Treasury ahead of domestic debt target on Covid


National Treasury building. FILE PHOTO | NMG

The Treasury has moved ahead of its domestic borrowing target for the first half of the current financial year after it tapped money from commercial lenders on the back of relatively low interest and reduced economic activity, which cut credit to the private sector.

Fresh data published by the Central Bank of Kenya (CBK), the government’s fiscal agent, shows domestic debt increased by Sh310.94 billion in the six-month period to nearly Sh3.49 trillion as at end of December.

The amount tapped from domestic investors such as banks and pension funds is an equivalent of 59.26 percent of the Sh524.69 billion net borrowing target for the full-year period ending June 2021.

Ideally, the prorated target for borrowing after six months would be 50 percent or Sh262.35 billion.

The director-general for public debt management at the Treasury, Haron Sirima, has in the past said that the Covid-induced drop in economic activity and resultant low uptake of credit by private firms had raised “loanable funds” to the government.

Increased liquidity amid relatively low interest on government securities, he said, prompted the Treasury to “front-load borrowing to finance critical development expenditures at lowest cost” earlier in the year that started in July 2020.

“Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the central bank as they reject expensive bids,” analysts at Cytonn wrote in this week’s market outlook report.

Latest credit statistics for the banking industry, the biggest buyer of government securities, shows the risk-averse commercial lenders advanced Sh154.7 billion to the Treasury in the July-October period, a 440.91 percent climb over Sh28.60 billion in a similar period a year ago.

The heavy investment in government securities, which are largely seen as risk-free, came at the expense of businesses and households whose new loans amounted to Sh84.6 billion — a modest growth of 8.77 percent over Sh77.8 billion a year ago.

Dr Sirima has, however, maintained that government borrowings usually “balance the need to not crowd-out private sector”. 

Overall, the Treasury has gazetted Sh786.65 billion as total domestic borrowing target for this financial year ending June 2021, comprised of Sh524.69 billion fresh debt and Sh261.96 billion rollovers amid shortfalls in tax collections in a depressed economy.

The Treasury, however, projects the net domestic borrowing target at Sh600 billion in the 2020 Budget Review and Outlook Paper (BROP), taking the projected total budget deficit past Sh1 trillion, including a Sh401.8 billion net external debt.

The widening of forecast deficit to 8.4 percent of gross domestic product (GDP) from 7.5 percent in June has been driven by shortfalls in tax receipts for the first five months of this financial year, falling Sh100.72 billion to Sh527.73 billion compared with a similar period a year ago.

The Kenya Revenue Authority (KRA), however, said tax collection in December marginally surpassed the target for the first time this financial year, coming in at Sh166 billion against a goal of Sh164 billion. This points to gradual recovery in economic activity which had been hammered by Covid-19 containment measures.

The Parliamentary Budget Office – which advises lawmakers on financial and budgetary matters – says in the latest budget outlook report that underperformance in revenue due to Covid-19 pandemic is likely to drive Kenya’s debt beyond the Sh9.0 trillion legal threshold, a year after President Uhuru Kenyatta leaves power.

“In previous financial years, the primary balance grew on account of significant expenditure on infrastructural projects, energy production as well as social expenditures,” PBO wrote in a budget watch report earlier this month. 

“The impact of Covid-19 on the economy is expected to adversely affect revenue generation. Given the current and projected expenditure demands, it is estimated that the Kenyan debt stock could reach Sh9.2 trillion in FY 2022/23.”

The Jubilee administration has ramped up spending since taking power in 2013 amid below-target tax collections which have driven up borrowing to plug the resulting budget deficit. 

President Uhuru Kenyatta’s government has defended increased borrowing, arguing debt has helped build new roads, a modern railway, bridges and electricity plants and transmission lines.

The accumulation of debt, including from international capital markets (Eurobond), has seen Kenya commit more than half of taxes to paying loans in recent years.

This has left little cash for Mr Kenyatta’s legacy projects under the “Big Four” agenda, which is aimed at modernisation and development of new factories, revamping of the ailing health sector, putting up affordable housing units and ensuring food security for Kenyans.