Jubilee blunders that sent interest rates into the sky

Experts applied pressure on the Treasury to review its economic policies to cushion Kenyans from the high cost of living, especially after soaring interest rates that have increased the burden on borrowers.

With government borrowing from banks at 20 percent interest rate, individuals seeking loans are forced to pay back at a rate of between 24 and 28 per cent. And because of the good returns banks get from cash loaned to the Government, most banks deny individuals and companies money for development and other expenditures and opt for the high-yielding T-Bills and Bonds that are risk-free and easy to manage.

The country’s economic managers are struggling to tame the declining stock market value, rising debt cost and a weaker shilling. This has raised doubts on whether the country would meet its ambitious 5.5 per cent revised growth plan in the current financial year.

As Kenyans shoulder the burden of the current cash crunch through higher costs of living and sky-high interest rates, leaders and economic experts Sunday increased the pressure on the Treasury to review its economic policies and reverse this worrying trend.

The appeal came as controversy raged on the spending of proceeds from $2 billion (Sh204 billion, current exchange rate) sovereign bond and whether the international bond had served the intended purpose, including helping reduce the cost of loans locally. Institute of Economic Affairs Executive Director Kwame Owino argued that Kenya borrowed at the wrong time, which made local interest rates rise.

Mr Owino put Treasury Cabinet Secretary Henry Rotich on the spot and asked the country’s chief economic manager to explain why the rates are still high despite heavy borrowing from the international market.

“We borrowed at a wrong time because we now risk liability. We will pay dearly for the foreign currency we borrowed yet our shilling is weak,” said Owino, adding: “Truth is that there is little confidence in the economy now than last year.”

Kneejerk reaction

National Assembly’s Public Accounts Committee (PAC) is scheduled to meet Rotich on November 2 to answer queries of the Auditor General’s report with indications the outcome of the session will inform the committee’s decision on whether to order a special audit into special offshore accounts and the sovereign bond.

The Jubilee administration’s major economic blunder is linked to a knee-jerk reaction to stabilise the shilling. Treasury’s intervention efforts saw it drain liquidity out of foreign exchange reserves and money markets, spurring a scurry for cash that is driving short-term borrowing costs higher and out of reach of individual and corporate borrowers.

CBK raised interest rates to stem the rapid depreciation of the local currency and avert a possible hike in the cost of living or inflation.

However, experts have cautioned the Jubilee administration against excessive borrowing. Senate Finance, Commerce and Budget Committee Chairman Billow Kerrow argued that the Government must analyse its financial systems and reduce international borrowing.

Kerrow blamed the administration for delaying to bring into the country Eurobond proceeds to ease the current wild swing in interest rates, but chose to hold the critical cash in offshore accounts.

“The Eurobond was taken to have an immediate impact locally but the Government kept the money in an offshore account. The Government must stop over-borrowing,” said Kerrow.

The Mandera Senator explained that imports have increased tremendously because of the ongoing projects like the Standard Gauge Railway, while the exports earnings have stagnated.

He said if the country continues to import and borrow heavily, the cost of repayment will increase and hurt the economy.

“The Government must review its monetary policy and financial management. We are borrowing too much and shall repay the debts in dollars,” said Kerrow.

John Randa, a senior Economist at World Bank and the author of the recent Kenya Economic Update, said the interest rates have gone up because the Central Bank monetary policy encouraged foreign investment into the economy by offering high yielding Treasury Bills, Bonds.

The attractive rates on short-term treasury bills are also seeing large depositors withdraw their money from banks, further reducing the cash financial institutions can lend to small borrowers.

One of the biggest culprits in the country’s cash crunch are the mega infrastructure projects, which demand billions of dollars and are largely financed through debt.

Banking industry experts say yields on short-term treasury bills have surged above longer dated bonds, an anomaly known as an inverted yield curve that signals investors are more concerned about near-term repayment risks than future economic prospects.

The rates in 91-day T-Bills jumped to 21.4 per cent at a recent auction, a rate that is record high compared to yields of 14.6 per cent bond that is maturing in March 2025.

Chris Becker, an analysts at Investec says the inverted curve was “indicative of short-term funding stress in the economy, which is typically followed by a slowdown in credit growth and cyclical economic growth.

The World Bank recently cut its growth estimate for Kenya in 2015 to 5.4 per cent, compared to December forecast of six per cent. The Kenya shilling has also weakened by 12 per cent against the dollar this year.

Public outcry

“We have been working this time on a syndicated loan, which could be up to $750 million,” Treasury PS Kamau Thugge recently told reporters.

Despite the growing public outcry over the mounting public debt, Treasury has defended the country’s debt sustainability strategy.

Rotich maintains the debt is still within Government targets, despite early warning signs that the country is struggling with repayments. He insists that the cash crunch situation has been overly exaggerated and that the CBK and Treasury had the situation under control

But he reluctantly admitted to Parliament that the Government was experiencing a cash crunch on account of depressed revenue collections and corrective measures to strengthen the shilling. He also promised to review his Budget plan to as part of austerity measures to curb high spending.

The National Treasury laid the ground for the current borrowing spree two years ago after it asked Parliament to approve its external borrowing limit by an additional Sh1.3 trillion.

The approval on borrowing limits allowed the Government to increase the country’s debt ceiling from Sh1.2 trillion to Sh2.5 trillion. The rebasing of the gross domestic product (GDP) has also served to support the current speed of debt accumulation.

Recent CBK data shows the country’s total public and publicly guaranteed debt stood at Sh2.934 trillion, or 51.29 per cent of GDP at the end of August. This is 60 per cent, or Sh1.1 trillion, more than the Sh1.8 trillion that President Uhuru’s regime inherited from Kibaki regime.

At Sh1.1 trillion, the current regime has borrowed more in three years than any previous government did in 10 years.

Out of the Sh2.9 trillion debt as at the end of August, the domestic market accounted for 48.1 per cent of this, falling from 49.95 per cent at the end of June.

After recently borrowing a Sh61.4 billion syndicated loan involving a number of commercial banks, the Government plans to borrow another Sh80 billion from banks in coming months, which will push public debt above Sh3 trillion, depending on the current exchange rate.

And with domestic borrowing crowding out local businesses and individuals, revenue pickings are likely to get even slimmer.

Data from CBK shows the debt portfolio borrowed locally has grown from Sh1.305 trillion held in

January to Sh1.384 trillion last week. This borrowing has seen the Treasury unravel CBK’s efforts to stabilise the currency, with the two institutions appearing to have differing priorities.

This he explained eases pressure from the private sector when borrowing locally.

“The Government borrows in dollars, which it gives to the Central Bank to keep outside the country. But after borrowing, the Government spends the money for its projects in the local currency,” explained the economist.

This comes after Controller of Budget (CoB) Agnes Odhiambo told the National Assembly’s Public Accounts Committee (PAC) that she did not approve the Sh53.2 billion pay-off, an amount from Eurobond proceeds. However, her office later explained that the position was based on a draft report and Treasury has since clarified the position.

Net profits

PAC was also told that the National Treasury spent Sh53 billion to pay syndicated loans from offshore special accounts contrary to the requirements of the Public Finance Management Act.

A report of the Auditor General for the Year 2013/2014 stated that net proceeds from the Sovereign Bond of USD 1,999,052,872.97 out of the total amount of USD 2,000,000,000.00 (Sh174 billion) were received on June 24, 2014 and deposited into an offshore account, contrary to Article 206 of the Constitution of Kenya and Section 17(2) of Public Finance and Management Act, 2012 which requires that all money raised or received by or on behalf of the National Government be paid into the Consolidated Fund.

“There is the risk of proceeds being appropriated without the authority of the CoB and also being applied for other purposes other than those the Sovereign Bond was floated,” the Auditor General stated in the report.

Treasury has however explained that it did not break the law as it instructed the Central Bank of Kenya (CBK) as the fiscal agent of the Government to pay an amount of US$600 million for the syndicated loan plus accrued interest of US$4.6 million. “These instructions were in line with the provisions of Section 50(7)(d) of the PFM Act and Section 45(d) of the CBK Act,” Rotich said.

On why the proceeds from the sovereign bond were not transferred to the Consolidated Fund and payment was directly from the offshore account, Rotich said: “By not converting the dollars to shillings and then immediately converting the same shillings into dollars, saved the Government exchange rate losses approximating Sh1.2 billion.”

The Government sought to raise capital from $ 1.5 billion Eurobond but raised $ 2 billion after it attracted bids four times its initial target.

In the deal, US investors bought about two thirds of the bonds, with British investors taking a quarter, which President Uhuru Kenyatta commended as a ‘vote of confidence’.

He said the funds would cut down the Government’s local borrowing, which would help it reduce interest rates. Economic experts are now attributing the rise in the interest rates to measures to strengthen the shilling after a fall to a low Sh105 against one dollar.