The National Treasury resorted to an emergency loans facility to repay more than Sh20 billion in interest repayments that were due to bondholders at the beginning of the month, reflecting periodic cash flow challenges.
Latest data shows outstanding overdrafts at the Central Bank of Kenya stood at Sh70.68 billion last Wednesday compared with Sh46.7 billion in the prior week.
The facility largely helps the Treasury to finance short-term needs when it faces a cash shortage, including urgent payment requirements such as salaries and other priority recurrent expenditures like debt repayments.
The Treasury said the Sh23.98 billion week-on-week growth was a result of the Sh21.9 billion it tapped from the facility to offset interest disbursements to domestic bondholders on September 9.
“This will be reimbursed from the proceeds of the Treasury bond auction for this month,” Bernard Ndungu, the director-general for accounting services at the Treasury, said.
“Depending on the level of maturities, the National Treasury utilises the overdraft and replenishes the same on a regular basis” it added.
The CBK, the government’s fiscal agent, is seeking to raise Sh30 billion from two re-opened bonds – a 10 and 20-year paper— whose sale started September 4 through September 18.
A recent auction of long-term bonds has seen rates swing between 16 percent and 18.4 percent, a substantial increase that started building from last year as the CBK took action to support the shilling and slow inflation.
The 10-year paper has a coupon –interest rate set in the first auction— of 16 percent, but investors are free to quote higher rates in the current sale. The bond was first sold in March this year and has 9.5 years left to maturity.
The 20-year paper has a coupon of 14 percent that was set in the initial September 2016 auction. The bond has 12 years to maturity.
Tapping of the emergency funds currently attracts an annual interest of 12.75 percent — an equivalent of Central Bank Rate which the lender’s Monetary Policy Committee set on August 6.
Section 46(3) of the CBK Act caps the cash the Treasury can access at five percent of the most recently audited revenues.
The Treasury is still using the Sh97.05 billion limit for the last financial ended June 2024 pending a fresh audit of the government accounts.
This means the Treasury still has room to access Sh26.37 billion from the overdraft facility compared with Sh50.4 billion in the first week of the month and Sh5.25 billion on July 24.
Emergency funds
Tapping of the emergency funds currently attracts an annual interest of 12.75 percent — an equivalent of the Central Bank Rate.
Some economists, however, warn against excessive use of the overdraft facility, arguing that it’s tantamount to printing money – with the attendant risks of creating inflationary pressures.
Some economists, however, warn against excessive use of the overdraft facility, arguing that it’s tantamount to printing money – with the attendant risks of creating inflationary pressures.
For example, former Treasury secretary Njuguna Ndung’u wrote in the Kenya Financial Sector Stability report back in 2012 when he was the CBK governor: “Accelerated borrowing from the central bank is inflationary as it is equated to the printing of money and therefore leads to macroeconomic instability through inflationary pressures.”
