Treasury raises overdraft from CBK to new high

The Treasury has increased its overdraft at the Central Bank of Kenya (CBK) to the highest amount ever at Sh39.1 billion following a rise in the legal borrowing ceilling.

Data from CBK shows the Treasury overdraft rose by Sh5 billion from the previous limit of Sh34.2 billion. The cash-hungry government is allowed to overdraw from its CBK account an amount equal to five per cent of the last audited annual revenues.

Officials at the Treasury said the government increased the overdraft following conclusion of the 2011/12 audit which put the revenues at Sh782 billion.

“The revised limit came to play on May 12 following release of new figures,” said a senior Treasury official.

However, taking all available credit has shut a useful borrowing window for the State at a time when it is hard- pressed for cash, with revenues lagging behind soaring expenditure.

As at the end of March the government’s total cumulative revenue amounted to Sh674 billion against a target of Sh727 billion, leaving it with a deficit of Sh53 billion.

Notably, the law requires that the Treasury clears the overdraft by June 30 every year. The government’s decision to take up the full credit as soon as the opportunity arose has provided a glimpse into the tight cash at the Treasury.

The ministry has confirmed that it will be listing the country’s debut sovereign bond at the Ireland stock exchange whose regulatory structure is friendly, allowing for a quick issue.

Overdraft uptake by the government is ordinarily equated to printing of money and is believed to trigger inflationary pressures.

The five per cent limit was introduced after the government misused the window during the Goldenberg Scandal to loot public resources.

The government is currently charged an interest rate equivalent to the Central Bank Rate (CBR), currently at 8.5 per cent. The rate is lower than what the Treasury is paying for a 91 day debt, 8.8 per cent, though.

Overdraft is a short-term debt which indicates that the money is not meant for development expenses but rather recurrent obligations such as payment of wages. The overdraft now constitutes 3.2 per cent of the country’s total official debt of Sh1.2 trillion.

The Treasury has been holding back on borrowing from the local market in an effort to keep interest rates low. Treasury bills portfolio just grew by Sh3 billion during the month of May to Sh279 billion, while long tenured bonds remained flat at Sh874 billion.

Increased participation of the government in the local debt market would have the undesirable effect of crowding out the productive private sector and pushing up interest rates. The sovereign bond is slotted for early this month.

Analysts have, however, raised doubt on whether the Sh132 billion ($1.5 billion) bond will quench the government’s need for cash.

“It is not immediately obvious whether interest rates will fall after the bond. There are a lot of government projects so it will be swallowed up,” said ABC corporate finance and advisory manager Johnson Nderi.

The government’s expenditure budget has been weighed down by security concerns which have forced it to increase spending in hiring security officers and intelligence surveillance.

CBK did not disclose the current average age of the country’s debt but with the growing component of the short-term overdraft and Treasury bills this is expected to decline.

As at November last year the average life had dropped below five years at four years and nine months.

The Treasury would prefer long tenure to ease repayment pressures when the debts mature. It has been issuing short-term bonds of two years to avoid locking in high interest rates for long periods.