Kenya retreats from domestic borrowing to cool interest rates

Friday August 11 2023

Central Bank of Kenya Governor Dr Kamau Thugge. PHOTO | LUCY WANJIRU | NMG


The Kenyan government has cut domestic borrowing target by Ksh270 billion ($1.88 billion) as it shifts the bulk of budget deficit financing to the external markets in an effort to ease pressure on domestic interest rates amid growing concerns that the State was crowding out the private sector.

The decision to cut domestic borrowing promises to give the Treasury fresh forex to retire loans and prop up the shilling.

The Central Bank of Kenya (CBK) has revealed that the Treasury has cut the net domestic borrowing target from Ksh586.5 billion ($4.09 billion) to Ksh316 billion ($2.2 billion).

Read: Kenya debt costs fall $1.63bn on cheaper loans

The difference of Ksh270.5 billion ($1.89 billion) has been transferred to the external target, which now rises to Ksh402 billion ($2.8 billion) from Ksh131.5 billion ($916.7 million).

Kenya’s overall budget deficit for the current fiscal year remains at Ksh718 billion ($5 billion).


The new external financing will come from regional and global multilateral financiers, CBK governor Kamau Thugge said on Thursday, without disclosing the specific ones the government has tapped for the funding or the terms of the loans.

The CBK — which is the government’s fiscal agent— said it received a letter from the Treasury, confirming the lower borrowing target, effectively authorising it to align its regular securities issuances with the lower quantum.

The immediate impact, Dr Thugge said, will be seen in interest rates, which in recent weeks have raced up to 16.8 percent for bonds and breached the 13 percent mark for Treasury bills, and also in bolstering forex reserves once the drawdown starts.

“We believe that with that reduced domestic borrowing, we will see a reduction in the pressure on interest rates, and also because of the additional external financing we should be able to have more foreign exchange which will help us build our international reserves,” said Dr Thugge in a post-MPC briefing on Thursday.

Read: Weak shilling raises Kenya debt repayment

He added that the funding will be largely concessional, but there is also some to be accessed that will be on commercial terms.

This impact on rates is, however, only likely to filter through once the government gives a firm indication that it is adhering to the lower borrowing target, which if done will also reduce competition with the private sector for bank loans.

“Investors will be watching closely on the signalling, but the most important development will come when this (reduced domestic borrowing) begins to come through. Investors would assess this on the evidence on how much borrowing is being requested at the marketplace,” said Gregory Waweru, the chief executive officer at SBG Securities.

The CBK also expects that the forex proceeds from the additional external borrowing will bolster its reserves, making it easier to roll over the maturing obligations which include the 2014 Eurobond that is due for repayment next June.

The State has been mulling different options to handle the $2 billion Eurobond maturity, including starting on repurchases ahead of next year to lessen the impact of the bullet payment due at the end of the bond’s life.

The CBK is now striking a more bullish tone on the ability to retire the bond from its reserves, after factoring in the enhanced external borrowing target.

The monetary regulator normally buys the dollar proceeds of external loans from the Treasury in exchange for shillings for spending locally.