To stop borrowing from the domestic market, keep revenue in one account
President Uhuru Kenyatta (left), Deputy President William Ruto (centre) and Treasury Cabinet Secretary Henry Rotich address journalists at State House in Nairobi on June 25, 2014. If the government is serious about bringing interest rates down, it will have to practise some fiscal restraint. PHOTO | EVANS HABIL
What you need to know:
- Achieving a 50 per cent reduction on the domestic borrowing programme is clearly going to be a Herculean task.
- Currently, it is not possible to locate all cash belonging to the government outside a small number of accounts held by the Central Bank of Kenya.
- By simply reforming cash-flow management – through a Treasury Single Account – the government will not have to go to the market every week to float treasury bills and bonds.
Just before he left for Washington DC, President Uhuru Kenyatta held a meeting with the international media on Monday, where he announced that the government would seek to reduce what it borrows from the domestic market by 50 per cent this year.
But he did not commit himself to this manifestly ambitious target.
Indeed, the tone of dispatch from the Presidential Press Service was cautious enough to project the statement as a mere declaration of intent.
Put plainly, the message from the President was a promise that the Treasury would henceforth restrain its big appetite for cash and strive to borrow around Sh100 billion from the local market, compared to Sh190 billion last year.
President Kenyatta was optimistic that the plan to reduce the domestic borrowing level would bring interest rates down, allowing wananchi to access cheaper loans from commercial banks.
Which begs the question: Is the President’s plan realistically achievable especially in the context of where the government is running a large and growing security budget and is faced with huge transfers to counties, a massive infrastructure spending programme, a high wage bill, and ballooning foreign debt service obligations?
Granted, the $2 billion the government received from the successful Euro Bond has created space to circumvent the domestic market.
But achieving a 50 per cent reduction on the domestic borrowing programme is clearly going to be a Herculean task.
Yet if the government is, indeed, serious about bringing interest rates down, it will have to practise some fiscal restraint.
TEN THOUSAND BANK ACCOUNTS
I have said it in these columns before and I dare repeat today. For interest rates to come down in any significant way, the government must provide markets with a credible plan for reducing the domestic borrowing level. Mere statements of intent will not work.
The markets must be given a clear picture of the government’s domestic borrowing needs for the remainder of this fiscal year.
The second thing that must be done almost immediately is the introduction of the so-called Treasury Single Account. We have been talking about introducing this animal for in excess of 10 years.
Why do we need it and how can it help bring interest rates down?
When you have such an account, you are able to see and know all the cash and bank balances in all government accounts from inside and outside the Central Bank of Kenya at any point in time.
Currently, it is not possible to locate all cash belonging to the government outside a small number of accounts held by the Central Bank of Kenya.
A study by the International Monetary Fund in 2012 estimated that the government has a total of 10,000 bank accounts held in commercial banks.
Another study conducted under the World Bank-sponsored Public Expenditure and Financial Programme estimated that at least 60 per cent of government accounts were situated outside the Central Bank.
LENDING IDLE BALANCES
How can one plan and forecast cash flows in such a messy environment?
You have a situation where significant idle balances sitting in accounts at commercial banks are excluded from computation of the government’s overall cash position.
And, in many instances, the government will be going to the domestic market to borrow from the same commercial banks. They readily lend the billions of the idle balances to the same government at a profit.
By simply reforming cash-flow management – through a Treasury Single Account – the government will not have to go to the market every week to float treasury bills and bonds.
And, experience has shown that whenever the government reduces the number of Treasury Bill auctions, interest rates start trending downwards.
Clearly, one of the reasons why interest rates are high is because the government manages its cash flows badly.
Borrowers are paying a heavy price for the antiquated cash management systems.
The Treasury Single Account system is part of the law that has been introduced as part of the Public Finance Management Act.
