Treasury will borrow Sh100 billion more from the domestic market in the next financial year as it cuts new foreign loans in a shift that looks set to lock out households and businesses from bank credit.
Treasury Principal Secretary Kamau Thugge on Tuesday said the government will borrow Sh319 billion from local sources such as banks and pension schemes, up from Sh217 billion in the current year ending next June — reflecting a 46 percent increase.
Kenya has recently deepened foreign borrowing, which will drop by Sh80 billion or 27 percent next year to Sh207 billion, to avoid crowding out the private sector from accessing bank credit and tap cheaper financing.
Some analysts are worried the heavy domestic borrowing might crowd out investment in the private sector.
“The government will increase borrowing from the domestic market and cut on its foreign debt in funding key development projects such as infrastructure,” Mr Thugge said yesterday.
The shift towards domestic borrowing comes amid increased focus on Kenyan debt that has more than doubled in the past six years to Sh5.15 trillion.
The International Monetary Fund (IMF), which warns the borrowing has raised fiscal vulnerabilities and increased interest payments, last month revised Kenya’s risk of debt default to moderate from low.
And global ratings firm Moody recently said Kenya is among countries at the highest risk of losing strategic assets to China over the pile of debt it owes Beijing.
These reviews have the ability to reduce the pool of foreign lenders able to lend Kenya cheaply.
The 46 percent increase in domestic borrowing will offer banks — which account for 54 percent of Sh2.5 trillion of local public debt — an opportunity to lend more to the State as they slow down lending to households and companies.
The rate cap, introduced in September 2016, has slowed lending with banks saying they cannot price risk to small and medium enterprises (SMEs) properly while the cap is in place.
Banks’ lending to government rose 15 percent to Sh1.17 trillion in the nine months to September while lending to the private sector grew by a paltry 2.7 percent to 2.4 trillion.
The shift to domestic borrowing will see taxpayers pay a higher interest rate for the new debt because foreign borrowing had been cheaper.
A 10-year domestic bond of August 2018 was priced at 12.69 per cent while a ten-year Eurobond issued in February were priced at 7.25 per cent.