The latest budget estimates by the exchequer have lowered the net domestic borrowing target to Ksh411 billion ($2.8 billion), down from the approved estimate of Ksh583 billion ($3.96 billion) in June of this year.
The Central Bank of Kenya (CBK) had already front-run the trim earlier last month, indicating the reduction was anchored on the expectation of higher foreign financing.
Net foreign financing has been subsequently raised to Ksh449 billion ($3.1 billion) from Ksh131 billion ($890.6 million) to mirror the improved prospects for greater external loans.
The Central Bank of Kenya (CBK) expects that the reduction in local borrowing would lead to a downward adjustment in interest rates on government securities while simultaneously addressing the private sector crowding out, The East African reported.
“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,” CBK Governor Kamau Thugge stated.
Doubts on the direction of interest rates on government securities have persisted even before the lower-than-expected trim to the domestic borrowing quota as analysts price in more interest rate pressures.
For instance, analysts at Sterling Capital doubted the expected cut to domestic borrowing, noting the reduction was partly pegged on an overambitious revenue target.
“We see this (cut to domestic borrowing) as untenable considering that this is pegged on a 27 per cent increase in tax revenue in the current fiscal year over the previous one and a significant increase in external borrowing. We foresee the CBK being more accommodative of higher investor bids in debt auctions, at least in the near future,” an analyst stated.
The recently concluded auction of reopened two and ten-year bonds this month, for instance, saw a weighted average rate of accepted bids at 17.45% and 17.92%, respectively. This contrasts with the papers' original coupon rates of 16.97% and 15.03%.
While Kenya has faced limited access to international capital markets in recent years, concessional lenders such as the World Bank and the International Monetary Fund (IMF) have played significant roles as financiers for the government.
In addition, other multilateral lenders, including the Trade and Development Bank (TDB) and the African Development Bank (AfDB), have also stepped in to address Kenya's external financing requirements.
In 2022, the African Development Bank Group approved an €89 million loan to boost the Kenyan government’s economic recovery efforts. Similarly, Afrexim Bank gave the country a $3 billion financial support loan this May.
During the recently concluded 2022/23 fiscal cycle, net domestic financing amounted to Ksh459.5 billion ($3.21 billion), while net foreign financing totalled Ksh310.8 billion ($2.11 billion).
The external loans included Ksh266.9 billion ($1.81 billion) in program loans and Ksh61.8 billion ($420.1 million) in project loan revenue.
The lower domestic borrowing target is expected to take pressure off the domestic credit market from which the government would require less internal financing.
