The Treasury has for the third time raised domestic borrowing for the current financial year by Sh84.63 billion amid rising interest rates that could dim hopes of a fall in bank lending rates after the removal of caps on borrowing costs.
Acting Treasury Secretary Ukur Yatani has in the latest monthly filling on the State’s budget increased the cash the government is targeting to borrow from domestic investors by 19.5 percent to nearly Sh514.03 billion for the year to June.
The upward adjustment in domestic borrowing is largely linked to the additional Sh55.23 billion expenditure for development that is contained in the revised national budget.
It also comes as the Kenya Revenue Authority (KRA) struggles to meet tax targets in a slow economy, forcing the Treasury to reduce the taxman’s target by Sh100 billion to Sh1.7 trillion.
This is the third time the domestic debt target is being raised from Sh422.89 billion in the first month of the fiscal year in July and Sh429.39 billion in September.
Analysts reckon that additional domestic borrowing could increase the cost of bank deposits as lenders compete with the State for savings from high-net worth investors, denying bankers room to offer cheap loans to households and businesses.
“This (raised domestic debt target), will actually send mixed signals to the market that despite the risk-on sentiment to private sector lending in the wake of rate cap repeal environment, the uptick in domestic borrowing will be an arresting factor,” analysts at Genghis Capital said in a note.
Central Bank of Kenya cut its benchmark lending rate for the first time in more than a year in November, signalling banks to lower the cost of loans.
The bank’s Monetary Policy Committee cut the rate by 50 basis points to 8.50 percent in its first meeting on November 25 since Kenya lifted a cap on commercial interest rates that it said had stifled credit growth and held back the economy.
Economists say heavy State borrowing from the domestic markets pushed up short-term interest rates and crowded out private sector investment.
Average interest on domestic government debt has been trending higher since the rate cap law was scrapped, giving banks a free hand in pricing of loans and factoring in “actual” risk of borrowers.
For example, average interest on 10-year Treasury bond increased to 12.280 percent in November after it became clear the cap on interest rates would be scrapped from 11.517 percent in August.
A bond of the same tenure was priced at an average of 15.04 percent in mid-August 2016, a month before the rate capping law was enforced. The yield on the benchmark 91-day Treasury Bills, on the other hand, increased to an average of 7.17 percent in December 2019 from 6.44 percent in August.
The domestic debt goal comprises nearly Sh391.45 billion in fresh net borrowing, while the remainder Sh122.58 billion is made of up of rollover of existing debt due for repayment in the course of the fiscal year.
The World Bank Group warned last October that the maturity of domestic debt which it estimated at Sh1.2 trillion, or 43 percent, of the Sh2.87 trillion public local debt by September 2020 would exert pressure on tax collections.
“The government could face challenges in rolling over such bonds in an environment of no interest rate caps, low subscription rates and overexposure of commercial banks to these assets,” the group wrote in an update on the Kenyan economy.