Treasury to issue local dollar bond to support budget

Car& General has cut its dollar-denominated borrowings. PHOTO | SHUTTERSTOCK

The National Treasury plans to issue a local foreign currency-denominated bond to help finance its budget.

The planned bond would complement domestic funding sources such as Treasury bills and bonds.

“To supplement traditional sources of funding, the Public Debt Management Office (PDMO) will explore alternative funding sources including the issuance of a Kenya shilling syndicated debt, foreign currency denominated domestic bond, and private placement for both local and external markets, among others,” the Treasury indicated in its new medium-term debt strategy report.

Data from the Central Bank of Kenya (CBK), for instance, shows that foreign currency deposits in the banking system touched a record Sh1.4 trillion as of November last year.

The proposition by the National Treasury backs the previous views by the CBK Governor Kamau Thugge that such a move would help release dollars.

“I will work with the National Treasury on the possibility of issuing a dollar-denominated bond and bills. If we can get Kenyans holding dollars in deposit accounts to release them by buying into the bond, then we will have the possibility of increasing the liquidity of dollars in the system and this will help us in building up foreign exchange reserves at the CBK,” he said in May last year during his vetting by Parliament for his present job.

The renewed interest in a foreign currency-denominated local bond comes at a time when the market has seen improved dollar liquidity following the issuance of a new Eurobond last week which eased refinancing concerns around the 2014 debut Eurobond maturity later in June.

The release of dollars partly held in speculation has seen the dumping of hard currency in the market in favor of the local currency, driving the Kenyan shilling out of losses to become a gainer against major world currencies on a year-to-date basis.

While the sitting CBK governor has backed plans for a hard currency-denominated local bond, his predecessor Patrick Njoroge stands in the opposite corner having argued local forex sovereign instruments would only quicken the dollarisation of the economy.

“It is very hard to think of how the government would mop up small deposits from retail investors, say with Sh1,000 each through a foreign currency issued bond. This would also end up fanning the flames of dollarisation in the economy and you can think of the effect this has had in other economies. I think it’s a slippery slope and in terms of benefits, I’m questioning the benefits of it,” he said in June last year.

Beyond the issuance of a local foreign-currency-denominated bond, the exchequer has outlined plans to seek debt for food security swaps which could see part of Kenya’s external debt cancelled in return for domestic resources being utilised towards projects to improve the country’s food security resilience.

“Other emerging funding sources such as debt swaps, especially debt for nature swaps and debt for food security swaps, are under consideration between the government of Kenya and the United Nations Development Partners to fund the budget deficit for the financial year 2024/25,” the National Treasury added.

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