CBK boss warns of hurdles meeting borrowing target

Patrick Njoroge, the departing governor of the Central Bank of Kenya (CBK), has cautioned that the government will have a difficult time meeting its borrowing goals from the domestic market in the upcoming fiscal year.

The CBK claims that obtaining the Sh521.5 billion from the domestic market is a difficult task that runs the risk of having unfavourable results at a time when investors are hard to attract.

The CBK is now requesting that the National Assembly order the Treasury to reduce the anticipated domestic borrowing for the fiscal year 2023–2024 due to market challenges.

“The domestic market has continued to support growing budgetary financing requirements. However, due to elevated financing needs, the capacity of the domestic market to finance deficits, especially in the last two financial years has been limited. The CBK raised 89 percent of the borrowing programme target in the 2021/2022 fiscal year and 57.3 percent (Sh249.1 billion) of the 2022/2023 borrowing target as of May 31, 2023,” the apex bank says.

This comes as the Budget and Appropriations Committee of the National Assembly has advised the House to raise the anticipated spending for the upcoming fiscal year by Sh80.7 billion to Sh3.69 trillion.

Out of the increase that is being considered, Sh56.5 billion will go toward recurrent expenses and the remaining Sh24.2 billion will go toward development.

According to the CBK, market risks are posed by the strong desire to use domestic markets to finance the government’s revenue shortfalls.

“Tight domestic conditions continue to prevail due to delayed budgeted external financing against the backdrop of elevated inflationary pressures, heightened geopolitical tensions and significant financial market volatility,” says the CBK.

“The domestic borrowing target for 2023/2024 is quite ambitious due to limited market capacity. In our view, this higher borrowing target is likely to have a disproportionately negative impact on yield curve stability and market confidence risking contagion across the total value of outstanding debt stock,” the CBK says.

At a time when investors are avoiding long-term government securities and focusing on short-term ones, the apex bank has issued this warning.

Due to a lack of interest from investors, the government was forced to postpone the auction of a 15-year bond in mid-April.

The Exchequer has shifted gears to lean on shorter-term bonds as it deals with the market realities of low appetite, as evidenced by the government’s two tap sales on a three-year bond in May.

As Dr. Njoroge leaves the stage to make room for Dr. Kamau Thugge to become the tenth governor of the CBK, he issues this warning on fiscal dominance.

Dr. Thugge’s nomination was approved by MPs on Wednesday.