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Government appetite for domestic borrowing crowds out private sector

FINANCIAL STANDARD
By Macharia Kamau | Nov 5th 2019 | 2 min read
By Macharia Kamau | November 5th 2019
FINANCIAL STANDARD

The total debt that the Government has borrowed locally stands at Sh2.8 trillion. This is the money that Treasury borrows through such instruments as Treasury Bonds and Bills, about half of which is advanced by commercial banks.

The action has seen Treasury crowd out the private sector. Banks are most likely to lend to Government - seen as less risky. Private sector are seen to offer low returns especially since interest rates were capped.

Treasury has in the past been told to ease up on domestic debt, a move that might compel banks to lend to private sector, where lending by banks has substantially reduced.

The Secretary-General United Nations Conference on Trade and Development (UNCTAD) Dr Mukhisa Kituyi recently urged the Government to avoid unnecessary debts, more so from the local market, by living within its means.

“When Government has to go to the domestic market to compete with investors in borrowing money because of unsustainable expenditure, it crowds out credit from investment but also raises the cost of retail loans for citizens,” he said.

Dr Kituyi spoke in September at the Africa Summit 2019 organised by Standard Chartered Bank.

“It makes sense to the banks to lend to the Government but it becomes part of the operating problem. Reducing our temptation to live beyond our means is critical for cushioning citizens from future debt struggles.”

Budget and Appropriations Committee Chair Kimani Ichungwa recently noted that high expenditure by State entities was to blame for the high amount of public debt.

“We have been told by the banking industry that we are not getting credit in the private sector because of the interest rate caps. Partially yes but to a greater extent it is not the capping of interest rates in my opinion,” said Ichungwa.

“The CS National Treasury bears the greatest responsibility in terms of getting credit to the private sector in the form of government borrowing. The government borrows because ministries and state departments do not regulate their expenditure.”

“If we want to avail credit to the private sector, it is the responsibility of accounting officers in government to rationalise expenditure, the KRA needs to collect more revenue even from the informal sector. If we are to deal with access to credit and increase liquidity, the government has to control its appetite for borrowing. There is no capping in Uganda or Tanzania but access to credit to the private sector has gone down and largely because of the behaviours of our governments in the region.”

Worse even, when borrowing locally, the State has opted for the costlier and short term Treasury Bills. According to the Kenya Institute of Public Policy Research and Analysis (Kippra), the short-term loans expose Government to certain risks in addition to making the loans costlier for the taxpayer.

Since 2015/16, the composition of short-term debt instrument has been larger than targeted.  

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