Kenya’s domestic debt costs rise Sh57bn on shift to bonds

The National Treasury has raised expenditure on domestic interest repayments for this financial year bySh57.33 billion after it opted to gradually reduce the issuance of cheaper short-term debt by borrowing more longer-dated bonds. The Treasury has in recent years largely issued bonds which are due for repayment in 15 and 25 years, a strategy that has seen it lengthen the average life of government debt. Gabriel Mwendwa, Chartered Financial Analyst joins CNBC Africa to unpack the numbers.

Thu, 17 Feb 2022 10:14:43 GMT

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AI Generated Summary

Kenya's shift to longer-dated bonds has led to a 57.33 billion increase in domestic interest payments, crowding out the private sector from accessing funds.
Reducing the budget deficit is challenging, as supplementary budget requirements drive the need for additional borrowing, risking over-reliance on private debt.
The government's focus on large infrastructure projects hinders efforts to expand the tax base through private sector investments, posing long-term fiscal stability concerns.

Kenya's National Treasury has increased expenditure on domestic interest repayments by 57.33 billion Kenyan shillings due to a shift towards longer-dated bonds over cheaper short-term debt. The strategy to issue bonds repayable in 15 and 25 years has extended the average life of government debt. Gabriel Mwendwa, a Chartered Financial Analyst, provided insights into the implications of these numbers. The exact figures remain dynamic, with estimates ranging from 67% to 70% of GDP, pending the latest data release. Domestic borrowing in Kenya stands at approximately 67%, crowding out the private sector from accessing financial resources. The high government risk rate has deterred financial institutions from lending to private entities since 2016, creating a challenging environment for business growth. Reducing the budget deficit is critical to alleviating the pressure on domestic borrowing. However, recent supplementary budget announcements indicate a growing need for additional funds, leading Kenya to consider another euro bond issuance before June. The World Bank has cautioned against over-reliance on private debt amid rising inflation and interest rates, underscoring the potential risks to the economy. As Kenya approaches elections, the focus on large infrastructure projects continues to drive borrowing requirements, with little emphasis on expanding the tax base through private sector investments. The government's preference for infrastructure over social projects complicates the path to reducing deficits and fostering sustainable economic growth. Balancing internal revenue generation with borrowing remains a key challenge for long-term fiscal stability. The rollover risk associated with maturing debt instruments poses a concern, as the government seeks new loans to repay existing obligations. While rollovers have been manageable thus far, sustained growth in tax revenue will be crucial to reassure lenders of Kenya's repayment capabilities. Financial institutions also face limited investment opportunities, prompting them to maintain substantial holdings of government debt. The government's ability to navigate these challenges will shape Kenya's economic landscape in the coming years, highlighting the importance of prudent fiscal management and strategic investment priorities.