The Treasury has increased the use of emergency loan facilities at the central bank to fund critical government expenditures, pointing to biting cash flow pressures.
Central Bank of Kenya says in its latest domestic debt report that the government’s outstanding overdraft hit Sh67.33 billion in the second week of November, the highest level since early June 2022, when the country cancelled a planned $1 billion Eurobond.
The overdraft facility —a temporary source of cash to cater for priority payments and emergencies — is usually tapped by the Treasury when revenue streams such as tax receipts and debt do not flow into government accounts at a pace that matches expenditure cash demands.
The facility helps the Treasury to finance short-term needs when it faces a cash shortage, including urgent payment requirements such as salaries and other priority recurrent expenditures like debt repayments.
The increased use of the facility is a pointer to cash flow challenges being faced by the Treasury after net domestic debt underperformed the Sh175.53 billion target for the quarter through September by Sh73.97 billion.
The Treasury is behind its domestic borrowing target with investors demanding more return than what the CBK, the government’s fiscal agent, is offering for Treasury bills — which mature in between three and 12 months — as well as bonds.
For instance, 364-day Treasury bills undershot targets by more than half when average interest was below 10 percent, before subscriptions improved in the last three auctions when the average interest hit double-digit levels.
President William Ruto said a fortnight ago that the government will in the future be looking to cap interest on domestic borrowing at 10 percent.
“The elephant in the room is that there is a higher risk of deficit monetizing (increased reliance on CBK overdraft facilities) in the event domestic market dries up amidst the sub-10 percent borrowing uncertainty,” Churchill Ogutu, an economist with IC Asset Managers, wrote in a note on Kenya last week.
“At the moment, this is a tail risk but could easily morph into the base case.”
The overdrafts, which are seen as the direct creation of cash by the CBK, are usually restricted to a maximum of five percent of the government’s most recently audited revenues. The cash from the CBK is supposed to be repaid by the end of the fiscal year.
Economists, however, warn against excessive use of the overdraft facility, arguing that it’s tantamount to printing money – with the attendant risks of creating inflationary pressures.
For example, the current Treasury secretary governor Njuguna Ndung’u wrote in the Kenya Financial Sector Stability report back in 2012 when he was the CBK governor: “Accelerated borrowing from the central bank is inflationary as it is equated to the printing of money and therefore leads to macroeconomic instability through inflationary pressures.”
The Treasury data shows budget deficit, including grants, for the quarter through December widened by Sh41.52 billion to Sh174.32 billion. This is filled through borrowing.
The wider deficit was a result of over-expenditure in the total budget by Sh65.53 billion in the three-month period to Sh759.52 billion.