Public debt costs surge by Sh15 billion

• The largest increase was on interest paid to international lenders, which rose by 27.1 per cent following Treasury decision to borrow from a syndicate of international banks as the local money market heated up. Interest paid to international lenders was Sh8.9 billion up from Sh7 billion.
• Yields on treasury bills and bonds returns rose to a high of 20 per cent in the second quarter of the financial year, as Central Bank tightened the supply of money in order to support the shilling and dampen the rising cost of living.
• The Gross public debt increased from Sh1.4 trillion as at end of June 2011 to Sh1.6 trillion in June 2012, comprising of 47.4 per cent external and 52.6 per cent domestic borrowing.
• Treasury had anticipated to raise Sh42.2 billion from external grants but only raised Sh15.2 billion, pushing it to borrow more. The interest amount paid for domestic borrowing was six per cent higher than the budgeted amount of Sh77.6 billion.
• To control the rising cost of living the government cut back its spending, which reduced the absorption of the budget expenditure estimates.

The cost of servicing public debts increased by 19.6 per cent last year, reflecting the rise in interest rates and growth in national borrowing.

Ministry of Finance data shows that the cost of government borrowing rose to Sh91.2 billion from Sh76.2 billion spent in 2010.

The largest increase was on interest paid to international lenders, which rose by 27.1 per cent following Treasury decision to borrow from a syndicate of international banks as the local money market heated up. Interest paid to international lenders was Sh8.9 billion up from Sh7 billion.

“The domestic interest payment totalled Sh82.3 billion, which was higher than Sh69.2 billion paid in the corresponding period of the previous financial year, mainly due to higher borrowing,” says the Treasury report.

Yields on treasury bills and bonds returns rose to a high of 20 per cent in the second quarter of the financial year, as Central Bank tightened the supply of money in order to support the shilling and dampen the rising cost of living.

“It was a necessary cost for them as they had to mop up liquidity to strengthen the shilling and check inflation,” said George Kamau, a portfolio manager at ICEA Lion Asset Management.

The Gross public debt increased from Sh1.4 trillion as at end of June 2011 to Sh1.6 trillion in June 2012, comprising of 47.4 per cent external and 52.6 per cent domestic borrowing.

The government had aimed at raising Sh172.2 billion from foreign financing but it underperformed raising Sh98.5 billion while it raised more from the local market; Sh73.2 billion compared to the targeted Sh61.9 billion.

Treasury had anticipated to raise Sh42.2 billion from external grants but only raised Sh15.2 billion, pushing it to borrow more. The interest amount paid for domestic borrowing was six per cent higher than the budgeted amount of Sh77.6 billion

Living cost

To control the rising cost of living the government cut back its spending, which reduced the absorption of the budget expenditure estimates.

The rise in cost of borrowing could have informed the Treasury’s decision to review its financing mix having stated that Sh106 billion of this year’s budget deficit would come from the local market with Sh143 billion being sourced from international lenders.

“Last year when interest rates were low domestic borrowing was key to financing the budget deficit but given the interest rate volatility they have opted for foreign financing,” said Alex Muiruri, a fixed income analyst with African Alliance Investment Bank.

An increase in interest repayments would see it take up a bigger chunk of recurrent expenditures, which are expected to grow faster with the implementation of the new constitution leaving less cash for development projects.

The government paid Sh961.3 million on behalf of parastatals it had guaranteed and were now in liquidity problems. The guaranteed institutions are Nairobi City Council, Tana and Athi Rivers Development Authority, and Kenya Broadcasting Corporation.