By MUNA WAHOME
Posted Tuesday, July 12 2011 at 00:00
The Central Bank of Kenya is for the first time targeting the diaspora with a Sh36 billion infrastructure bond with the twin aims of boosting currency reserves and plugging State budget deficit.
With what is expected to be double-digit returns, the product is likely to force banks to raise yields on hard currency accounts of Kenyans living abroad and attract larger inflows.
World Bank recently noted that countries, including Kenya, had overlooked the role remittances could play in dealing with financial shocks, eradicating poverty and improving access to finance. Countries like Ethiopia and Egypt have for years established formal systems for dealing with the diaspora inflows.
“World Bank estimate indicates that the diaspora holds up to $1.8 billion in chequing accounts earning zero interest and the proposed infrastructure bond will therefore provide an attractive alternative investment,” said CBK governor Njuguna Ndung’u.
But Bonds Traders Association yesterday said market leaders had held meetings with CBK but were not aware the instruments were to be issued soon. They noted the market players had requested that CBK keeps them updated early enough for effective marketing but that they welcomed the development.
“This would avoid conditions associated with a sovereign bond like in the case of Ghana where the state is fed up enough to the extent they would want out,” said Fred Mweni who is also the managing director of Tsavo Securities.
“The diaspora is holding hard currency of hundreds of millions in current accounts which are earning 0 to one per cent. A double-digit return will bring in even more hard currency.”
The government wants to raise Sh119.5 billion in 2011/12 from the domestic market, as it seeks to plug a Sh184.4 billion deficit, of which Sh36 billion or a third would come from infrastructure bond issues. The State has raised Sh88 billion through infrastructure bonds since early 2009.
In the current financial year, massive infrastructure projects including airport and road upgrades and a peri-urban railway system are in the works.
“Modalities to achieve this (diaspora participation) are being worked out but it is anticipated that the Foreign currency amounting to approximately $400 million will be retained by Central Bank and the shilling equivalent passed on to Government for implementing the infrastructure projects targeted,” said CBK.
The bank said after the pilot diaspora marketing, it would target the same Kenyans with long-term bonds including the 30-year Savings Development Bond.
In all, it hopes to raise $600 million from the bond issues by the end of this year, the CBK governor said. The bank industry regulator has been holding an average of $3.9 billion which is below the statutory four-month and has been fighting to increase this to four months. Commercial banks hold another $1.2 billion.
“The Central Bank has resumed its plan to build up international reserves over time with the view to reach coverage of four months of imports of goods and services within the programme period,” IMF said last week in its assessment of the country.
Targeting commercial bank current accounts comes weeks after the governor engaged in a bitter war with the commercial banks accusing them of arbitrage and speculation that has caused the Shilling to fall to record lows. Apart from asking banks to punish the culpable dealers, it has also opened bidding for its hard currency to all banks and forex bureaus.
The Kenya diaspora this year has averaged $66 million in monthly remittances and overall has overtaken tourism as the most important source of foreign currency, with substantial improvement expected over the $641 million total recorded last year.
“The increase in remittances in 2011 reflects economic recovery in source markets, and a favourable domestic economic environment,” says Charles Koori, the director of research at the CBK.
Apart from the diaspora, foreigners are expected to invest in the infrastructure bonds due to various incentives, boosting the flagging Shilling apart from contributing to de-bottlenecking Kenya infrastructure.
“Foreign investors usually participate because there is no withholding and capital gain taxes on the issues,” said Mr Mweni. Past issues have all been fully subscribed.