Treasury faces pressure as borrowing trail targetsThursday January 19 2023
Treasury Cabinet Secretary Njuguna Ndung’u faces a growing headache in financing the national budget as the government continues to fall behind target in both its domestic borrowing plan and tax collection.
In the current fiscal year that started in July, the Treasury is targeting to borrow a net of Sh550.9 billion from the domestic market to help fill a budget hole of Sh849.2 billion, with the remaining Sh298.4 billion coming from external lenders.
Estimates by analysts from NCBA indicate that by mid this month, the Treasury had managed to raise just 33 percent of the domestic borrowing target, versus a prorated target of at least 50 percent.
Last week, the Treasury revealed that the tax collection in the first five months of the fiscal year (July to November) November fell short of the target by Sh32.2 billion.
The Kenya Revenue Authority (KRA) collected Sh786.5 billion in the period, well below the target of Sh818.7 billion.
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The lagging tax collections, which are largely due to slower performance of income taxes, reflect a tough economic environment where companies are struggling to create new jobs or grow profits.
On the borrowing front, the NCBA analysts say that demands by investors for higher interest rates have collided with the Central Bank of Kenya’s (CBK) distaste for high-priced bids in the regular bond auctions, lowering the performance rate of these sales.
At the same time, the analysts said, there has been weak demand for longer-dated issuances, due to uncertainty over interest rates.
“In light of its constrained fiscal position, this may explain the sovereign's shift toward more concessional external financing from development/multilateral agencies such as the IMF and the World Bank,” said the NCBA analysts in a weekly fixed income note.
“In addition, the need to improve fiscal space has compelled the government to seek methods to broaden its revenue base, which will be complemented by austerity measures to manage debt optics.”
In the last seven months, the government has only managed to hit its target from a bond issuance in the November infrastructure paper sale, which raised a total of Sh94.7 billion from a combined target of Sh65 billion in a primary and tap sale.
It is therefore expected to offer investors bonds with varying maturity profiles to cater for a wider range of buyers, in a bid to raise the performance of these issuances.
This month, the government is in the market for Sh10 billion in a tap sale of the reopened five and 15-year bond sold earlier this month, which raised Sh31.5 billion against a target of Sh50 billion.
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At the same time, the state has opened the sale of February’s bond —on sale until February 13— which is a dual-tranche offering comprising a reopened 10-year paper first sold in 2017 and a new 10-year paper, which together seek to raise Sh50 billion.
The coupon rate of the reopened paper is 12.97 percent, while that of the new offering will be determined by the market.