Treasury eyeing domestic borrowing to ease burden interest hit external debts

Njuguna Ndung’u

Treasury Cabinet Secretary Njuguna Ndung’u.

Photo credit: File | Nation Media Group

President William Ruto plans to lock externally borrowed funds to foreign currency-generating projects amid high-interest rates and growing service costs in the external markets, which have left the government tightly pressed over the next three years.

In an indication of a bigger government presence in the domestic debt market, the National Treasury said projects generating returns in shillings would be funded through the local currency to avoid a huge burden from a depreciating shilling against other foreign currencies.

“To better manage net sovereign cash flow in funding development programmes, to the extent possible, projects that generate local currency benefits should be funded through local currency while projects that promote economic sectors that have direct and indirect foreign currency income generation may be funded through external borrowing,” Treasury stated in its latest debt strategy.

This is even as the government faces a heavy debt service burden between 2023 and 2025 when most of the loans taken in the past will mature, leaving it in a tight fiscal space.

“There is an urgent need to reduce over-reliance on external debt markets and instead shift the focus to deepening and developing domestic debt market to assume more role in funding government borrowing needs, facilitate borrowing in local currency, attract more capital inflows to lower the local currency yields hence reducing borrowing costs and risks of public debt and by extension for the rest of the economy,” the Treasury said.

Local sources that the government plans to tap include the retail infrastructure bond, M-Akiba, where Kenyans can invest and have the government use the cash to undertake infrastructural projects, as investors earn interest. The Treasury appears to be keen to avoid accumulating more foreign-denominated debts, with the shilling staying in a slump against other foreign currencies for months now.

The shilling exchanged at 125.52 units against the dollar on February 16, up from 123.42 units when 2023 started, a 1.7 per cent depreciation. More domestic and foreign debts are expected to mature over the next three years, leaving the government with an over Sh2.3 trillion burden.

“The maturity of domestic debt is highest in 2023 majorly due to maturing short-term government securities. The repayment structure is relatively smooth except for spikes in 2023, 2024, and 2028 due to maturities of international sovereign bonds.

“Public debt sustainability indicators are projected to begin improving in 2026 after settlement of major maturities in 2024, 2025, and 2026 coupled with anticipated recovery in the exports sector as the global economy recovers from 2020 Covid-19 pandemic effects and shocks to the global supply chain,” the Treasury says.

Meanwhile, Kenya remains at high risk of debt distress after the public debt crossed the Sh9 trillion mark in December. The government plans to borrow Sh720.1 billion in 2023/24, which could raise the public debt to over Sh10 trillion by June 2024.

The Treasury observes that rising interest rates in both domestic and external markets pose a risk to debt service, noting that it may limit the government’s pursuit of restructuring.