Treasury behind borrowing targets on high finance costs

As the current financial year started it emerged the government was experiencing unprecedented difficulties in raising cash, partly because the Sh2.2 trillion Budget was an increase of 25 per cent while domestic borrowing and tax revenues were short of targets.

Though some analysts claimed the cash crunch was chiefly a result of the below-target tax revenues, data shows that money raised in the first three months of the financial year was actually higher by 10.4 per cent than at the same time last year.

The first quarter tax target was a massive Sh328 billion, but the Kenya Revenue Authority (KRA) managed to raise Sh300 billion, attributing the shortfall to reasons beyond its control such as the delayed passage of the Excise Tax Bill by Parliament and inability to implement the capital gains tax.

In terms of domestic borrowing, the Capital Markets Authority (CMA) shows in its latest update that the National Treasury accepted only Sh48 billion out of the targeted Sh65 billion in the first quarter – leaving it with a Sh17 billion shortfall.

The Central Bank of Kenya did not take up all the money offered because it was expensive with some of the bidders asking for well over 25 per cent in return. The problem was brought about by high interest rates precipitated by the need to keep the shilling stable.

The government was not keen to incur high interest costs by taking up expensive money.

Analysts also see the delays in releasing cash to Parliament, the Teachers Service Commission and the counties as an indication that there was a cash crunch.

“It is a matter of balancing cash flows; there may have been issues in managing the inflows and outflows. We saw delays in releasing money to the extent that Parliament, for example, had not paid for utilities in time at one point,” said John Mutua, a public finance programmes officer at the think-tank Institute of Economic Affairs.

Mr Mutua added the Treasury should have been publishing and publicising a document on the implementation of the budget every six months.

“There is a budget document that is produced but is only available internally at the Treasury so the public does not really know its details. That is where we see the things that are likely to affect revenue. People will know when a shortfall can be expected,” said Mr Mutua.

The Treasury is still struggling to have domestic borrowing hit the set target. With nearly half the year gone, domestic borrowing was behind target by a considerable margin having raised a net of Sh90.8 billion against a target of about Sh115 billion or half-way through the annual target of Sh229 billion as indicated in the 2015/16 Budget Statement.

“In the first six months... approximately Sh364.8 billion has been raised against maturities of Sh273.9 billion resulting in a new borrowing of Sh90.8 billion for the financial year 2015/16 indicating that Treasury are behind budget by 19 per cent on a year-to-date basis,” said Kestrel Capital in a market update.

The Treasury is still keen to avoid locking itself into bonds in which it will be forced to pay top dollar to investors with aggressive bidding, but the question is whether that stance will hamper the ability to raise enough funds from the market.

READ: Treasury locks in Sh104bn of expensive domestic borrowing

Some investment advisers – such as Cytonn Investments – have told their clients they should not even buy the long-term instruments but should concentrate on the short-term ones as it sees the government reverting to using Treasury bills to raise money when a cash crunch returns.

This is because the Treasury will try to avoid locking itself in long-term paper (mainly bonds) for which it will be paying high returns to investors.