The report tabled in Parliament shows that Kenya raised
about $1.5 billion (Sh188.35 billion) through an international sovereign bond
in 2025.
The transaction was spearheaded by Treasury and happened at
a time when the country was under pressure over maturing public debt.
The borrowing, priced at 9.5 per cent, was primarily
intended to finance a liability management operation, including the buyback of
a $900 million (Sh117 billion) Eurobond.
However, the auditor general’s review found that only Sh78.3
billion of the proceeds were actually used for the intended buyback operations.
Gathungu reports that a further Sh30 billion was diverted to
plug shortfalls in domestic borrowing, specifically Treasury bond proceeds,
pending disbursement of external financing.
In total, the audit questions the regularity and
effectiveness of Sh110 billion from the Eurobond proceeds.
Gathungu cited insufficient documentation and a lack of
clarity on how the funds were ultimately applied.
“In the circumstances, the regularity and effectiveness in
the utilisation of the Sh110 billion proceeds of the Eurobond could not be
confirmed,” the auditor states in the report.
According to the Auditor General, this diversion breached
the terms under which the bond, the major one under the William Ruto
administration, was issued.
“The utilisation of the sovereign bond proceeds to cover for
shortfalls arising from Treasury Bond was a breach of the subscription
agreement,” the report states.
Gathungu notes that the contractual framework only permitted
the funds to be used for buying back existing Eurobonds or refinancing external
debt.
The audit further cites a legal opinion presented to the
Treasury, which warned against any “material deviation” from the agreed use of
proceeds.
The breach could amount to a violation of contractual
obligations with investors, the auditor general notes.
The obligations are anchored in key documents, including the
subscription agreement and deed of covenant governing the notes.
Despite these restrictions, the report indicates that a
significant portion of the funds was redirected outside the permitted scope,
raising the risk of contractual breaches with international lenders.
Crucially, auditors say they could not confirm whether the
Sh30 billion used to support domestic debt operations was ever reimbursed after
the anticipated external funds were received.
“The audit could also not establish whether the proceeds
that were used to cover the Treasury Bond were reimbursed after receipt of the
external resources,” the report notes.
The findings are likely to reignite scrutiny over the
country’s public debt management practices, particularly the use of expensive
commercial loans to manage existing liabilities.
Eurobond misuse featured in the previous administration,
with Kenyans yet to know the truth about what more than Sh300 billion borrowed
by the regime went into.
Then Auditor General Edward Ouko concluded that the money
could not be traced, and he was barred from travelling to the UK to probe the
funds.
For the current case, the Resource Mobilisation Department
at the Treasury had initially sought approval to issue the bond as part of
strategy to manage the burgeoning debt.
The plan was to smooth out repayment pressures by buying
back or refinancing maturing external debt. The gross total public debt and
guarantees crossed the Sh12 trillion mark.
But the audit suggests that part of the funds ended up being
used for short-term fiscal support, rather than strictly for debt restructuring
as agreed with investors.
The report does not indicate whether any sanctions or
remedial measures have been taken following the breach.
Gathungu, however, warns in the highlights of the potential
legal and financial risks arising from non-compliance with bond terms.
Any violation of the agreed use of proceeds could expose the
government to disputes with noteholders and potentially undermine investor
confidence in future sovereign issuances.
The findings come at a time when the Kenya Kwanza
administration continues to rely on both domestic and external borrowing to
finance its budget.
Maturing debt obligations are equally piling pressure on the
coffers.
