(Bloomberg) -- The World Bank is aiding Kenya to issue Africa’s first sustainability-linked bond by the end of this year, as the East African nation broadens its external funding sources.

The $500 million bond, which will have pre-determined sustainability performance goals, is expected to be issued by November, said Isfandyar Zaman Khan, lead financial sector specialist at the World Bank Kenya. “Kenya has promised a very ambitious sustainability agenda, which includes not just climate, but also social and health and energy.”

Kenya will be the first sovereign on the African continent to float a so-called SLB and will use the proceeds for general budget support, Khan said in an interview. 

The nation, whose President William Ruto has staked a claim to be Africa’s leading voice on how to combat global warming, has been vigorously pursuing new funding sources to finance its budget deficit since returning to international capital markets in February after years of being priced out of them. 

Financing Budget

The shortfall is expected to be 3.9% of gross domestic product for the year through June 2025. The country is also planning to issue a Samurai bond in Japan, a Panda bond in China and debt-for-nature, debt-for-medicine and food-security swaps.

Kenya is considering various financing options for its 2024-25 budget deficit, including issuing sovereign bonds in international markets “as and when conditions are favorable,” and with a view to “lowering costs and risks in the debt portfolio,” according to Treasury Principal Secretary Chris Kiptoo.

“The nature and quantum will be determined under guidance of transaction advisers who may be appointed in the next fiscal year,” he said in response to queries. 

The World Bank will assist Kenya in developing the sustainability-linked framework and key performance indicators for the bond, Khan said. “The way that KPI is modeled is to reward Kenya when they have achieved something above and beyond what they would have done in normal circumstances,” he said.

The World Bank also plans to collateralize Kenya’s SLB issuance to help reduce the risk for investors, which will lower the cost of borrowing, Khan said. It has the potential to set an example for other sovereigns to follow, he said.

Growing Popularity 

“Kenya is the ideal country to lead the way both because of a strong commitment, but also because it’s strong government policies toward sustainability,” he said.

Sustainability-linked bonds are “becoming more and more popular,” according to Marek Hanusch, lead economist at the World Bank Kenya. “What makes them so attractive is that they are outcome based not input based; because in the end of the day, there’s this concern about greenwashing,” he said.

Similar bonds have been sold by Chile, which raised $2 billion in March 2022 and Uruguay. The Democratic Republic of Congo and Angola are also exploring issuances, according to Khan.

(Updates with Kenya Treasury comments from sixth paragraph)

©2024 Bloomberg L.P.