State debt repayment could push bank loan rates up, again

Kenyans are staring at another round of interest rate hikes as the Government seeks to extend its borrowing spree to fund development projects. This comes even as consumers continue to pay rates as high as 25 per cent on some loans despite both Treasury and the Central Bank of Kenya (CBK) assuring borrowers of a winding down in rates more than two months ago.

With a significant portion of Government debt due for repayment in the third and fourth quarters of the 2015/2016 financial year, there have been concerns on the possibility of the Government ramping up domestic borrowing, crowding out the private sector.

"There are several repayments due for maturity starting this month and the Government has to meet its obligation to investors to pay up, which will put significant pressure on Treasury," explains Mr Maurice Oduor, an Investment Manager at Cytonn Investments.

In addition to this, the fact that majority of this debt is short-term, the Government has a delicate balancing act in paying and refinancing it's debt.

"In December alone, total Government debt maturities stood at Sh58 billion and an additional Sh9 billion dollar denominated Eurobond interest payment, bringing total debt due in December to Sh67 billion," read a report from Cytonn Investments in part. "In January 2016, the figure is much higher at Sh86.0 billion."

With the Kenya Revenue Authority (KRA) hard pressed to meet its revenue collection targets and CBK maintaining a tight monetary policy, consumer interest rates are set to go higher as the effects of the expensive credit filters through the system.

KRA boss John Njiraini last month warned that a poor performance in income tax driven by employment freezes and sackings in Government and the private sector is making it hard to meet revenue targets.

The Pay-As-You-Earn (PAYE) is one of the biggest sources of taxes in the country, accounting for more than half of taxes collected.

The new excise tax law implemented in November last year is however expected to bring in some much-needed windfall for the taxman in the second half of the 2015/2016 financial year.

Data from the World Bank's 2016 edition of the International Debt Statistics indicates that Kenya's external debt stock jumped by 18 per cent from Sh1.3 trillion in 2013 to Sh1.6 trillion in 2014 - the highest recorded growth in at least 10 years.

A large part of this spike was attributed to the country's first Sh200 billion Eurobond floated in June 2014, which has since cast Treasury and the Jubilee administration into the spotlight over the disbursement of the funds.