Treasury's heavy domestic borrowing to keep rates high

National Treasury Cabinet Secretary Henry Rotich during a Liaison Committee hearing looking into supplementary Budget estimates at Parliament Buildings on April 13, 2016. Financial experts have warned that the Treasury's heavy domestic borrowing will keep the cost of loans high in spite of the Monetary Policy Committee revising the lending rate downwards to 10.5 per cent. PHOTO | DIANA NGILA | NATION MEDIA GROUP

What you need to know:

  • Estimates by two investment firms, Kestrel Capital and Cytonn Investments, show the National Treasury has over-borrowed locally by about Sh100 billion in the current financial year.

  • Kestrel says the Treasury had by May 16, borrowed Sh275.2 billion, which means the target had already been exceeded by nearly Sh84 billion.

  • Since May 16, the date of their report, the State has borrowed more through Treasury bills and bonds.

The lowering of the Central Bank rate is unlikely to reduce the cost of loans because the government has been increasingly borrowing from the local market to plug its budget shortfall.

Estimates by two investment firms, Kestrel Capital and Cytonn Investments, show the National Treasury has over-borrowed locally by about Sh100 billion in the current financial year, surpassing a revised full-year target of Sh191.15 billion.

Kestrel says the Treasury had by May 16, borrowed Sh275.2 billion, which means the target had already been exceeded by nearly Sh84 billion.

Since May 16, the date of their report, the State has borrowed more through Treasury bills and bonds.

The retention of the current lending rates will also be cemented because the Central Bank of Kenya (CBK) did not review the Kenya Bankers Reference Rate (KBRR), which is computed as an average of the CBR and the two-month weighted moving average of the 91-day Treasury bill (T-Bill) rate.

The banking regulator, through the Monetary Policy Committee (MPC), is expected to review the KBRR every six months, but retained the rate at 9.87 per cent in January despite an increase in the Treasury bill rate, which is a key ingredient of the pricing formula.

A regional bank’s analyst, who requested anonymity to speak in confidence, told the Nation that banks are expected to use the KBRR, which is set by the CBK, but the disregard for T-Bills, which has heightened the cost of deposits, will not allow the lenders to advance any cheaper loans soon.

“As long as the government continues to borrow heavily from the local market and the T-Bill rates go up, banks have to adjust the interest paid on deposits and that means the money cannot be lent at a cheaper rate. The government is the safest borrower, and many people will definitely prefer T-Bills to bank deposits as long as the rates remain as attractive as they are,” said the analyst.

The analyst added that the indication by the government to present a bigger budget and the recent indication that tax revenue collection had fallen below target, had emboldened the market, creating an expectation of a higher T-Bill rate from the State to the disadvantage of banks.

He, however, praised the move to lower the CBR by 100 basis points to 10.5 per cent, saying although CBK Governor Patrick Njoroge understood the technical aspect of working out a formula to lower lending rates, some parameters such as excessive government spending and borrowing were beyond his reach.

The CBK boss said the decision was supported by the strong economy, which had grown by 5.6 per cent in 2015, from 5.3 per cent in 2014.

“The committee noted that overall inflation is expected to decline and remain within the government target range in the short-term. Therefore, it concluded that there was policy space for an easing of monetary policy, while continuing to anchor inflation expectations. The MPC, therefore, decided to lower the CBR by 100 basis points to 10.5 per cent.”