On Treasury bonds, the market is voting with its feet

William Ruto

President William Ruto speaks during a press conference at State House, in Nairobi, on April 2, 2023. This government has its eyes focused on an imaginary enemy within politics. It is firmly focused on blaming the previous regime, instead of daily economic management.

Photo credit: Tony Karumba | AFP

Investors continued to shy away from government bonds this week, with the auction of three-year and 15-year bond raising only Sh1.76 billion, out of the desired Sh30 billion.

This has been going on for months. Investors have preferred 90-day, 180-day and one-year bills. But even the 90-day T-bill was undersubscribed, despite an interest rate above 10 per cent.

The cash crunch persists as the government spends more than it can raise in taxes or borrow. 

Secondly, previous borrowing has caught up with the government and, because of successive high roll-over interest rates, the problem could get worse. The poor health of government finances is fuelling negative sentiment. As a result, business and consumer confidence is tanking.

Increased interest rates are hurting business, further dampening investments and consumption.

The escalating cost of living is particularly troublesome. Prices are rising at a fast rate, now at 9.2 per cent. From food to fuel, the cost of living is getting dearer by the day.

There is a growing sense of frustration among Kenyans. And one can well understand. In a democracy, a citizen elects a government to solve problems such as escalating cost of living and unemployment. 

Some commentators have blamed politics, calling for the decoupling of politics from the management of the economy. When the opposition were in the streets a couple of weeks ago, this was a common line of criticism.

But politics and economics are two sides of the same coin. The economy is governed by laws created in Parliament. Businesses and private individuals operate in an environment created by the government. 

What we are witnessing in the bond market demonstrates that politics is economic management. The market players are voting with their feet. The market is staying away from any bond that is two years and above.

The bond offered just before Easter attracted a 17 per cent subscription. This week, just six per cent. For the past five months, all the bonds have been undersubscribed. The market is saying, “We don’t have faith in the government.” 

How exactly is all this the result of politics? Citizens and market players observe what leaders are saying, writing and doing. For instance, the same government that has been saying there is no money intends to increase the budget to Sh3.67 trillion. This means they will have to tax and borrow more. 

Unnecessary expenditure 

Senior leadership is saying we are going to live within our means while engaging in unnecessary expenditure. For instance, is it necessary to go to every county, twice per week, in order to pray? God would probably hear them even if they prayed from home. 

You cannot reduce expenditure by buying new cars. And if you can’t pay salaries, you should not be employing more people.

Citizens should stand up and call the government to order. Government leaders must take responsible action. And if they are unable or unwilling to do that, they should quit.

Some have suggested that rather than criticising, we should be giving government advice. Frankly, I am not convinced that what government leaders need are policy recommendations. These senior political and economic managers are not new to the government. It seems to me they are busy chasing private interest. 

First, the government is pursuing the wrong policy. Raising interest rates is a lazy way to control imported inflation, because it does nothing to global food and fuel prices, but hurts domestic production.

Rather, the government should reduce interest rates and use other alternatives to control inflation. Food prices will only stabilise when we have sufficient food.

We can either import or grow it. The point of the short-term subsidies the government removed was to support Kenyans as they waited for the rainy season to grow food. The longer-term solution is to reduce the reliance on rain-fed food production.

Lower interest rates will assist government get out of the current debt distress, by rolling over existing debt at lower rates, while promoting domestic production. In addition, the government must follow its own advice and reduce reliance on short-term debt. The current borrowing spree (Sh191 billion since January) should stop.

It must also eliminate wasteful expenditure. To do so, the tone at the top must be right. You can’t have senior leaders telling civil servants not to have tea, then hopping on a helicopter to go distribute two bags of relief food! Increasing the budget to Sh3.67 trillion certainly does not reduce the budget deficit.

But this government has its eyes focused on an imaginary enemy within politics. It is firmly focused on blaming the previous regime, instead of daily economic management.

@NdirituMuriithi is an economist