CBK issues warning over Sh532b domestic borrowing plan

Central Bank of Kenya (CBK) has cast doubts on President William Ruto’s hope of sourcing more money domestically to support the administration’s upcoming Sh3.59 trillion budget, terming the plan too ambitious.

CBK’s warrning follows a drastic decline in the performance of the government papers – the major domestic borrowing options – since 2021 even as the administration exploits all avenues to squeeze more money from the already depressed economy.

It means local banks, investors, insurance and individuals will find it hard to lend to the government over default fears amid revenue collection shortfalls that have gripped the State.

“In view of the foregoing, the domestic borrowing target for FY2023/24 is quite ambitious due to limited market capacity. In our view, this higher borrowing target is likely to have a disproportionately negative impact on yield curve stability and market confidence,” CBK Governor Patrick Njoroge (pictured)  said in a presentation before the public debt and privatisation committee.

The governor, who is set to exit the apex bank as the tenure ends this month, has advised the administration to instead revise downwards the targeted borrowings to avoid fattening the value of the outstanding debt stock. From July, the administration is planning to borrow about Sh532.5 billion from the domestic market to support the budget. External borrowing has been capped at Sh198.6 billion while ordinary tax revenue is expected to be Sh2.57 trillion.

Collection shortfalls

Should the current persistent revenue collection shortfalls by Kenya Revenue Authority (KRA) extend to the next fiscal year, the regime might equally be forced to return to the international market.

Kenya has been finding it tough to borrow due to the expensive interest demanded by investors amid the tightening of policy by developed economies like the United States, leaving emerging markets like Kenya with high debt servicing costs due to weaker local currency against major foreign currencies as creditors worry of exchange losses.

Treasury bond auction has been attracting interests rate above the 14 per cent mark, forcing the exchequer to reject the costly bids. Since 2021, CBK has raised 89 per cent of the borrowing program target compared to 57.3 per cent or Sh249.1 billion in the current financial year as of May 2023. The warning by CBK echoes the Budget and Appropriation Committee which has also cautioned that the revenue collection targets given to KRA are nearly unachievable.