The International Monetary Fund (IMF) says the government can unlock the current domestic funding challenges by offering a higher return to bond investors.
The multi-lateral lender, which has further doubled down on its support for a weaker local exchange rate argues that greater returns will lure in more investors to take up government securities, reversing the current apathy for the papers.
The low uptake of new bond issuances amid high maturities of domestic debt partly contributed to the liquidity crunch in March that saw the State delay salary payments for the month.
“If the shilling is artificially held high, that suffocates the domestic market. Likewise, if you keep the reward for bondholders artificially low, what happens is you are likely to run out of money when you don’t have access to external financing,” noted IMF managing director Kristalina Georgieva.
However, the multilateral lender admits raising the return to bondholders would be a catch-22 situation as a weaker shilling would portend increased inflation and higher debt service costs.
“There is an impact on inflation and debt service costs, but the alternative is a suffocated economy. When the economy is functioning, businesses create more jobs and generate more income for revenue purposes and a country can meet the higher debt service costs,” she added.
Investors have been increasingly unwilling to lend to the government at prevailing rates, and have instead pushed for higher interest rates
Instead, they have preferred parking their money in the shorter-dated 91-day Treasury bills, adopting a wait-and-see attitude on the trend of returns offered in the bond market.
Rising inflation has also forced investors to pile pressure on the State in search of better real returns as the inflation rate remains high and above the preferred government rate of no more than 7.5 percent.
The government appears to have in part taken on board the IMF view in letting the shilling weaken steadily against the US dollar without intervening to reverse course—the Central Bank of Kenya (CBK) has always maintained that it does not intervene to set the rate direction, but rather to iron out volatility only.
The CBK quoted the shilling at Sh136.39 against the US dollar on Friday.
The local unit has weakened by more than double digits in just four months of 2023, to surpass the depreciation rate in the entirety of 2022 when the unit shed nine percent against the US dollar.
The weakening of the Kenyan Shilling against the US dollar has been against a waning green buck whose strength has been fading against the basket of major currencies as measured by the dollar index.