Tight liquidity hits Kenyan government debt auctions

A lack of liquidity in Kenya’s money markets has sent the overnight interbank lending rate above the three-month Treasury bill yield and curbed demand for government securities at the weekly auction, traders said on Tuesday.

The weighted average interest on the interbank market for overnight lending jumped to 8.1052 percent a week ago, well above the 91-day Treasury bill’s yield, which stands at 7.611 percent. The overnight rate has remained above 8 percent.

Fixed income traders said the problem was caused by a glitch in the budget cycle that meant the government is unable to quickly disburse cash to local authorities and state agencies, at the start of the financial year in July and August.

“Before approvals go through and cash is disbursed, those normal delays, that now causes the market to tighten so there is no liquidity,” said a trader with a commercial bank.

Officials at the ministry of finance did not immediately respond to a request by Reuters for comment. Parliament is yet to debate and pass Finance Minister Henry Rotich’s budget for the 2018/19 fiscal year presented in June.

The liquidity squeeze has already reduced demand for the government’s debt at the weekly auction held by the central bank.

“To have your overnight rate higher than (the) T-bill (rate) it means that they could struggle and we have begun to see it in auctions. Now you will see auctions underperform at least until the situation is corrected,” said the fixed-income trader.

During last week’s Treasury bills auction, the central bank got demand for just 60 percent of the 24 billion shillings ($239.28 million) worth of bills on offer.

Jibran Qureishi, economist for East Africa at Stanbic Bank, said he expected the liquidity to start easing up at the end of this month, once firms finish paying their taxes and the government’s fiscal year gets properly underway.

“It is a very cyclical thing at the beginning of the (fiscal) year... By the end of August, we will improve,” he said.