CBK faults Treasury on risky debt option

Central Bank Governor Dr Patrick Njoroge (CBK) addresses guests,CBK staff and media during media briefing at his office in Nairobi on Tuesday 23rd Jan, 2018. [Photo: Elvis Ogina.Standard]

Central Bank Governor Patrick Njoroge has warned Treasury against some of the alternative sources of procuring debt to plug the budget deficit.

Dr Njoroge said the country should be wary of debt sold in private boardrooms, saying it would kill transparency and create products that are hard to resell in the open market.

He said Treasury’s exploring of an option of raising funds in private placement, as opposed to the open auction, was a bad idea.

In a letter sent to fund managers in July, the National Treasury mooted the option to the financial sector, hoping to agree on a pricing mechanism for such bonds.

“The matter is still in a preliminary stage and as the fiscal agents for the Government, we will weigh in when it comes up,” Dr Njoroge said at a Press briefing in Nairobi, a day after the chief lender lowered the base lending rate to nine per cent from the previous 9.5 per cent.

“What I think is for us to find a way in which we borrow without harming the market. What we want is predictability and presenting an instrument that investors understand. There is no point of holding an instrument in the market, which you cannot sell,” he said.

Reports indicate that Treasury is seeking alternative sources of funds with maturities ranging from 30 years, an option that is not available in bank loans and public bonds.

This comes at a time Treasury is facing mounting pressure on its borrowing limits, which have run afoul of the prudent limits set under the Public Finance Management (PFM) Act.

This has raised eyebrows from various quarters.

The Act requires that borrowing stays below half of the Gross Domestic Product (GDP).

The public debt astronomically climbed to Sh5.01 trillion as at last March, according to the latest figures available on the CBK website, putting debt to GDP at over 60 per cent.

The State is now looking to book off-balance-sheet financing, which it will not need to declare on its official books, leaving room for dangerous accumulation of undisclosed debts.

Earlier this year, the National Treasury sought parliamentary approval to change to the PFM Act that would put limits on foreign borrowing only.

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