State to reduce domestic borrowing by 50pc

January 24, 2012

, NAIROBI, Kenya, Jan 24 – The government plans to reduce its domestic borrowing by 50 percent this fiscal year once it receives a Sh51.7billion ($600 million) loan from international banks in a few weeks.

Economic Secretary Geoffrey Mwau disclosed that the domestic borrowing would be substituted by foreign borrowing which is expected to ease pressure on the Treasury Bills markets leading to lower interest rates.

“What that means is that out of the Sh109 billion that we were supposed to borrow domestically, we are now going to borrow nearly half of that and that means that there is less pressure in the Treasury Bills market,” the economic secretary explained.

Kenya has in the last few months seen a tightening of its monetary policy which has in turn seen the interbank rate soar to nearly 30 percent.

This has meant that banks prefer to invest in the risk-free bonds, which guarantees them higher returns as opposed to giving loans which are riskier.

Besides being blamed for crowding out private sector credit, the higher yields paid by the government have contributed to the high interest rates which are currently above 15 percent and way beyond the international standards of between five and six percent.

Commercial banks in the country are estimated to hold more than 55 percent of Treasury Securities, a situation that encourages them to retain high lending rates even as they enjoy high returns from the risk free investments.

An increase in the number of financial obligations that the government has to meet has in turn seen it seek more funds from the local market.

The situation was late last year been exacerbated by a deteriorating exchange rates which touched a historic low of Sh107 and consequently led to the significant rise in interest rates.

With the $600 million syndicated loan that is expected to be released soon, all this is expected to be reversed.

The austerity measures that the government is implementing coupled with efforts to increase efficiency in public spending as well as the scaling up the absorption of donor funds from the current 60 percent should augur well for the economy which is expected to grow by five percent this year.

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