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Domestic debt near Sh2.2trn amid gaping budget deficit

The National Treasury building in Nairobi. FILE PHOTO | NMG
The National Treasury building in Nairobi. FILE PHOTO | NMG 

The stock of domestic debt has risen by Sh83.3 billion since the start of the fiscal year, falling just Sh5 billion shy of the Sh2.2 trillion mark even as the government comes under pressure to plug a huge budget deficit.

Latest government debt data published by the Central Bank of Kenya shows that the stock of domestic debt now stands at Sh2.195 trillion, having risen from Sh2.112 trillion at the end of June.

But with the revised borrowing target from the domestic market standing at a steep Sh410.2 billion, the government remains behind target for the first four months of the fiscal year, with investors in recent weeks offering less than the advertised targets in Treasury bill and bond auctions.

Analysts at Commercial Bank of Africa say the government’s attention has remained in the domestic market as opposed to external borrowing as it avoids the premium likely to be demanded by foreign lenders due to the economic uncertainties of recent months.

“However, this has proved difficult in the last few weeks owing to the relatively tight liquidity as a result of the preference to hold cash and the tightening of shilling liquidity, as a consequence of the Central Bank’s forex sales,” says CBA analysts in the October note on the economy.

“Elections in emerging economies generally exert a substantial premium on sovereign debt; this may have informed the Kenyan government’s unwillingness to seek external debt financing.”

The Budget Review and Outlook paper (BROP) released in September showed an upward revision of the budget deficit to Sh691.2 billion (Sh750.9 billion excluding grants) from the previous Sh535.5 billion, due to expectations of reduced tax revenue and supplementary spending on food imports, subsidies and elections.

The Treasury expects to cover the deficit by increasing domestic borrowing from the initial target of Sh275.7 billion to Sh410.2 billion and external borrowing from Sh256.02 billion to Sh277.3 billion.

But there are lingering concerns on the negative effect of the higher borrowing by government from the domestic market on private sector credit, which has seen anaemic growth in the past one year as banks shun customer lending due to the rate cap and lend to government instead.

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