The government is to blame for bank interest rates failing to come down
What you need to know:
- Whenever commercial banks — the main investors on T-bills — smell that the government is greedy for cash, they increase the prices immediately.
- With the Treasury Bill rate within the double-digit range, it means the much-touted reference rate will most likely also kick in at a very high level.
Just the other day, we were all hyping the success of the Eurobond and all the good tidings it would bring to the economy.
The government promised the public that with the billions we were going to receive from the Eurobond, interest rates would come tumbling downwards, and we would enjoy cheap loans.
So far, things have not gone according to predictions. In this economy, interest rates mainly move up and down depending on the government’s greed for cash.
We all expected that having received the billions from the Eurobond, the government would stay out of the domestic market for some time.
Instead, the opposite happened. We were still celebrating the success when the government went to the domestic market and borrowed massively.
Whenever commercial banks — the main investors on T-bills — smell that the government is greedy for cash, they increase the prices immediately.
The upshot was that the Treasury Bill rate surged upwards from a single digit level for most of May and June to 11.4 per cent.
Why was the government picking too much expensive money from the domestic market at a time it was also telling us the Eurobond money was already in the house?
Two explanations have been given. First, there were pressing bills that had to be cleared before the Eurobond money came through.
Secondly, the government could not resort to borrowing from the Central Bank overdraft facility because it had already breached the upper limit.
The events served to expose the National Treasury’s shortcomings in cash-flow management and forecasting.
Indeed, it is the responsibility of the National Treasury to ensure the government is able to fund its expenditure in a timely manner and meet its obligations as they fall due.
But such is the poor state of cash management that it is not uncommon to find the government going to the domestic market to borrow expensive money, while billions are lying idle in bank balances of ministries, counties and project funds.
There is a strong case, indeed, for centralisation of all government cash balances.
ANNUAL PERCENTAGE RATE
Which takes me back to the original topic of discussion: Will interest rates come down in the near future?
As we went to press, the Monetary Policy Committee was expected to announce the new Kenya Bank Reference Rate.
This is an innovation which is supposed to serve as the new bench-mark for pricing loans.
We remember how, early this year, the government appointed a Treasury-led task force to advice it on how to deal with the problem of high lending spreads in Kenya.
Mark you, the difference between the interest a commercial bank pays a depositor and what it charges when it lends the same money to a third party in this country is ridiculously high.
It is the task force which came up with the idea of a Kenya Bank Reference to be calculated as an average of the Treasury Bill rate and the Central Bank Rate, and to serve as a new bench-mark. Under the new regime, banks will also be forced to publish an Annual Percentage Rate.
It is puzzling, indeed, that just as the new bench-mark rate was about kick in, the Treasury Bill Rate started behaving badly.
With the Treasury Bill rate within the double-digit range, it means the much-touted reference rate will most likely also kick in at a very high level.
Has somebody been manipulating the situation to make sure that commercial banks continue enjoying high lending spreads?
I am no conspiracy theorist. How events will unfold remains to be seen.
What is clear is that for interest rates to come down in any significant way, the National Treasury must provide the market with a credible plan for bringing down domestic borrowing.
The markets want to see a clear stance on the domestic borrowing needs for the remainder of the fiscal year.
If the government stays out of the market by postponing some of the Treasury Bill auctions, the lending rates will start trending downwards.
