Category Archives: IMF

Afghanistan Bank Governor on Economic Prospects

Ajmal Ahmady, the acting Governor of the Central Bank of Afghanistan, Da Afghanistan Bank (DAB) in the ousted government has continued to post a series of tweets about events in the country. He answered questions about the country’s reserves, future relations with the IMF, relations with the US, management of the budget and deficit and the local banking sector.

1. Ajmal Ahmady @aahmady This thread is to clarify the location of DAB (Central Bank of Afghanistan) international reserves.

I am writing this because I have been told Taliban are asking DAB staff about location of assets. If this is true – it is clear they urgently need to add an economist on their team.

2. First, total DAB reserves were approximately $9.0 billion as of last week.

But this does not mean that DAB held $9.0 billion physically in our vault. As per international standards, most assets are held in safe, liquid assets such as Treasuries and gold.

3. The major investment categories include the following assets (all figures in billions):

(1) Federal Reserve = $7.0

  • U.S. bills/bonds: $3.1
  • WB RAMP assets: $2.4
  • Gold: $1.2
  • Cash accounts: $0.3

(2) International accounts = 1.3

(3) BIS = $0.7

4. Interesting note was that the IMF had approved a SDR650 billion allocation recently.

DAB was set to receive approximately $340 million on August 23rd. Not sure if that allocation will now proceed with respect to Afghanistan.

5. Given Afghanistan’s large current account deficit, DAB was reliant on obtaining physical shipments of cash every few weeks.

The amount of such cash remaining is close to zero due a stoppage of shipments as the security situation deteriorated, especially during the last few days.

6. On Friday morning, I received a call notifying me that there would be no further USD shipments (we were expecting one on Sunday, the day Kabul fell).

On Saturday, banks placed very large USD bids as customer withdrawals accelerated.

7. For the first time, I therefore had to limit USD access to both banks and dollar auctions to conserve remaining DAB dollars.

We also put out a circular placing maximum withdrawal limits per customer. During the day, afghani depreciated from 81 to almost 100 and then back to 86.

8. On Saturday at noon, I met with President Ghani to explain that the expected Sunday dollar shipment would not arrive.

On Saturday evening, President Ghani spoke with Secretary Blinken to request dollar shipments to resume. In principle it was approved.

9. Again, seems ridiculous in retrospect, but did not expect Kabul to fall by Sunday evening.

In any case, the next shipment never arrived. Seems like our partners had good intelligence as to what was going to happen.

10. Please note that in no way were Afghanistan’s international reserves ever compromised.

Assets are all held at Fed, BIS, RAMP, or other bank accounts. Easily audited. We had a program with both IMF and Treasury that monitored assets. No money was stolen from any reserve account.

11. Given that the Taliban are still on international sanction lists, it is expected (confirmed?) that such assets will be frozen and not accessible to Taliban.

I can’t imagine a scenario where Treasury/OFAC would given Taliban access to such funds.

12. Therefore, we can say the accessible funds to the Taliban are perhaps 0.1-0.2% of Afghanistan’s total international reserves. Not much.

Without Treasury approval, it is also unlikely that any donors would support the Taliban Government.

13. I believe local banks have told customers that they cannot return their dollars – because DAB has not supplied banks with dollars.

This is true. Not because funds have been stolen or being held in vault, but because all dollars are in international accounts that have been frozen.

14. Taliban should note this was in no way the decision of DAB or its professional staff.

It is a direct result of US sanctions policy implemented by OFAC. Taliban and their backers should have foreseen this result. Taliban won militarily – but now have to govern. It is not easy.

15. Therefore, my base case would be the following:

  • Treasury freezes assets
  • Taliban have to implement capital controls and limit dollar access
  • Currency will depreciate
  • Inflation will rise as currency pass through is very high
  • This will hurt the poor as food prices increase.

Kenya Eurobond 2021 A to Z

Kenya’s 12-year Eurobond, in which the Government sought to raise $1 billion, attracted offers worth $5.4 billion after a three-day virtual roadshow with European investors.

Here’s a peek at a draft 223-page prospectus

Advisors to the National Treasury were Citigroup and J.P. Morgan Securities as book runners, co-managers were NCBA and I&M banks, Citi was also the paying agent and registrar, while legal advisors were Dentons, White & Case, Dentons Hamilton Harrison & Matthews and Coulson Harney.

Banking: The Central Bank regulates all mobile phone-based banking products offered by banks.

The government will not participate in the recapitalization of the National Bank of Kenya and plans to divest from commercial banking.

Debt rescheduling: During Covid, Kenya secured debt suspension relief from eight out of its 10 Paris Club member creditors, and China for a total of Kshs 38 billion of 68 billion requested, to free up liquidity for Covid-19 pandemic-related expenditures.

Default: Is non-payment of the principal for 15 days after it falls due or interest for 30 days after the due date. Also if Kenya ceases to be a member of the IMF or default on another security by $25 million.

Litigation: Any disputes shall be resolved under arbitration rules of the London Court of International Arbitration and shall be lodged through the High Commissioner of Kenya in London.

London Bond Listing: An application has been made to list and trade the notes on the London Stock Exchange. Notes are in denominations of $200,000

Past Eurobonds: In 2014, Kenya raised an aggregate $2.75 billion through dual-tranche 5- and 10- year Eurobonds. In 2015, Kenya had $750 million syndicated loan with a consortium of banks and in February 2018, Kenya issued its last Eurobond, a $2.0 billion one comprising a 10-year tranche and a 30-year tranche.

In April 2019, the Auditor General issued a special audit report on the 2014 Eurobond and found the funds were fungible utilized but some were spent outside the Government’s IFMIS.

Purpose: The Kenya Government intends to use the funds for general budgetary expenditures.

Repayments are made in US dollars.

SGR: In January 2021, Kenya secured a debt suspension from China of a loan by Eximbank to fund Kenya’s SGR. US$378 million, will be repaid over five years, after a grace period of one year, in ten equal, semi-annual installments.

The Kenya Electricity Transmission Company recently signed a contract with China Electric Power Equipment and Technology Company for the electrification of this section of the Mombasa-Nairobi railway.

Subscription: In case, the bond was under-subscribed, Citigroup, J.P. Morgan, I&M and NCBA would have filled the gap.

Taxes: All payments are made, without deducting withholding tax. Also, interest payable on the notes has been exempted from income tax and capital gains tax in Kenya.

Kenya’s Money in the Past: IMF Transparency Evaluation

Last week a team from the International Monetary Fund (IMF) released a Report known as the Fiscal Transparency Evaluation Update on Kenya. The country has had an on – and – off history with the IMF and World Bank and one of the key objectives of this report was to estimate Kenya’s balance sheet and take into account all the public sector entities which were believed to have grown significantly since 2014.

Size: The report found that there are 519 entities, including 213 extra-budgetary ones, 47 county governments, social security funds, the Central Bank and 14 financial intermediaries, and 136 public corporations. It estimates that assets are liabilities are 30% greater than in 2014.

The stock of Kenya’s public sector liabilities (mainly pensions) is high (at 30% of GDP) compared to other emerging markets and low-income developing economies and creates potential fiscal risks. Fortunately, it finds that Kenya’s public sector net worth, estimated to be -5% of GDP in 2017-18 is broadly comparable to other similar economies.

It cites some glaring issues. Nairobi County has the largest amount if negative net-assets followed by Mombasa and Isiolo, Garissa, then Murang’a. Nairobi inherited a loan it has been servicing but which still has a Kshs 3 billion balance. Also, Nairobi has guaranteed a Kshs 19.1 billion loan, which is in its books, but this relates to assets that were transferred to another entity – the Athi River Water Service Board.

PPP: Concern about public-private partnerships (PPP) projects: There are 78 PPP’s (67 by the national government and 11 by county governments) in the pipeline, worth $11.4 billion and it notes that no risk analysis is undertaken for pipeline projects, which are sizable and growing in number.

PPP projects are 13% of GDP and half of the amount relates to six projects that are at the procurement stage. These are the Nairobi Mombasa highway, Mombasa petroleum hub, Nairobi – Nakuru – Mau Summit highway, 140MW geothermal at Olkaria, road annuity programs, and a second Nyali bridge project

State Corporations: High-risk public corporations lost Kshs 23 billion in 2017–18. These were topped by Kenya Broadcasting Corporation which lost Kshs 9 billion. Its losses were equal to 436% of revenue and it has a net worth of Kshs -54 billion. Others were Kenya Railways Corporation (which lost 6 billion), Nzoia Sugar Company Limited -3 bn, and South Nyanza Sugar Company -2 bn. Also losing 1 billion each was the National Oil Corporation of Kenya (which was supposed to be an IPO candidate), Chemelil Sugar, Agro-Chemical and Food Co., Muhoroni Sugar, and the Nairobi City Water and Sewerage Co. These ten account for 95% of the loss-making entities.

Oil & Mineral prospects: Kenya has small reserves of natural resources accounting for 3.2% of GDP but non-oil mining could be 10% of GDP by 2030 with oil boosting it by another 1.5%. Neighbour Uganda has better prospects with greater amounts of proven oil (1.7 billion barrels in Lake Albert) and gas reserves and has taken steps to ensure transparency, establishing a sovereign wealth fund and moving towards joining the Extractive Industries Transparency Initiative (EITI). Uganda which has two major upstream projects – a domestic refinery and an export pipeline through Tanzania, is expected to start production after 2023 and reach a peak of 230,000 barrels per day.

Summary: The big headline so far is that approximately 500 projects are stalled with an estimated cost of Kshs 1 Trillion (12% of GDP).

Kenya remains the third most attractive financial market in Africa

The third edition of the Africa Financial Markets Index report that was released in October 2019, found that Kenya had retained its third position thanks to industry efforts to improve opportunities for investors.

The AFM index by the Absa Bank Group and the Official Monetary and Financial Institutions Forum (OMFIF) is a useful tool designed to gauge Africa’s readiness to fund itself and its growth plans. It reviews 20 African countries across six pillars of market depth, access to foreign exchange, market transparency, tax & regulatory environment, the capacity of local investors and macroeconomic opportunity and the legality & enforceability financial agreements.

Overall, South Africa remained in first place, topping four of the six pillars, while Mauritius topped the legal agreements measure and Egypt topped the macro-economic opportunity one.

Speaking on trends across Africa observed in the 2019 AFM Index, Jeff Gable, the Head Of Research at the Absa Group, said there were several exciting financial markets events across the continent this year. These included the first-ever sovereign blue bond by Seychelles to support marine projects, Nigeria selling a 30-year government bond that was four times over-subscribed, Uganda halving the withholding tax on government bonds from 20% to 10%, Zambia launching a primary dealer system and Ethiopia announcing plans to launch a stock exchange in 2020.

On the AFM Index 2019, Kenya, along with Botswana and Namibia, increased to above 50 in the first pillar of market depth. The value of bonds listed in Nairobi doubled from $8.8 billion to $17.5 billion, mostly due to sovereign issues. However there remained a need to have more active trading of bonds and equities, and Kenya has rolled out an M-Akiba infrastructure bond targeted at retail investors that they can access for just over $30.

Kenya came second behind Mauritius on the pillar of enforceability of market agreements. It also scored well for its new insolvency law which encourages rehabilitation of distressed firms, and its endorsement of standard financial master agreements (ISDA GMRA, GMSLA).

However, it lost the lead on the foreign exchange pillar to South Africa. While the country has built up high foreign exchange reserves, up from 4 months to 5.8 months of import cover, the International Monetary Fund (IMF) had reclassified Kenya’s exchange rate regime from ‘floating’ to ‘other managed arrangement.’  The AFM Index has continued to highlight the risk of rigid management of foreign exchange by some African countries and pushed for more flexible regimes.

On the third pillar of market transparency, Kenya’s tax code was found to be supportive, but the country had raised taxation on mobile cash transactions creating some uncertainty. There has also been some recent progress as, in the last few weeks, capital markets stakeholders have convinced the Government to retain the country’s capital gains tax at 5%, and set aside an amendment in the 2019 Finance Bill that had proposed to change it to 12.5%.

The country was also flagged for its capping of interest rates which had shrunk credit availability and weakened companies profitability.

Kenya’s Treasury Cabinet Secretary, Ukur Yatani, in a speech read on his behalf at a Nairobi launch of the report, spoke of the need for Kenyans to save and invest to fund economic growth. Even with the country attaining formal financial inclusion of 82%, up from 26% in 2006, more could be achieved through financial markets.

He said that the country had established a Nairobi International Financial Centre authority to attract capital to Kenya and with the movable property security rights in place, the government was now supporting the setup a Kenya Mortgage Refinance Company that would make it easier for banks to advance funding towards affordable home ownership.

He noted that President Kenyatta had declined to assent to the Finance Bill until Parliament reviewed the cap on interest rates which, evidence showed, had resulted in a negative impact on the economy. Kenya was one of the few countries on the index which saw bank non-performing loans go up, from 10 to 11.7%, last year. He hoped that Members of Parliament would now view the President’s determination as an opportunity to give a stimulus to the economy.

Jeremy Awori, CEO of Barclays Bank of Kenya said that the country had ranked favourably, rising from 5th, when the first AFM Index report was published in 2017, to 3rd in 2018, a position it retained this year. This was due to efforts by industry stakeholders and regulators who had also worked with the Capital Markets Authority to launch a 10-year master plan for the industry. He added that, after Kenya had come up with new regulations for exchange-traded funds, Barclays Kenya had launched the first ETF in the region – New Gold which had performed well since its introduction.

He said that, as Barclays transitions into the Absa brand in Kenya and across Africa, customers will not feel any change in products or services and that they were working to upgrade systems to ensure they remain accessible from anywhere in the world. He added that strong domestic financial markets were a cushion to economic headwinds and that Barclays would soon launch a new wealth and asset offering in Kenya.

Charles Muchene, Chairman of Barclays Bank of Kenya, saluted Paul Muthaura, the outgoing CEO of the Capital Markets Authority, who has led the organization to be recognized as the most innovative capital markets regulator in Africa for four years in a row.  He said that a new ATS platform,  introduced at the Nairobi Securities Exchanges, had broadened the capacity of traders, enabling them to do multiple transactions on the same day, while also supporting securities lending and derivatives trading.

Later, in speaking about the capacity of local investors, the CMA CEO spoke of the need to educate, and shift, more retail investors towards long-term gains from managed funds. This would cushion them from the tendency to speculate on quick returns from land, gambling, and pyramid schemes.

Geoffrey Odundo, CEO of Nairobi Securities Exchange, said they had held some positive engagements with the National Treasury to get more big government listings to the NSE. He also said that they now have an Ibuka program to nurture small companies to be more attractive for investments, adding that this was part of a plan to increase its equities turnover from 6% of the total market to 15% in a few years. The NSE now had 12 asset classes including equity and index futures launched earlier this year and had been voted the second most innovative exchange in Africa.

The 2019 AFM Index report can be downloaded here along with a databank summary of the different country rankings under each of the six pillars.

CIA Economic Data on Kenya and its President in 1978

Excerpts from a declassified CIA document from August 1978. 

The Economic Intelligence Weekly Review issue, dated 24 August 1978, was published two days after Kenya’s first President Jomo Kenyatta, who had led the country since independence in December 1963, passed away.

The document is meant for US government officials and was done in a format that is useful to them. It has economic indicators, industrial material prices, and contains data from sources like the IMF, and the Economist (their index of 16 food prices). There are also charts on Inflation, unemployment, trade patterns (imports and exports), unemployment rates, interest rates etc. in different countries that are classified by segments such as the Big Seven (US, Japan, West Germany, France, UK, Italy and Canada), other OECD, OPEC (oil-producing nations) and also Communist countries, and other ‘World’ countries.

There are detailed write-ups in the CIA weekly review on:

  • The black market in Cuba: Hustling of consumer goods is vibrant, reflecting shortages of consumer goods. Most consumer goods are rationed except a few luxury items like rum and cigarettes. It also notes that aggregate personal incomes in Cuba are up 38% since 1973 and have reached the rank and file of Cuba, with no evidence of appreciable corruption among top-level officials.
  • The USSR has borrowed more than it needs to build a pipeline. It obtained $2.5 billion, which was $1 billion more than required, from the CEMA International Investment Bank (IIB). Five Eastern European countries helped build it, and in exchange, they will receive gas annually, while sales of natural gas to Western Europe are expected to yield $750 million to $1 billion. The IIB borrow funds in European markets and on-lends them to Eastern European countries at rates better than the countries could obtain on their own. Items paid for with the loan funds included equipment bought from West Germany, Italy and France.
  • Concern about Poland debt payment problems despite a shrinking deficit: For a third year, Poland had to borrow $4 billion and could face a financial crunch or debt rescheduling. Cutbacks of available industrial materials have been severe, affecting production, while debt service payments are now double what they were in 1976 – amounting to 60% of Poland’s exports to the West, compared to 37% in 1976. 
  • The USSR is engaging with Iraq and India.
  • On Kenya, it looked at the transition era and economic stakes of the Kenyatta family, whose inner circle controlled key economic posts and had extensive commercial and agricultural investments, and land tracts around the country. 

The CIA found that the substantial economic investments built over 15 years would deter them from unconstitutionally challenging Acting President Daniel arap Moi, even as they predicted that the Moi-Njonjo group’s (Njonjo was Kenya’s Attorney General and a key ally of Moi in the transition phase) efforts to increase the economic pie could cause disenchantment with the Kenyatta clan.

It was expected that economic pressures would cause the government to push for redistribution of the country’s wealth as it also noted that the family is big in two activities – charcoal and ivory whose exports were banned. At the time, Kenya was considering applying to the IMF for assistance with its balance of payments in the coming years as oil prices had risen, key foreign exchange earners like coffee and tea were slumping, and there was a need to modernize the military while Kenya had also lost its top destination market – Tanzania with the collapse of the East African Community.

It is an astonishing amount of economic data, from fourty years ago – so what does the CIA collect today on different countries and economies?

See also this story from the Standard newspaper.