Capital Markets

Domestic debt costs rise Sh57bn on shift to bonds


Public Debt Management Office director-general Haron Sirima. PHOTO | DIANA NGILA | NMG

The National Treasury has raised expenditure on domestic interest repayments for this financial year by Sh57.33 billion after it opted to gradually reduce the issuance of cheaper short-term debt by borrowing more longer-dated bonds.

The Public Debt Management Office (PDMO) attributes the 13.59 percent rise of the finance costs to Sh479.22 billion in the budget to the growing pile of bonds which matures in five or more years and reduction in Treasury bills which are repaid in a year or less.

“Interest cost on domestic debt has increased following shift in strategy to more uptake of Treasury bonds and lower refinancing risks on Treasury Bills,” PDMO director-general Haron Sirima said via text.

Interest rate on T-bills –which mature in three to 12 months— range between 7.2 percent and 9.6 percent— while the coupon on most bonds range between 10 percent and 13 percent.

This means that shifting more of the State borrowing to bonds leads to higher interest payments to bondholders.

For the government, however, the strategy also has the benefit of reducing the risk of a large number of T-bills being replaced at higher interest rates in a short period of time in what is technically known as refinancing risk.

The Treasury has in recent years largely issued bonds which are due for repayment in 15 and 25 years, a strategy that has seen it lengthen the average life of government debt.

For example, the average time in which the domestic debt will be due for repayment had increased to 6.9 years in June 2021 from 4.17 years three years earlier.

“On the domestic market, the [medium-term debt management] strategy seeks to reduce refinancing risk through maintaining the existing stock of Treasury bills at the current levels while issuing medium to long term debt securities under the benchmark bond programme,” the Treasury wrote in the Debt Management Strategy 2022.

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