The National Treasury spent an additional Sh13.42 billion or 6.58 percent more on domestic interest repayments than it had budgeted for in the half-year period to December on the back of growing shift towards longer-dated debt, which pays higher interest rates.
Expenditure on interest payments on Treasury bonds and bills zoomed past the Sh203.86 billion estimates for the review period to Sh217.28 billion, Treasury Cabinet Secretary Ukur Yatani says in the latest budgetary disclosures.
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.
Interest rate on T-bills –which mature in three to 12 months— currently range between 7.2 percent and 9.7 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 Public Debt Management Office (PDMO) at the Treasury has since raised the full-year budget for domestic debt cost by 13.59 percent to Sh479.22 billion in line with rising finance costs.
“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 told the Business Daily on February 10.
Issuance of longer-dated bonds by the Central Bank of Kenya —the government’s fiscal agent— has seen pension funds grow their investments in the fixed income securities at a faster rate than commercial banks which largely rely on deposits.
Pension schemes prefer long-term investment since their customers will require their money after years and decades as opposed to banks which face constant liquidity needs for depositors.