The Treasury’s expensive emergency borrowing from the Central Bank of Kenya (CBK) doubled last week to Sh15.06 billion compared to the previous week even as cheaper money was available in the market.
It was the third straight week the Treasury was borrowing through an overdraft from the CBK since the beginning of the fiscal year in July, according to the monetary authority.
In the week ending August 24, the government borrowed Sh7.84 billion, which was also double the amount it borrowed in the week before.
It was only in the first two weeks of last month that the Treasury did not acquire emergency funding from the CBK, signalling improved liquidity conditions in State coffers at the time.
The Treasury was incurring the overdraft costs last week even as the money market displayed signs of liquidity with the average interbank rate down to 5.52 per cent compared to 5.84 per cent in the previous week.
The government pays an interest rate equivalent to the prevailing Central Bank Rate (CBR), which currently stands at 9.0 per cent.
The CBK hinted that the requirements for cash within the Treasury could have been related to payments it was making through the financial institutions, which in turn were liquid.
“Liquidity conditions improved in the interbank market during the week ending September 05, 2018, partly reflecting increased government payments at the end of the month. As a result, the weighted average interbank rate declined to 5.52 per cent from 5.84 per cent in the previous week,” the CBK said in the bulletin.
The overdraft amounts to deficit financing or creation of paper money, which is not backed by assets. In large amounts, the financing has the potential to spur demand-driven inflation by injecting too much cash in the markets when no real goods or services are produced at the same time to counter the effect.
By law, the government is restricted to borrowing up to five per cent of the most recently audited total revenue (which has been used in recurrent expenditure).