Efforts by the Central Bank of Kenya (CBK) and the National Treasury to bring down interest rates in the economy, are set to be tested by a 32 percent increase in government’s net domestic borrowing in the upcoming fiscal year, amid sub-par revenue collection and heavy debt repayment obligations.
The Draft 2025 Budget Policy Statement (BPS) which was published last week, has retained the earlier disclosed domestic borrowing target of Sh545.8 billion for the 2025/26 fiscal year, which is an increase of Sh132.7 billion from the current year’s target of Sh413.1 billion.
The domestic market will thus shoulder the bulk of financing the Sh759.4 billion budget deficit, for the upcoming year, with external lenders expected to contribute net loans of Sh213.7 billion.
The year-on-year increase means that from June, the CBK will face pressure to accept more funds from the domestic bonds and Treasury bills market, risking upward pressure on yields.
Analysts have also raised concerns about the continued underperformance of tax collection (against target) in the current fiscal year, which risks an upward adjustment of borrowing targets via a supplementary budget.
In the six months to December, the Kenya Revenue Authority (KRA) missed its pro-rated tax collection target by Sh163 billion.
The taxman collected Sh1.07 trillion in the period, which was below the Sh1.23 trillion it needed in order to stay on track, to meet its full year target of Sh2.47 trillion.
“This slow growth only exerts pressure on the government to finance the budget, through a combination of domestic and external borrowing both of which grew significantly in December 2024, compared to the same period in 2023,” said analysts at Sterling Capital, a Nairobi based investment bank.
At the same time, the government is spending Sh1 trillion in the current year in interest charges on public debt (both domestic and external), which will rise to Sh1.08 trillion in the 2025/26 fiscal year.
Bringing down interest rates has been identified as a key short-term target, in order to help revive growth in lending to the private sector, which in the year to November contracted by 1.1 percent, the first such scenario since 2002.
The dip in lending growth by banks coincided with a fall in quarterly growth in gross domestic product in the second and third quarters of 2024 to 4.6 percent and 4.0 percent respectively, from 5.6 percent and six percent in 2023.
Having identified high interest rates as one of the causes of the lending dip, the CBK cut its base rate from 13 percent to 11.25 percent between August and December last year and is expected to make a further reduction during its early February monetary policy committee meeting.
Following the rate cuts, Treasury bill rates have declined from highs of nearly 17 percent to between 9.5 and 11.3 percent currently, while Treasury bond yields in the secondary market at the Nairobi Securities Exchange (NSE), have come down to a range of 12 to 15 percent, from 19.5 percent in October.