Treasury cuts CBK overdraft to one year low of Sh13bn
The Central Bank of Kenya. The Treasury has cut its overdraft at the CBK by Sh17 billion this month. PHOTO | FILE
What you need to know:
The reduced borrowing now stands at a one-year low of Sh13 billion, down from Sh31.2 billion at the beginning of August.
The overdraft has traditionally been used to meet funding shortfalls caused either by short term debt (T-bill) redemptions or distortions arising from government spending.
The Treasury has cut its overdraft at the Central Bank of Kenya by Sh17 billion this month in a move money markets experts say could signal determination to lower interest rates.
CBK’s latest figures show that the reduced borrowing now stands at a one-year low of Sh13 billion, down from Sh31.2 billion at the beginning of August.
The overdraft has traditionally been used to meet funding shortfalls caused either by short term debt (T-bill) redemptions or distortions arising from government spending.
The maximum overdraft that the Treasury can draw from CBK currently stands at Sh39.1 billion, being five per cent of the last audited annual national revenue.
“Paying down the overdraft reflects a decline in domestic borrowing demand. The move is also a pointer to a directional move with a bias toward lowering interest rates in general,” said Kestrel Capital head of fixed income market Alexander Muiruri.
The Treasury had last drawn the maximum amount at the beginning of July, when the government needed funds for recurrent expenditure at the beginning of the new financial year.
The steady cutback on this facility is indicative of an improved cash position combined with inflows from other debt instruments.
Commercial Bank of Africa Senior dealer Joshua Anene said the lower overdraft is also reflects the Treasury’s limited disbursement of government funds in the past month, a situation which has tightened the liquidity in the money markets, pushing interbank rates upwards given that banks have been remitting tax revenues at the same time.
“It is a good signal to the market because it gives Treasury room to borrow if there are pressing short term monetary needs. However the gains they would make in bringing down interest rates may be undone by the high interbank borrowing rate which will discourage banks from passing on the lower cost of credit to borrowers,” said Mr Anene.
Overdraft is a short-term debt instrument normally not directed to development expenses but rather recurrent obligations like payment of wages.
The overdraft now constitutes just one per cent of the country’s total domestic debt of Sh1.281 trillion.
“However, given the heavy T-bill maturities in September 2014 we expect the overdraft to revert upward next month,” said Mr Muiruri.
The cut in overdraft has contributed to a reduction in total domestic debt by Sh9 billion to its lowest level since the end of June when it stood at Sh1.25 trillion.
The Treasury is normally charged an interest rate equivalent to the Central Bank Rate (CBR), currently at 8.5 per cent. This means Treasury would find it cheaper to borrow through the 91-day Treasury bill whose rate has come down to 8.23 per cent although last week’s issue of Sh4 billion returned zero bids at that price.
Overdraft uptake by the government is ordinarily equated to printing of money and is thought to trigger inflationary pressures. It was notoriously used to print money during Goldenberg Scandal prompting the IMF to instigate the five per cent limit.
The limit is normally fixed and would require parliamentary approval to adjust. It helps the Government maintain fiscal discipline that had completely disappeared in the 1990s.
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