State borrows heavily to fund MPs’ pay, devolution

By Jevans Nyabiage

Nairobi, Kenya: The Government is spending more to pay off interest on local debt after its borrowing shot up dramatically over the last six months.

Much of this is due to the Treasury bills and bonds issued by the Government to raise cash for devolved structures and higher pay for Members of Parliament and public servants.

Interest payments by the Government on its local debt hit Sh50 billion in that period compared to Sh48 billion over the same period in the 2012/13 financial year.

This is likely to spark fears that the country’s public debt could be slowly edging towards unsustainable levels and most probably stoke interest rates. Currently, the biggest concern is that Kenya is reeling from high cost of servicing ballooning domestic debt.

Government securities accounted for 94.3 per cent of gross domestic debt on December 20, 2013.

Kenya’s gross domestic debt increased by a massive Sh118 billion in six months to reach Sh1.2 trillion by December 20 last year, according to new data from the Central Bank of Kenya (CBK).

The banking regulator says this resulted from a rise in the stock of Treasury bills by Sh43.1 billion, Sh46.9 billion in Treasury bonds and Sh27.2 billion in Government Overdraft. There was also Sh900 million in other domestic debt, which include clearing items in transit, advances from commercial banks and pre-1997 Government Overdraft and Tax Reserve Certificates during the six-month period.

Government securities held by commercial banks, Insurance companies and parastatals declined from 51.1 per cent, 10.5 per cent and 4.4 per cent in June, 2013 to 48.2 per cent, 10.3 per cent and 3.6 per cent, respectively, on December 20, 2013.

 “Those held by pension funds and other investors, which comprise Saccos, listed and private companies, self-help groups, educational institutions, religious institutions and individuals increased to 26.6 per cent and 11.3 per cent of total securities, during the week under review,” said CBK said in its weekly report.

At the end of June 2013, domestic debt stood at Sh1.051 billion.

 Tax experts are concerned with the growing budgetary deficit and in particular the options of its financing without compromising the macroeconomic stability.

Total interest

The Government’s borrowing from the domestic market is often associated with high interest rates that crowds out the private sector from the debt market.

  CBK says the cumulative interest and other charges on domestic debt during the week ending December 20, 2013 was Sh50 billion compared with Sh48.2 billion during a similar period of the fiscal year 2012/13.

 “The cost during the period was on account of interest and other charges on Treasury bills, Treasury bonds, Government overdraft at the Central Bank and the pre-1997 Government overdraft amounting to Sh8.4 billion, Sh40.4billion, Sh0.4 billion and Sh0.9 billion, respectively,” CBK said.

According to Investment analyst Aly Khan Satchu, the key game changer for the domestic bond market is the imminent issue of a Sovereign Eurobond by the Government as early as this month.