The Central Bank of Kenya may begin to reject expensive short-term bids at the domestic market after receiving a notice from the Treasury on plans to cut the domestic borrowing target from Kes586.5 billion to Kes316 billion.
Banks have been pricing loans to the government expensively given the pressure to repay maturing loans and slow tax receipts that have sent bond rates approaching 17 percent while short-term treasury bills are rising above consumer lending rates.
Oversubscribed Treasury Bills
At the latest auction, investors oversubscribed the three-month Treasury Bills by 1,044 percent. They were demanding 13.1 percent only for CBK to accept Kes41.6 billion overpriced bids against a target of Kes4 billion.
Now CBK Governor Dr Kamau Thugge said Treasury has cut down targets for domestic borrowing in favour of dollar loans. This move has the effect of short-circuiting local debt markets and bringing down the cost of government borrowing.
“I think if they stick to the plan, then we might just start to see the CBK rejecting some of the higher bids we were seeing in the market,” said IC Asset Managers Economist, Churchill Ogutu.
Dr Thugge said he had received a letter from the Treasury, confirming the lower borrowing target. This note effectively authorizes CBK to align its regular securities issuances with the lower quantum.
The Treasury is likely to make an official re-profiling through supplementary budgets, confirming the cut in domestic borrowing and an increase in foreign loan targets to Kes402 billion.
The additional dollar loans are expected to save Kenya from its current foreign currency shortfalls. It will also allow the country to build adequate reserves to meet the maturing Eurobond payment.
The initiative will also see the Treasury meet import demand, especially the build-up from the Government-to-Government credit oil import deal.
Largely multilateral, in nature most of the dollar loans will also come at an affordable cost given the global high-interest rate environment that had prohibited Kenya from accessing commercial loan markets since.
Mr Ogutu said delayed IMF funding that was received this year, the Fund’s additional support under the augmented loan programme, and the new credit line under the 20-month Resilience and Sustainability Facility (RSF) will likely bring in over a billion shillings.
Another tranche is likely to come from the Afriexim Bank. Kenya may also pursue the World Bank DPO funding to plug the difference with the rest being met by syndicated banks.
Dr Thugge told journalists going forward, CBK expects, the current account to improve, the balance of payments to go into surplus and now also with potentially the pausing of raising of interest rates by the US, to see perhaps less pressure on the shilling.
The official shilling exchange declined to an average of 143.4 units for the dollar, a record low while lenders spread are seeing some banks trade the currency upwards of 150, driving up the cost of imports.
Kenya is also banking on global climate push to leverage debt restructuring as Environment CS Soipan Tuya said the country will use the platform provided by the African Climate Summit hosted by Nairobi next month to call for renegotiation of the country’s debt and ease fiscal strain.
Ms Tuya said Kenya is pushing for a relook into our international financial institutions on how the financing of climate and development is happening and the need to re-engineer that to respond to debt distress questions that will give the African countries some space and legroom to be able to focus on development as well as climate action.