The National Treasury has proposed to cut domestic borrowing by Sh53.3 billion to ease pressure on lending rates.
According to the draft Budget Policy statement published by Treasury, turning to the local market has been reduced to Sh168.2 billion from Sh221.5 billion in the current budget.
CFC Stanbic says the government has already borrowed Sh108 billion from the domestic market, which means it has five months to seek Sh60 billion.
“The supplementary budget has shown signs of consolidation especially with the cut in domestic borrowing, which will be a catalyst for interest rates to come down,” said CfC Stanbic Bank Regional Economist Jibran Qureishi.
Mr Qureishi, however, cautioned that the government must stick to the estimations and not overshoot its set targets.
“Last year the budget policy paper said the government would cut domestic borrowing from Sh190 billion to Sh100 billion, but we ended up borrowing more than that,” said the CFC Stanbic economist.
The draft supplementary budget notes the growing risk of heavy domestic borrowing on interest rate pressure and the high cost of paying back debt taken at high rates.
“Recourse to significant uptake of domestic debt financing could lead to an increase in the domestic interest rates and a refinancing risk and these may exert pressure on the debt sustainability position,” notes the draft by Treasury Permanent Secretary Kamau Thugge.
When facing a cash crunch last year, Treasury was forced to pick up short-term debts from Treasury Bills at high rates which mature between three months and a year.
“The maturities are coming up in March and May but if the government does not appear desperate, then it will relax interest rates,” said Mr Qureishi.
Last week, the 91-day bill was traded at 11.702 per cent, while the 182-day bill was trading at 14.380 per cent.
The government is now set to borrow Sh294.1 billion externally after Sh60 billion ($588 million) external loan from syndicated banks in October.
The move has cut down the budget gap from 8.7 per cent to 8.1 per cent from Sh569.2 billion to Sh522.3 billion.