Cash-strapped Treasury now faces highest domestic debt servicing costs

A cash-strapped National Treasury is now facing its highest domestic debt servicing costs in the 2020/21 financial year.

The exchequer is expected to service Ksh.174.7 billion this month representing a 137.3 per cent rise in local debt redemptions from December.

The payments include Ksh.128.8 billion in Treasury bills (T-bills) and Ksh.31.1 billion in Treasury bonds (T-bonds) and Ksh.14.8 billion in coupon payments.

According to analysts at Sterling Capital, the high domestic debt redemptions will see the National Treasury use locally borrowed funds to mainly retire maturing debt.

“The sharp increase in domestic debt service this month implies that a big proportion of funds raised particularly in T-Bill auctions will be directed towards debt redemptions rather than new borrowing,” the analysts stated in a note.

Additionally, the analysts expect the Central Bank of Kenya (CBK) to be more accommodative of higher investor bids while increasing acceptance levels.

Already, the reserve bank accepted Ksh.55.9 billion from a two-year bond auction that only targeted to raise Ksh.25 billion.

Moreover, the analysts now expect the National Treasury to once again lift its domestic borrowing target as receipts from taxes slack to plug the budgeting financing gap which now includes heavy debt redemptions.

The National Treasury is already ahead of its fiscal year domestic borrowing target having already raised Ksh.360.6 billion by November last year or an equivalent 45.8 per cent of Ksh.786.6 billion in expected gross borrowings.

“We believe that the challenge experienced by Treasury in raising revenue to finance the fiscal budget has been the driving force behind increased borrowing during the period in review,” the analysts added.

On Thursday, the National Treasury admitted to having empty coffers as it blamed the COVID-19 crisis for the delayed disbursement of funds to counties which have since fallen behind by more than two months.

Earlier in the week, the exchequer finally opted to join the Debt Service Suspension Initiative (DSSI) offered by Paris Club and G20 country creditors which will see it save in excess of Ksh.73 billion in external debt servicing costs.