By James Anyanzwa
The Government’s Sh119.5 billion domestic borrowing target has come under pressure arising from volatility in the domestic money markets and the resultant under subscription of Treasury bills and bonds.
According to researchers at Stanbic Investments (EA) Ltd, only Sh14 billion or about 12 per cent had been raised as at December 2011, implying a further Sh105.5 billion must be borrowed by the Government in the 2011/2012 fiscal year.
The analysts’ fourth quarter economic report pointed out that Treasury auctions experienced lower subscription rates mainly due to tighter liquidity, more attractive commercial bank rates and increased uncertainty over direction of interest rates.
The rise in interest rates is also attributable to persistent inflationary pressures. Bond yields also responded to Central Bank’s further tightening of monetary policy.
The report indicates that higher yields had led to lower bond valuations with listed Treasury bonds losing approximately 20 per cent of their value last year.
"The secondary bond market witnessed subdued activity because of uncertainty over the direction, and volatility of interest rate," said the report dated January 10.
Last year, the Government admitted that it is facing serious challenges to raise resources from the domestic market to finance its programmes.
This it attributed to prevailing unstable macroeconomic conditions characterised by spiralling inflation and volatility in interest rates and exchange rates.
Treasury expects to borrow Sh119.5 billion through issuance of Treasury bills and bonds to finance part of the overall budgetary deficit amounting to Sh236.2 billion (7.4 per cent of the GDP) during the current fiscal year. The amount is part of the Government’s overall Sh1.06 trillion Budget for 2011/2012 fiscal year.
Treasury Permanent Secretary Joseph Kinyua, however, admits that most investors have snubbed the money markets owing to unstable macroeconomic environment.
"This instability has impacted adversely on the Government’s ability to raise the budgeted domestic resources since there are few takers for the securities," said Kinyua, adding that the volatility has also affected the performance of both equities and bonds market at the Nairobi Securities Exchange.
Last year, yields on securities rose across all tenors, with the short end recording the highest rise. This increased the Government’s cost of domestic borrowing and prompted CBK to issue shorter dated bonds.
The Central Bank Rate was raised from six per cent to 18 per cent in the year under review, while the Cash Reserve Ratio was increased by 0.5 per cent to 5.25 per cent.
