CfC Stanbic urges Treasury spending cuts to keep rates low

The government must show commitment to reining in spending before the end of the current fiscal year if interest rates are to remain stable, CfC Stanbic says.

CfC Stanbic economist Jibran Qureishi said the Budget Policy Statement (BPS) set to be released next month provides an opportunity for government to cut the domestic borrowing target, which should reduce pressure on interest rates.

Mr Qureishi said fiscal consolidation (cuts) is possible as the Treasury has recently boosted its finances through a $600 million (Sh60 billion) syndicated loan.

Cutting the deficit in the next fiscal year (2016/17) though is likely to be tricky because of the general elections, usually accompanied by fiscal spillage as the government pushes through with incentives such as wage rise and project outlays.

“We expect the supplementary budget to cut around Sh60 billion from the domestic borrowing target and also think spending cuts may come in. We expect, however, the fiscal deficit to come in lower than the governments planned 8.7 per cent of GDP in 2015,” said Mr Qureishi.

“What we also want to see in this consolidation is the Central Bank rejecting high bids and reducing auction sizes, which will help curb interest rate growth. If they show desperation for funds there will be rate pressure.”

He says there is a need for better coordination of the fiscal and monetary policies for the consolidation to work.

Last year, some analysts pointed out that the fiscal policy framework set out by the Treasury was affecting the effectiveness of the monetary policy tools employed by Central Bank of Kenya at the time there was exchange rate volatility and spiking interest rates.

Standard Chartered chief economist for Africa research Razia Khan said in the lender’s outlook for 2016 she expects to see some bit of fiscal consolidation being announced in the supplementary budget.

READ: StanChart upbeat on Kenya’s growth, predicts fall in rates

Ms Khan said such consolidation combined with what is expected to be benign inflation and a modest depreciation of the shilling should keep interest rates steady before they start to come down later in the year.

The government has a target of Sh221.5 billion in new domestic borrowing for the fiscal year ending June 2016, with the cumulative net borrowing up to the second week of this month standing at Sh83 billion.

The market has factored in expectations of high appetite for money on the part of government, and are demanding higher rates on government securities despite the market being relatively liquid and the currency stable.

The last bond sales in the primary market for a two-year and 10-year issue saw the Treasury accept higher rates of 15.7 and 16.1 per cent respectively.

In the Treasury bills market, the interest rates on all three tenors have gone up in recent weeks. The latest 91-day, 182-day and 364-day Treasury bill issues carried yields of 11.7, 14.1 and 14.9 per cent respectively.