Treasury ups debt target by Sh32bn as taxes fall short

The Treasury has raised this year’s borrowing target by Sh31.6 billion, setting the stage for a possible rise in interest rates as businesses compete with the state for lending opportunities.

At the beginning of the financial year the government had planned to borrow Sh105.6 billion from the local market, but by November (five months into the financial year) the Treasury had borrowed over Sh88 billion.

Latest tax collection figures show the Kenya Revenue Authority is behind target by more than Sh40 billion.

This has prompted the Treasury to raise the figure to Sh137.2 billion, as revealed in a budget policy statement released last week.

Heavy borrowing by the government tends to crowd out the private sector as commercial banks prefer to lend to the Treasury which poses less default risk than individuals and companies.

“We expect the government to raise interest rates in order to finance the expected increase in recurrent expenditure. The possible preference of domestic credit to external credit by the Government may result in constrained credit growth among the private sector,” said Kestrel Capital in a weekly note to investors.

Kenya’s debt levels went up by 9.8 per cent in the five months between November and June last year to Sh1.8 trillion as the government sought cash to fund salary increments for civil servants and in anticipation of high expenditure events of the first quarter of this year.

(Read: Salary awards raise public wage bill by Sh48.4bn)

Data from the Ministry of Finance shows that as at last November local debt stood at Sh958 billion compared to Sh859 billion in June, the beginning of the government’s financial year, while external debt rose to Sh824 billion from Sh763 billion.

Finance minister Njeru Githae, however, said the government would exercise prudence while borrowing to avoid elbowing out investors.

“There is liquidity so it is easier to borrow,” said Mr Githae.

The total public debt currently stands at 46.1 per cent of the country’s GDP, which is slightly above the IMF recommended ratio of below 45 per cent.

(Read: Moody’s raises the alarm over high public debt)

The government has, however, argued that this is a cyclical rise that will be contained after implementation of new structures created by the Constitution.

“It is still below 50 per cent of GDP so it is still manageable and most of it is internal, which means if we want to reduce it is easy,” said Mr Githae.

Domestic borrowing, which includes amounts raised from issuing government securities and overdraft position from Central Bank of Kenya, constitutes 53 per cent of the public debt.

Parliament recently raised the ceiling of external debt to Sh1.2 billion from Sh800 billion. Despite the increase in total debt the interest paid out is below budget by Sh1.37 billion.

“This is explained by changes in exchange rates between the actual and projected debt service payments,” said the Treasury debt bulletin.

Faced with higher maturities of short-term borrowing instruments in the first quarter of the year and the need to raise cash to fund the elections, the Treasury is expected to be more active in the debt market.

The recent depreciation of the shilling against major currencies will be a concern as this is likely to balloon Kenya’s external debt and add the interest burden.

Of the external debt 32 per cent is held in dollars against which the shilling has lost 1.95 per cent since November and 33 per cent in Euros against which the local currency has lost 4.5 per cent.

Energy and infrastructure sectors received the biggest share of the external loan, more than 36 per cent, while the health sector received the lowest share of 5.4 per cent.

Early last year the Treasury took up a syndicated loan of Sh54 billion ($600 million) from three international lenders to avoid expensive money from the local market, and a further Sh7.2 billion from Standard Chartered Bank in October as a quick loan to fund buying of biometric voter registration kits.

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