The Treasury has raised the target for domestic borrowing by Sh103.7 billion in the 2023-24 financial year, underlining the State’s increased reliance on local debt to plug the fiscal deficit.
Final budget estimates tabled by the Treasury in Parliament show net domestic borrowing for the period starting July 1 is set to rise to Sh532 billion from Sh428.3 billion this fiscal year.
The higher target for net domestic borrowing is expected to offset a projected decline in net foreign financing to Sh131.5 billion from Sh395.8 billion in the current fiscal year.
The fall in foreign financing is due to the heavy maturities of external loans, primarily among them the 10-year $2 billion Eurobond that was borrowed in 2014.
The target for programme loans has also been set down to Sh65.4 billion from Sh275.3 billion at present.
The turn towards the domestic market, however, comes against the underperformance of local government securities which has been driven in part by investor apathy for bonds under a rising interest rates environment.
Investors have preferred to hold short-term Treasury bills or have demanded higher risk-adjusted returns to take up longer-dated government securities.
“Treasury bond issuances were generally undersubscribed at an average rate of 67.14 percent. Treasury bills were oversubscribed with investors seeing short-term risks in the market and favouring their risk-adjusted returns,” analysts at AIB-AXYS Africa stated in a quarterly economic update note published last week.
Bonds issued in April, for instance, returned a lacklustre 26.7 percent performance rate as bids totalled to just Sh16.02 billion against Sh60 billion from which the exchequer accepted bids worth Sh10.24 billion.
The government's appetite for debt is expected to remain high as it seeks to plug a Sh663.5 billion fiscal balance in the next financial year.
Investors are projected to continue demanding a premium to hold local securities in the near term as the government remains under fiscal pressure to fully fund its budget estimates.
“We expect investors to continue pushing for a 15 percent bond likely in the third quarter. In the first quarter, the one-year paper gained the most, driven by investors demand for higher returns in response to rising local and domestic economic instability,” added AIB-AXYs analysts.
The exchequer will, nevertheless, bank on improved domestic revenue mobilisation to cushion against underperformance from borrowing.
Total ordinary revenues are for instance expected to grow by more than Sh364 billion in the new financial year to top Sh2.894 trillion with tax revenues at Sh2.571 trillion and ministerial appropriations in aid at Sh332.5 billion.