Kenya seeks Sh77b syndicate loan in crisis borrowing

National Treasury PS Kamau Thugge [PHOTO. FILE/STANDARD]

NAIROBI: Kenya has raised about Sh80 billion through a syndicated loan from three commercial banks as it struggles with a cash crisis at home that has hit government expenditure.

The drastic decision was taken after borrowing rates on treasury bills crossed 20 per cent making it too expensive to borrow locally, Permanent Secretary in the National Treasury Kamau Thugge told Weekend Business yesterday. Standard Chartered, CFC Stanbic and Citi Bank have agreed to lend the State $750 million (Sh77.25 billion) to be released within two weeks and hopefully help in reducing interest rates locally.

"We should access the funds within two weeks... to help us push the process forward and reduce interest rates gradually," Mr Thugge said. Borrowing from the three lenders was largely unanticipated but was a stopgap measure to place a damper on the interest rates that were spiraling out of control.

He said it was unsuitable to borrow locally at such high rates when the same funds could be borrowed from the international markets. The three lenders agreed to lend the funds at the London Inter-Bank Offer Rate (Libor) + 5 per cent, which would still be below 8 per cent effectively.

Investors in the week's 91-day bill auction forced the CBK to accept an average bid of 21.35 per cent, almost three times higher than the 8.5 per cent in similar auctions at the start of the year. The rapid rate increase has caused panic in the market with fears that borrowers from commercial banks could be hit by another rise on borrowing costs for outstanding loans – after another increase just three months ago.

Commercial banks raised interest rates on loans by up to 3 per cent, taking the cue from the industry regulator that had adopted a tight stance to discourage consumption, especially of imported products. It all started with depreciation of the Shilling against the dollar with the CBK's monetary policy stepping in through an intervention that would make it unattractive to hold onto dollars.

Mopping the local currency from circulation has the effect of raising rates, especially the cost that banks lend to one another to cover the daily cash requirements. "When interbank rates rose, investors gave more money to the Central Bank of Kenya pushing up the T-Bill rates," Thugge said, heaping the blame of higher borrowing rates, in part, to the CBK.

Depreciation of the Shilling against the US dollar was never really a Kenyan problem, he explains, but rather a global problem with the rise of the American economy. In effect, CBK was tackling the appreciation of the US dollar in its interventions to tighten money supply but in the end causing a sharp rise in the cost of borrowing to both the State and the ordinary consumers.

Thugge said the higher domestic rates had informed the shift to international borrowing, but was still within the limits that had been approved in the national budget. He also revealed that government revenues had fallen below targets by about Sh12 billion in the first quarter, but was quick to add that it was normal and that Kenya Revenue Authority almost always played catch-up on collections.