up the process, and want to have model agreements in several sectors such as housing, energy and transport so that the projects can be processed more quickly. Other countries have standardised these procedures very successfully, such as India, from which we want to borrow the concept.
What are the prospects for the capital gains tax?
ROTICH: We are not introducing something unusual, as this tax already exists in most African countries. The laws we are introducing are not meant to kill business but to make sure that both government and the private sector are contributing to the country’s development. Some sectors are growing faster than others due to quick capital gains appreciation. We designed it so that a very minimal rate is charged compared to capital gains tax in other countries, and it is fixed on a net basis. The challenge is how to implement it in a fairly cost-efficient manner. We will start with the sectors that are ready to apply and slowly accompany those that will need to get accustomed to how the tax works.
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