Domestic borrowing: State tightens chokehold on firms

Treasury CS Njuguna Ndungu during the Budget Highlights for FY 23/24 at the Parliament on June 15, 2023. [Elvis Ogina, Standard]

A National Assembly’s watchdog committee has raised eyebrows over the State’s appetite for domestic debt amid the slowing growth of credit to the market.

Analysis of Bank Supervision Annual Reports from the Central Bank of Kenya (CBK) shows a drop in the growth of new loan accounts.

This drop happens to be going up as the government increases the amount it borrows from the domestic market to finance the budget deficit.

The Budget and Appropriations Committee in its June 2023 report on supplementary estimates II for the financial year 2022/23 noted that the domestic market is becoming “non-responsive.”

The committee noted that Treasury borrowed an additional Sh50 billion from the domestic market in the financial year 2022/23 over the 2021/22 financial year.

“The committee expressed concern over the increased appetite for domestic borrowing, especially given the non-responsiveness of the markets, which has pushed up interest on both short-term and long-term domestic debt instruments, translating into high cost of domestic borrowing,” the report reads. The Kiharu MP Ndindi Nyoro-led committee cited the State’s overreliance on domestic borrowing, saying while it may ease exchange rate risks from external borrowing, it may have a bearing on credit to the private sector where commercial banks prefer to lend to the government.

“This is at the expense of the private sector or lend at unfavourable interest rates, thereby hampering the sought private sector-led economic growth,” the report notes.

These effects are already being felt in the credit market going by the CBK’s annual reports.

In 2022, CBK in its Bank Supervision Annual Report showed a total of 14.4 million loan accounts. This is an increase of 1.4 million compared to 2021 when the loan accounts by the end of that year were 13,016,827.

In 2020, there were 11.4 million loan accounts, which represents a growth of 1.6 million to 2021 figures and 3.1 million when compared to the 2019 figure of 8.3 million loan accounts.

This trend shows the number of additional loan accounts has been reducing from 3.1 million between 2019 and 2020, 1.6 million between 2020 and 2021 and 1.4 million between 2021 and 2022.

This decrease in the number of loan accounts corresponds to the increasing amounts the government borrows from the domestic market.

For the specified years, the most increase was recorded in 2020 from 2019, which stood at 3.1 million new loan accounts.

This could be on account of the fact that in the financial year 2019/20, the government borrowed Sh283.5 billion to finance the fiscal deficit as specified in the Budget Statement.

This is the least amount borrowed by the government, according to the Budget Statements, in the last five financial years.

In the financial year 2020/21, the government borrowed Sh493.4 billion from the domestic market to finance the budget deficit.

The result was 13.0 million loan accounts in 2021, which is a slowed growth of 1.6 million when compared to the 2020 figure of 11.4 million accounts.

As a result, a further drop of 1.4 million was witnessed in the number of loan accounts in CBK’s 2022 report. There were 14.4 million loan accounts, across the 11 sectors, compared to 13.0 million

The highest borrowing by the government from the domestic market to finance the fiscal deficit was Sh658.5 billion in the financial year 2021/22.

This high amount that has been steadily growing since 2019/20 explains the unresponsiveness of the market whenever the government seeks to raise money from within as detailed in the National Assembly’s Budget and Appropriations Committee report.

Further borrowing from the domestic market this financial year while slightly less compared to 2021/22, may have a ripple similar effect on loan accounts in subsequent years.  

During this period, the size of non-performing loans has also increased from Sh335 billion in 2020 to Sh503 billion in 2022.

This, however, can also be explained by the increased gross loans, which increased from Sh2.6 trillion in 2019 to Sh3.6 trillion in 2022.

Nevertheless, the increase in additional non-performing loans has been going up since 2020.

Between 2022 and 2021, Sh43 billion was added to the non-performing loans basket. This is compared to Sh24 billion between 2020 and 2021.

National Treasury and Economic Planning Cabinet Secretary Prof Njunguna Ndung’u said in his Budget Statement that the government seeks to borrow Sh586.5 billion from the domestic market.

“The fiscal deficit will be financed through net external financing of Sh131.5 billion equivalent to 0.8 per cent of GDP and net domestic financing of Sh586.5 billion equivalent to 3.6 per cent of Gross Domestic Product (GDP),” read the Budget Statement in part.

The CS also specified measures to improve liquidity in the domestic market. This will be done by CBK’s launch of the upgraded Central Securities Depository code named “DhowCSD.”

“The upgraded Central Securities Depository will improve financial market liquidity, enhance operational efficiency in the domestic debt market, further promoting market deepening, broadening financial inclusion through expansion of digital access and position Kenya as the preferred financial hub in the region,” said Prof Ndung’u.