Treasury struggles to get T-bill buyers

National Treasury Acting CS Ekur Yattani when he appeared before the Senate Finance Committee to deliberate on administrative options for financing county governments. [Boniface Okendo/Standard]

The government has found itself with less cash to spend on critical items such as drugs after it was forced to offset some maturing short-term debt using taxes.

In a new budget document, the National Treasury says it had difficulty borrowing money to retire some maturing loans. This saw it resort to other revenues to refinance or roll over its short-term debts.

Refinancing is the use of debt to repay another debt.

“Market refinancing of maturing Treasury bills was not adequate and other sources of revenue had to be utilised to redeem maturing bills,” said Treasury in the Draft Budget Policy Statement 2020 released this week.

Treasury bill is a short-term government paper, kind of an IOU, which is redeemable within a year. Longer maturity debt is taken through a Treasury bond.

As of February last year, 43 per cent of the T-Bills were to mature within a year. This is close to Sh1 trillion, or 70 per cent of the taxes that the Kenya Revenue Authority (KRA) collects on average each year.

Because Treasury cannot retire all the Sh1 trillion from the taxes it collects, it usually borrows to repay these loans.

Unfortunately, investors did not warm up to the government papers that National Treasury issued. This has been reflected in the under-subscription of some of the Treasury bills and bonds that Central Bank of Kenya, Treasury’s fiscal agent, has been floating.

This left National Treasury Cabinet Secretary Ukur Yatani’s team with fewer cash to refinance maturing loans.

Treasury noted that the budget deficit was being funded in an environment of floating market interest rates after rate caps were removed.

“The domestic sources have not been liquid on the short end of the yield curve for the first half of the fiscal Year 2019/20,” explained Treasury.

“It is, however, expected that the second half of the fiscal year will be more liquid so as to provide full funding of maturing Treasury bills and bonds and provide resources to fully finance the net domestic financing requirements.”

By the end of the current financial year, Treasury expects to borrow Sh300.7 billion from the domestic market for budgetary purposes, including development activities.

Development expenditure will also be financed through net foreign financing of Sh353.5 billion.

Treasury has noted before that the cost of deficits financing and refinancing maturing debt has remained higher since 2014 than in the previous years.