In a strategic move aimed at relieving the pressure on domestic interest rates and promoting private sector growth, the Kenyan government has announced a significant shift in its borrowing strategy.
The decision, which involves a reduction in domestic borrowing targets by Sh270 billion, reflects an effort to address concerns that the state's borrowing activities were crowding out private enterprises.
The Central Bank of Kenya (CBK) disclosed that the government has slashed its net domestic borrowing target from Sh586.5 billion to Sh316 billion.
This substantial reduction of Sh270.5 billion has been reallocated to external markets, resulting in a new external borrowing target of Sh402 billion, up from Sh131.5 billion. Kenya's overall budget deficit for the current fiscal year remains at Sh718 billion.
CBK Governor Kamau Thugge explained during a post-Monetary Policy Committee (MPC) briefing on Thursday that the government's aim is to mitigate the upward trajectory of interest rates by reducing domestic borrowing and securing additional financing from global and regional multilateral financiers.
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The governor emphasized that while the majority of the new funding is expected to be concessional, some commercial borrowing may also be undertaken.
"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," Dr. Thugge stated.
The impact of this strategic shift is likely to be twofold. First, it is expected to put downward pressure on the interest rates that have recently surged, reaching 16.8 per cent for bonds and surpassing the 13 per cent mark for Treasury bills.
Second, the additional external financing is predicted to bolster the country's foreign exchange reserves, thus strengthening its ability to manage forthcoming financial obligations.
Gregory Waweru, the CEO of SBG Securities, highlighted the significance of the government's commitment to adhering to the new borrowing target.
He noted that investors would closely monitor this commitment and gauge it based on the government's actual borrowing behaviour.
“Investors will be watching closely on the signalling, but the most important development will come when this begins to come through. Investors would assess this on the evidence on how much borrowing is being requested at the marketplace,” Waweru said.
The CBK's optimism also extends to its ability to manage upcoming financial obligations, particularly the repayment of the 2014 Eurobond set to mature next June.
With the enhanced external borrowing target, the CBK appears more confident in its capacity to handle the $2 billion Eurobond maturity.
The CBK's traditional practice involves purchasing dollar proceeds from external loans in exchange for local currency, which aids local spending and economic stability.
The government's shift in borrowing strategy comes as a response to the growing need to balance its financial requirements while preventing undue strain on the domestic economy.
As the government proceeds with its revised borrowing plan, the markets and private sector will closely observe its impact on both interest rates and private enterprise growth.
For now, the nation anticipates the government's actions to gradually ease domestic borrowing pressures and foster a more conducive economic environment.
