State mulls going slow on domestic market borrowing

By James Anyanzwa

The Government has hinted at the possibility of switching from domestic to external borrowing in a bid to control burgeoning interest payment on government securities.

National Treasury says borrowing from the domestic market coupled with the increased interest payment on Treasury bills and bonds poses a major risk on debt sustainability.

But even as the Government considers foreign markets for funding there are also concerns that a sudden and aggressive shift from domestic debt could risk reversing some of the gains that previous debt strategies have achieved in terms of market deepening. There are also worries that borrowing externally could expose the local economy to adverse exchange rate risk.

According to the National Treasury, the stock of publicly guaranteed debt is projected to hit Sh2.22 trillion as at the end of June this year.

In addition the structure of the debt portfolio is projected to be 48 per cent external debt and 52 per cent domestic debt. The Government’s domestic sources of loans consist of Government securities and Government overdraft at the Central Bank.

Government securities comprise of Treasury bills, Treasury bonds, Infrastructure bonds and the pre-1997 Government debt. The stock of outstanding Treasury bonds increased to Sh816.28 billion in December 2013 from Sh744.17 billion in June 2013.

The stock of outstanding Treasury bills also increased to Sh307.26 billion from Sh267.21 billion during the same period.

Commercial terms

According to Treasury’s Medium Term Debt Management Strategy (2014) the Government prefers concessional external financing and a limited window for borrowing on commercial terms to minimise costs and refinancing risks.

“Financing on non-concessional terms will be on exception basis and will be biased towards projects with high-expected risk-adjusted rates of return including critical infrastructure that would otherwise not be undertaken due to lack of concessional financing,” says Treasury.