Kenya government starved of borrowing
The Government is being starved of borrowings as commercial banks shun its programme to lend to each other, following the move by Central Bank of Kenya to raise its base lending rate to 16.5 per cent.
If this persists, analysts warn, it threatens to undermine the government’s budgetary programme, given that tax revenues are also on the decline.
On Wednesday, the 182-day Treasury Bill, which government uses to borrow for short-term financing, was under subscribed by 76 per cent — the biggest fall in subscribers in recent history — receiving only Sh731 million out of a total of Sh3 billion on offer.
Fixed income traders say this was occasioned by tight liquidity, mismatch in interest rates and uncertainty in the direction the interest rates might take.
“The market is facing a liquidity squeeze. There is no money right now,” said Mr Peter Njuguna, a forex dealer at the Kenya Commercial Bank (KCB).
The mismatch in pricing of the inter-bank (overnight) lending rate and government papers has seen banks lend to each other.
While the 182-day Treasury bill interest rate is at 15.73 per cent, the overnight rate stands at 30 per cent.
“If your shortest maturity, which is overnight lending rate is at 30 per cent, why go for a 182 T –bill that has a lower yield?” a forex dealer at the Commercial Bank of Africa, Mr Duncan Kinuthia, asked.
Last week, the yield stood at 15.661 per cent compared to 15.742 per cent two weeks before. The liquidity crunch has also been affected by the country’s missed target in its domestic borrowing.
Another forex dealer at a commercial bank indicated that the absence of banks at the Treasury bill auction, left traders who were reluctant to take the risk on the Treasury bills.
“CBK is looking for money for its budget needs and the under subscription might undermine this effort,” the dealer said.
However, raising the base rate is paying off on the forex market with the shilling closing the day at 92.30/60 to the dollar, against Wednesday’s performance of 93.80/94.00.
The shilling has since October 11 when it traded at Sh107 to the dollar, gained 13.6 per cent, making it the World’s best performing currency.
Central Bank of Kenya is expected to auction 91-day Treasury bills worth Sh4 billion shillings and 182-day Treasury bills worth Sh3 billion shillings.
