Kenya is seeking to lower its cost of borrowing by committing to reduce its forest cover losses and lift electricity connections as key performance indicators in a bid to unlock at least $500 million (Sh64.7 billion) from a sustainability-linked bond (SLB) and similar debt instruments.
The coupon or interest rate paid by the government will remain unchanged if the targets are simply matched, but the finance cost will fall if they are exceeded.
Underperformance will, however, result in higher debt service costs.
SLBs give borrowers flexibility on the use of the funds but tie the cost of the debt to whether or not the key performance indicators (KPIs) are achieved.
Kenya will, for instance, see the interest rate on the debt unchanged if it can limit the loss of accumulated natural forest cover to less than 44,000 hectares by 2030.
The debt will be cheaper to service if the target is outperformed by a loss of forest cover of less than 38,000 hectares over the same period.
At the same time, the country must also increase access to electricity for the rural population to 81.8 percent by 2030 from a 2023 baseline of 67.9 percent and will have outperformed this KPI if rural electrification levels surpass 94.4 percent over the same period.
Kenya will be slapped with a penalty, which will be passed in the form of a higher coupon/interest rate on sustainability-linked facilities if it fails to meet targets, which will be assessed every two years.
The recently published framework will allow Kenya to issue sustainability-linked loans and bonds, increasing the diversification of borrowing instruments in a list that now includes Shariah products, Samurai bonds from Japan and debt for nature/food swaps.
The National Treasury had sought to raise Sh64.7 billion ($500 million) from a sustainability bond by June 30 but was unable to have the lending framework in place within the window.
The policy published this week by the National Treasury is also a prerequisite to the disbursement of Sh97 billion ($750 million) from the World Bank development policy operations (DPO), a facility now expected at the end of this week.
The National Treasury expects a two-pronged gain from the issuance of sustainability-linked instruments, including the unlocking of flexible funding for the exchequer and a means to meet climate goals.
“As a country highly vulnerable to climate change, yet rich in natural resources and human capital, Kenya recognizes the need for financing mechanisms that promote environmental resilience, social progress, and economic stability,” the National Treasury said.
“Unlike traditional green, social, or sustainability bonds and loans, which restrict the use of proceeds to specific projects, sustainability-linked instruments provide Kenya with greater flexibility, while ensuring accountability through robust key performance indicators (KPIs) and sustainability performance targets (SPTs).”
SLBs are sold to a wide range of financiers including pension funds, asset managers, insurance companies and development finance institutions.
The choice of accumulated natural forest loss in hectares as a KPI for the framework is anchored on Kenya’s forests’ key role in climate change mitigation, preserving water resources, conserving biodiversity and maintaining soil quality.
The year 2024 will serve as the baseline for the KPI, where Kenya’s tree cover stock was estimated at 10.24 hectares while the forest stock was established at 3.84 million hectares.
The choice for rural electrification as the second KPI is anchored on electricity being viewed as crucial for human and economic development by playing a key role in basic and daily activities such as lighting, refrigeration and the running of basic appliances.
The year 2023 has been selected as the baseline for the KPI, when the rural electrification rate was set at 67.9 percent.
The National Treasury is expected to publish a report every year on the performance of each KPI.
Every two years, the cost of borrowing for Kenya under the sustainability facilities will be adjusted, falling if the country has outperformed on the KPIs or rising if Kenya misses targets. The cost of borrowing or the coupon will remain the same if Kenya meets targets as outlined in the framework.
The government has developed the framework through the Public Debt Management Office (PDMO) in the National Treasury with collaboration from international donors including the World Bank, Germany’s development bank KfW, the Organization of the Petroleum Exporting Countries (Opec) and the French Development Agency (AFD).
The National Treasury has been pushing to diversify its funding sources away from just traditional instruments like Eurobonds and bilateral loans.
Kenya tapped Sh21.9 billion ($169.42 million) in Samurai financing from Japan in August last year, and earmarked proceeds for local motor vehicle assembly and energy sectors.
Samurai financing refers to debt denominated in Japanese currency- the Yen- and subject to Japanese regulations.
Kenya has also previously considered issuing Shariah and Panda bonds, the former being a Shariah-compliant bond issued on global markets, and the latter a yuan-denominated instrument.
The National Treasury is also eyeing a Sh129.42 billion ($1 billion) debt-for-food security swap to make early repayments on Kenya’s outstanding Eurobonds, with maturities in 2031 being on the card.
The swap, which has a guarantee from the US-DFC (United States International Development Finance Corporation), was expected by the end of June 2026, and the National Treasury has been seeking transactional advisors to guide the issuance.
Under a debt-for-food swap, the guarantor would help Kenya raise a cheaper instrument from the international capital markets to refinance a costlier facility, while the country would apply realized savings on projects boosting food security.
Treasury Cabinet Secretary John Mbadi underlined diversification as a debt sustainability approach.
“The government is evaluating opportunities to access new and diversified international capital markets. This includes the potential issuance of Samurai bonds in the Japanese market and Panda bonds in the Chinese domestic market,” he said.
“By tapping into these markets, the government stands to benefit from deep and diversified pools of capital, secure potentially competitive financing terms, and promote currency diversification within the debt portfolio, thereby reducing reliance on traditional funding sources.”
