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The Government Eases Domestic Borrowing to Lower Interest Rates

Patricia Mutua by Patricia Mutua
August 11, 2023
in News
Reading Time: 2 mins read

The government of Kenya has trimmed its domestic borrowing goal by Kshs 270.5 bn as it moves a significant portion of the budget deficit financing to international markets. This manoeuvre aims to alleviate the strain on local interest rates, which has raised concerns about the government’s impact on the private sector. By reducing domestic borrowing, the Treasury anticipates having additional foreign currency to pay off debts and stabilize the country’s currency, the Shilling. According to the Central Bank of Kenya (CBK), the net domestic borrowing target has been lowered to Kshs 316.0 bn from Kshs 586.5 bn. Consequently, the remaining Ksh270.5 billion has been allocated to external borrowing, increasing the international target to Kshs 402.0 bn from Kshs 131.5 bn.

Read more: Growth in New Loan Accounts in Kenya Reduces on The Back of the Government’s Overreliance on Domestic Borrowing

The budget shortfall for Kenya in the current fiscal year remains at Kshs 718 bn. The CBK governor, Mr. Kamau Thugge, revealed that this new external funding would be sourced from both regional and global multilateral financiers. The expected outcomes of this strategy include a reduction in domestic interest rates, which have surged recently, and an enhancement of foreign exchange reserves as external borrowing is initiated. Mr. Thugge also noted that the majority of the funding would be concessional, with some funds accessed under commercial terms.

Read more: Kenya’s Credit Outlook Downgraded Amid Tight Liquidity Position

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However, the impact on interest rates and reserves will depend on the government’s adherence to the revised borrowing target. Investors will closely monitor this commitment and its effect on the market. Additionally, the CBK expects the foreign exchange generated from increased external borrowing to aid in repaying maturing obligations, such as the 2014 Eurobond, due for repayment in June 2024. The CBK is optimistic about retiring the bond using reserves following the revised external borrowing plan. Typically, the monetary regulator exchanges shillings for dollar proceeds from external loans to facilitate local spending.

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