Government returns to domestic market for Sh35b budget support

The Government has come back to the domestic market for a loan, this time seeking Sh35 billion for budgetary support.

Through the Central Bank of Kenya (CBK), the Government yesterday floated two Treasury Bonds that become the first significant borrowing in the New Year. It also seeks to use the debt instrument to mop up Sh20 billion from the money markets as way of ensuring stability of the shilling.

The bank uses repurchase agreements and term auction deposits to remove the excess liquidity, making it costlier to hold onto dollars, which in turn lends support to the shilling.

“The Central Bank of Kenya (CBK) acting in its capacity as a fiscal agent for the State is offering the investing public an opportunity to invest in two and ten-year fixed coupon treasury bonds,” the bank said in a notice published yesterday.

The offer is open till January 25. According to the details of the offer, the interest rates for the two year loan will be market-determined, while the ten-year tenor will attract a coupon rate of 12.37 per cent. The purpose of the new loan has been given as ‘budgetary support’ and all investors are required to complete bond application forms.

The minimum amount per investor is Sh50,000, while the top ceiling is Sh20 million per tenor per investor. The bond will be listed on the Nairobi Securities Exchange (NSE) and secondary trading is expected to start on January 26, 2016. The borrowing comes at a time when there has been increasing pressure for the Government to keep off the domestic market, whose borrowing saw a spike in interest rates that almost derailed the economy last year.

It is also set to signal a return of Government in the domestic market, which could start piling pressure on loan rates coming at time when the Government is under pressure to account for how it spent the billions raised from the Sh250 billion Eurobond.

The average lending rate is now at 16.27 per cent but those borrowing personal unsecured loans are paying up to 22 per cent at some banks.

Kenya’s insatiable appetite for loans has been blamed on increased expenditure against a relatively slower growth in revenues. This has put pressure on the Government to increase borrowings. The weak shilling that has since stabilised at about Sh102 trading against the dollar has meant an increase in interest rate repayment for foreign currency denominated debts. This has made external borrowing expensive.

In the current Sh2 trillion Budget, Kenya’s overall fiscal deficit had been projected to reduce from Sh624.34 billion last year to Sh569.79 billion. But weak collections by the Kenya Revenue Authority (KRA) have left Treasury with little options but to borrow so as to plug the financing deficit.

The Government plans to plug the budget deficit by borrowing Sh340.53 billion this year from the international market and another Sh227.08 billion from the domestic market.