Investor apathy in local Treasury bills and bonds has opened a Sh128.1 billion hole in the 2022/23 budget.
New data from the National Treasury shows net domestic financing in five months of the fiscal year to November missed the target by a quantum of Sh128.1 billion with attained financing at Sh180.7 billion.
“The debt domestic financing was below the target by Sh128.1 billion attributed to liquidity challenges in the domestic debt market,” the National Treasury said on Wednesday.
“Budget execution is affected by less than target financing.”
The observed liquidity challenges as indicated by the National Treasury have been traced by analysts to the allocation of funds to the short-ended T-Bills against risks emanating from a rising interest rate environment.
Higher yields on government paper have disincentivised investors from locking up capital for long periods with the results of the investor apathy being mirrored in Treasury bond auctions across the five months.
The government primarily borrows locally from bonds with T-bills mostly deployed as a liquidity management tool by the Central Bank of Kenya (CBK).
According to data from the CBK, the exchequer raised Sh216.4 billion from bonds in eight auctions spread between July and November against a target of Sh285 billion.
The performance of Treasury bond auctions was off the mark by Sh68.6 billion while investor bids rounded off to Sh256.7 billion in the period.
Of the eight auctions, only November’s infrastructure bond and its subsequent tap sale were oversubscribed, mopping up Sh94.7 billion against a softer target of Sh65 billion.
Net foreign financing across the five months meanwhile totalled Sh39 billion and featured inflows/disbursements of Sh138 billion and repayments/outflows of Sh98.9 billion on principal debt.
The strong net foreign financing outcome was against a continuation of tighter external financing conditions which have seen the government strive to access funds from the international capital markets.
Nevertheless, multi-lateral lenders have stepped up to plug the gap through concessional lending with the International Monetary Fund (IMF) disbursing Sh84.5 billion ($682.99 million) on July 18 and December 19 via the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements.
The shortfall in domestic financing is expected to pack pressure on the government in meeting its Sh3.3 trillion spending plan in the financial year to June.
At the same time, the government already faces pressure from obligations carried over from the last fiscal year and an increase in unbudgeted spending in the opening months of the 2022/23 financial year.
The new administration has nevertheless doubled down on the fiscal consolidation task and has targeted a lower overall fiscal deficit than the original budget.
