Public debt up by Sh67.5bn in two months to August

The Treasury borrowed Sh67.5 billion from the domestic market in the two months between June 30 and August 30, pushing total public debt to Sh1.91 trillion.

Latest data released by the Central Bank of Kenya (CBK) shows that domestic debt stood at Sh1.12 trillion as at August 30, reflecting increased levels of borrowing from the domestic market by the government.

The acceleration in borrowing is likely to push total public debt beyond Sh2 trillion, setting the Treasury on course to hitting the Sh2.4 trillion mark that former permanent secretary in the ministry of finance Joseph Kinyua had predicted would take three years to reach.

“Gross government domestic debt increased by Sh67.3 billion to reach Sh1.12 trillion on August 30, 2013, from Sh1.05 trillion held at the end of June 2013. This followed increase of Sh10.2 billion, Sh30.2 billion and Sh27.2 billion in the stocks of Treasury bills, Treasury bonds and government overdraft at the Central Bank, respectively, and a decline of Sh0.4 billion in other domestic debt during the period,” said CBK in its latest weekly bulletin.

The debt comprises nearly half the size of Kenya’s annual economic output (GDP). It has increased by close to Sh250 billion since June 2012, when gross public debt stood at Sh1.633 trillion.

Banks remain the biggest lenders to the government, holding Sh518.8 billion worth of government securities as at August 30.

Pension Funds hold Sh274.7 billion worth of securities, with insurance companies the third biggest lenders to government at Sh112.6 billion.

According to the Treasury’s debt update for up to June, external debt stood at Sh843 billion, with the level likely to rise if the government successfully issues a maiden Eurobond that is expected to be of up to $2 billion (Sh174 billion).

The Eurobond will partly be used to retire a Sh50 billion loan borrowed from a consortium of international banks last year.

While the Treasury is yet to update the external debt numbers as at end of August, depreciation of the shilling, which was exchanging at 86 units to the dollar as at June 30 compared to 87.40 this week, could see the amount increase.

Appreciation or depreciation of the shilling either decreases or increases external debt level and the repayment costs.

The government recently announced a Sh425 billion loan deal with China, which could raise the external debt significantly over the years of its disbursement.

The government is under pressure to raise its borrowing, especially from the domestic market, to cover for the increased expenditure on devolution and the rising wage bill, which has outpaced growth in revenue collection.

The increased debt will also see a rise in interest costs, which have this financial year been lower than they were at a similar period last year.

According to CBK, the cumulative interest on domestic debt as at August 30, 2013, stood at Sh14.2 billion, compared to Sh18.2 billion as at August 30, 2012. The cumulative interest between August 23 and August 30, 2013, rose from Sh7.9 billion to Sh14.2 billion.

Kenya spent Sh284.11 billion paying off public debts in the 2012/2013 financial year, according to disclosures made by the Treasury secretary Henry Rotich in a gazette notice published on August 2.

The Treasury projected the debt to GDP ratio to fall to below 45 per cent from 49.7 per cent by June 2016 in the annual debt report (of June 2012).

According to risk and research firm Stratlink Kenya however, Kenya’s debt-To-GDP ratio likely to rise, as the country takes in additional foreign debt to fund projects.

Stratlink projects the ratio to rise to nearly 55 per cent by June 2016. The firm also point out at a widening current account deficit as a threat to the sustainability of public debt.

“For the overall public debt, sustainability could deteriorate if a significantly lower than anticipated growth materialises. This could be triggered by a widening of the current account deficit.

“An increase in global food and fuel prices would raise the import bill and put pressure on the current account and the exchange rate, potentially making the country pay more in foreign debt repayment,” said Stratlink in their fixed income and equities review for September.