The Treasury has cut the projected cost of servicing public debt for the current fiscal year by Sh14 billion, reflecting the lower interest rates on issued securities.
Kenya had projected under the June 2018 budget that interest payments on domestic debt for the fiscal year 2018/19 would hit Sh285.6 billion but has now cut that to Sh271.6 billion as per the 2019 draft Budget Policy Statement (BPS) released last weekend.
This is despite the projected new borrowing for the fiscal year rising by Sh78 billion to Sh631.5 billion.
Interest costs for foreign debt remain unchanged at Sh114.4 billion, with the stability of the shilling protecting the country from exchange-rate inflation on the dollar debt.
The government securities’ yield curve has come down on the short end, and flattened on the longer term paper, largely due to the reluctance of Central Bank to take up expensive bids from the market even when faced with high maturities and a need to close the domestic borrowing target gap.
The expectation by the Treasury that the interest payments will fall below initial projections could be an indicator that the stance will continue.
Declining rates
“The interest rates for government securities have been declining, indicating that the implementation of government domestic borrowing programme-supported market stability,” said the Treasury in the BPS.
Since June 2018 to date, the rate on the 91-day Treasury bill has declined from 7.7 to 7.2 percent while the 182-day and the 364-day Treasury bills declined to 8.9 percent and 9.9 percent from 9.5 percent and 10.5 percent, respectively.
For the 2019/2020 fiscal year, the Treasury expects to spend Sh426.2 billion on debt interest. Earlier projections in the budget had put the amount at Sh384 billion.
In the 2019/20 fiscal year, the budget deficit is expected to stand at Sh572.2 billion, to be financed largely through domestic borrowing amounting to Sh271.4 billion and foreign financing at Sh306.5 billion.
“Given the expenditure and revenue enhancement measures put in place, fiscal deficit inclusive of grants is projected to reduce from Sh631.3 billion (7.2 percent of GDP) in 2017/18 to Sh572.2 billion (5.0 percent of GDP) in 2019/20,” said the Treasury in the BPS.
As a percentage of GDP, however, domestic debt service is expected to fall slightly from 2.7 per cent in 2018/19 to 2.5 per cent in 2019/20.