The Treasury has shelved its proposal to take away the responsibility of issuing government securities from the Central Bank of Kenya (CBK) after the latter lobbied to retain the role, which earns it up to Sh3 billion in commissions a year.
The draft medium term debt management strategy document that was published by the Treasury last month had proposed to give the securities issuing role to the Public Debt Management Office (PDMO), saying that this was part of reforms aimed at reducing the government’s borrowing costs.
However, the final version of the strategy that was presented to Parliament last Thursday is silent on this proposal, indicating that it had been deleted after the CBK protested.
Sources had said the CBK had petitioned Treasury Cabinet Secretary John Mbadi over the contested proposals.
CBK Governor Kamau Thugge hinted at the changes in his briefing following the February 5 monetary policy committee meeting, saying that the regulator had been engaging with the Treasury on reversing the proposal.
“In terms of the medium-term debt management strategy, we have engaged with the National Treasury … We continue to have very good relations with the Treasury, and I think there will be some revisions to the strategy,” said Dr Thugge on February 6.
“What was submitted was more of a draft, not an agreed position,” he added.
In its role as the government’s fiscal agent, the CBK is paid a commission of 1.5 percent of the amounts raised through issuance of Treasury bills and bonds.
The annual commission is, however, capped at Sh3 billion as per a 2007 agreement between the CBK and the Treasury.
In any given year, the government issues more than Sh1 trillion worth of T-bills and hundreds of billions in bonds, meaning that the CBK is guaranteed to hit the cap amount of Sh3 billion.
Third party issuing agents such as custodian banks, authorised securities dealers and stockbrokers used to be paid a commission of 0.15 percent of the value of T-bills and bonds they sold on behalf of the CBK, but these payments were stopped from September 2024 as part of the cost-saving measures.
Transferring the issuance role to the PDMO —a department of the l Treasury— would have seen the government avoid paying the agency fees to the CBK, although the regulator remits to the Treasury a dividend payment from its annual surplus.
In the year to June 2024, the CBK payment to the consolidated fund stood at Sh5 billion.
To empower the PDMO to take over the role of issuing securities, the Treasury had proposed to elevate it to a State Department with its own budget.
Beyond the commissions, however, the ability to determine the cost at which the government borrows was at the centre of the fight to control issuance of government securities.
In the present setup, the Treasury retains the ultimate responsibility for the final decision on the overall size of borrowing (fiscal deficit), but the CBK makes the call on the size and details of individual auctions, including interest rates.
This has led to concerns by some Treasury insiders that the CBK may be conflicted in its monetary and fiscal roles.
Having the PDMO as the primary issuer of securities would therefore give the Treasury greater control over the cost of its borrowing, while also giving the debt office its full mandate of managing all aspects of public debt.
Barring the CBK from the issuance of government securities would have seen Kenya join the likes of the US and a number of EU countries where their monetary regulators do not act as government’s fiscal agents, allowing for wider separation of fiscal and monetary policies.
In addition to the fiscal agent proposal, the Treasury has also walked back on a proposal in the draft strategy to stop the issuance of the 364-day Treasury bill, which was meant to reduce exposure to short-term securities and improve transmission of monetary policy in the economy.
The draft strategy called for lowering the debt maturing in one year as a percentage of GDP, which would lengthen the debt maturity both in the domestic and external portfolio.
The 364-day paper was seen as the likeliest candidate due to the prominence of the 91-day and 182-day as risk-free benchmarks or pegs for credit pricing in the economy, and the fact that the government has an option of issuing one- or two-year Treasury bonds when need arises, offering an alternative route for those currently buying one-year T-bills.
Instead, the final version of the debt strategy proposes usage of liability management options (such as switch bonds) to address the refinancing risks associated with short-term maturities. It also proposes a reduction of debt maturing in one year, without explicitly calling for the removal of the 364-day T-bill.
The Treasury currently targets Sh24 billion from T-bill issuances every week, comprising Sh10 billion apiece from the 364-day and 182-day tenors, and Sh4 billion from the 91-day T-bill.
