Treasury’s headache after Parliament cuts down local borrowing

The National Treasury is facing a migraine after Members of Parliament approved proposals limiting its reliance on domestic borrowing. The proposal by the Budget and Appropriation Committee (BAC) adopted by the National Assembly last week has forced the exchequer to restructure its deficit financing program covering the 2021/22 budget in favor of external borrowing. The new recommendation will see the net foreign financing and net local borrowing ratios reclassified from 28:72 to 43:57 implying greater external financing. “For the avoidance of doubt and after consultations with the National Treasury, the Committee has approved the debt mix ratio of 57:43 of domestic to external borrowing. This strategy provides the optimal debt and is also consistent with key provisions in the PFM Act,” the BAC stated in its report tabled in the National Assembly on Thursday. This means that Treasury will be required to borrow an additional Ksh.132.7 billion externally lifting planned external loans for the financial year commencing in July from Ksh.267.3 billion. At the same time, the exchequer will be tasked with trimming Ksh.132.8 billion from net domestic borrowing financing. As part of the amendments, the BAC has proposed a Ksh.200 billion reduction in the quantum of borrowing off Treasury bills (T-bills) even as analysts warn of execution risks. Limited options The expected rise in external financing is expected to leave Treasury in a fix with the plan altering its present deficit funding plan contained in the 2021 Budget Policy Statement (BPS). Treasury has already leveraged most options from external sources to include loans from the World Bank, the IMF and even Eurobonds in its July 2021 to June 2022 plans. In original plans of Ksh.267.3 billion in net external financing, Treasury has for instance scheduled Ksh.124.3 billion in Eurobond proceeds, Ksh.54 billion from the IMF’s rapid credit facility (RCF) and Ksh.74.3 billion from the World Bank. Analysts at Genghis Capital have cast doubts at additional sources for external financing at this point. “At this juncture, it’s really hard to pinpoint the exact sources of this increased external financing,” they stated in a note published on Monday. On the domestic front, the analysts expect Treasury to breach the limits on domestic borrowing as the BAC report preempts a Ksh.75 billion roads bond. “We are of the view that the proposed roads bond will get in the way of the overall target on domestic borrowing. This will give legs to an overshooting in the proposed net domestic borrowing target,” the analysts added. “One has to give in with the most likely result being a relaxation of the net domestic borrowing target so as to accommodate the floating of the roads bond.” Parliament has opted for the new debt mix covered in the Medium Term Debt Strategy (MTDS) to cool-down rising debt distresses as Kenya’s budget funding runs into higher deficits. On Friday global credit ratings agency Standards and Poor’s downgraded Kenya’s long-term debt issuer status highlighting inherent risks from the greater reliance in borrowing.

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