State lines up more loans to push debt load to Sh6.6tr

Kenya’s total debt is set to hit Sh6.6 trillion, with the National Treasury expected to borrow an additional Sh774 billion to finance the budget amid shrinking revenues due to the Covid-19 pandemic.

This is according to an analysis of the latest Central Bank of Kenya (CBK) data.

A fiscal deficit of Sh774 billion - the difference between a country’s spending and tax revenues - is the deepest budget hole since June 2017 when the government borrowed Sh788 billion to finance mega infrastructural projects, including the Standard Gauge Railway (SGR).

The increase in borrowing saw the country’s debt vulnerabilities rise, resulting in the International Monetary Fund (IMF) downgrading the country’s debt distress from low risk to high.

The borrowing is not only due to increased Covid-19-related expenditures but also due to poor tax collection, including the foregoing of at least Sh172 billion in tax reliefs aimed at leaving consumers and businesses with more disposable income to navigate through this period.

By June 12, the National Treasury had borrowed Sh372.7 billion from the domestic market, the highest since June 2016 when net domestic borrowing was Sh395 billion. In the 2018/19 financial year, net domestic borrowing was Sh306.6 billion.

Total domestic borrowing for the current financial year is likely to rise even higher as the figure does not include auctions for the last two weeks.

In the end, the total stock of domestic debt is likely to stand at Sh3.16 trillion at the end of this month.

External borrowing, on the other hand, is set to hit Sh3.4 trillion by the end of this month when government fiscal year closes, with the Treasury increasing the tally by Sh401.5 billion.

The net financing for the current financial year, ending at the end of this month, includes approximately Sh212 billion from the World Bank, IMF and African Development Bank.

Further analysis of the CBK data shows that depending on Treasury’s spending needs, domestic debt could increase by Sh47.4 billion, which is the new borrowing for the Treasury-bills and bonds that the regulator offered, or will offer, between June 15 and June 29.

But the budget deficit is expected to widen further in the upcoming fiscal year, with the National Government expected to borrow Sh840 billion in the 12 months to June 2021.

More than half of these loans will come from local investors, with most of them already showing eagerness to put their money in government securities.

Treasury bills and bonds that CBK has auctioned over the last two weeks have been oversubscribed by 262 per cent. A five and 10-year Treasury bond that CBK reopened saw investors offer the governments Sh105 billion against Sh40 billion that the latter had asked for.

It was the same with the weekly auctions of Treasury-bills, which were oversubscribed by an average of 188 per cent, with CBK receiving bids of Sh45.2 billion against an offering of Sh24 billion.

This was despite the average interest rates for the three short-term government papers - 91, 182 and 364 days Treasury-bills - declining.

Treasury will hope that interests rates, which have mostly been helped by the lowering of CBK’s benchmark index, will remain low into the next fiscal year.

The increased borrowing is due to the need for the government to act fast by propping up businesses and help workers get back their livelihoods. Under the prevailing conditions, the government will struggle to collect taxes. It expects to collect Sh1.6 trillion in taxes in the next fiscal year.

More than half of this money (ShSh493.4 billion) will come from local investors and Sh328 billion externally; the rest will be borrowed from foreign financiers.

Although it is a huge increase from the Sh571 billion that Treasury had initially planned to borrow for the 2020/21 financial year, debt-shaming critics have spared Treasury the tongue-lashing.

According to legislators and development partners, even a broke government such as Kenya’s cannot just stand by as the economy collapses. 

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