Market News

Rate cap removal to hit Treasury hardest

Acting Treasury Secretary Ukur Yattani
Acting Treasury Secretary Ukur Yattani. FILE PHOTO | NMG 

Successful removal of the rate cap is set to bring to an end three years of cheap credit for the government in the local market that saw Treasury ramp up domestic debt from Sh1.8 trillion in June 2016 to Sh2.7 trillion last June.

Following the enactment of the rate cap law in September 2016, interest on domestic credit dipped as banks flooded the government securities market while avoiding lending to the private sector.

The Treasury went on a borrowing spree, often raising its local borrowing target to meet Budget deficit.

“In the event that the rate cap is repealed the most likely scenario would be a rise in interest rate on domestic debt (T-bills and bonds) as the private sector will now be competing with government for bank capital,” head of research at Sterling capital Renaldo D’Souza said.

According to ratings agency Moody’s though, if the government continues to miss tax targets and increases appetite for local loans, banks will just take advantage of the absence of the cap and charge Treasury a premium to make more money from the less risky treasuries rather than lend the private sector.


This year, acting Treasury Secretary Ukur Yatani increased domestic debt target to Sh300.31 billion, from the Sh283.5 billion read in the June 13 Budget Statement by then Treasury CS Henry Rotich.

Over the three years of cheap credit, banks mainly bought short-term Treasury bills rather than long-term bonds so they can easily exit the market if the cap is lifted.

CBK data shows that Treasury bills increased 60 percent from Sh613 billion in June 2016 to Sh982 billion in June this year while bonds rose 51 percent from Sh1.15 trillion to Sh1.74 trillion a similar period.