Battle shifts to Bonds after Uhuru’s assent to Bill

President Uhuru Kenyatta signing into law the Banking (Amendment) Bill, 2015 at State House, Nairobi. Looking on are Deputy President William Ruto, Attorney General Prof. Githu Muigai, Cabinet Secretary for Treasury Henry Rotich, Central Bank Governor Patrick Njoroge, Central Bank Deputy Governor Sheila M'Mbijjewe, Permanent Secretary Treasury Kamau Thugge, and Solicitor General Njee Muturi.  24th August,2016

After President Uhuru Kenyatta signed a Bill capping interest rates on bank loans into law, now the battle shifts to the bond market. Lenders will work to bid up the 91-day Treasury bill rate while the Government will strive to bring it down.

This is because for the Government not to be seen as bringing down lending rates, it will stop accepting bids way above the the Central Bank benchmark rate or CBR.

Banks awash with money will be forced to shift toward better-yielding long term Government paper (currently with a yield of 14 per cent). In order not to crowd out the private sector borrowing, the Government will be forced again to drive long-term yield curve down to about 10 per cent. They can do this by stopping to borrow or substituting international borrowing for local borrowing or collecting more taxes and reduce the debt component in funding the budget.

Let us look at each in turn. Can the Government afford to reduce local borrowing? The answer in my view is, emphatically, Yes. To do so, the Government will have to become more efficient in the way it uses its funds, thus reducing the need for short-term borrowing. There was all the talk about one Central Bank clearing account for the Government, under which all departments have their bank balances in one account to improve cash-flow management.

A second and most important opportunity is to reduce corruption and promote value for money procurement. Treasury can tighten the noose on Government departments, forcing them to buy what is necessary under greater oversight, thus reducing corruption. This could have a double whammy effect on President Kenyatta’s campaign.

Can treasury substitute local borrowing for international borrowing, oh yes Euro bond #2 is on the way. After a successful first issuance there has been talk about issuing a second Euro bond. Despite all the controversy that came with it, the Euro bond issue was hugely successful and there has been talk about another one. The Government has not outlined any big projects post-SGR that require huge capital injection.

And 2017 being an election year, I foresee the next big project coming to the table late in 2018 once the new administration is installed. Furthermore, with the noise around the EAC partners not committing towards the LAPSSET projects, the need for heavy financing is mitigated somewhat. I suspect that with all the world leaders ‘trooping’ to Nairobi in recent times, a lot of multilateral lending has been agreed to fund projects.

On the third question - whether the Government can collect more taxes - again my answer is in the affirmative. Treasury signed in the budget statement this year that it will embark on reforming the Kenyan tax code. This work has started with getting stakeholder views and there must be confidence in Government circles that they can successfully expand the tax base.

Secondly, by assenting to the Bill, President Kenyatta has transferred private profits into the hands of the spending public, an expansionist approach. This creates additional disposable incomes through reduced interest expense and higher returns on savings. This additional income can be channelled into consumption sectors of the economy, which will translate to higher consumption tax for the Government.

Thirdly, SMEs, touted as engines of economic growth the world over, were in Kenya borrowing at very high rates, above 20 per cent. This law could lead higher survival rates for SMEs, which means more jobs and more tax income for the State in the long-run.

We must now watch out for the immediate impact on inflation and the value of the shilling as Kenyans rush to spend their new-earned money or on cheap credit. Kenyans love this new law, with politicians adoring it. Only the bankers are sulking but we have to remind them that their tonic will be found in innovation.

The Writer is a financial analyst