Treasury walking on thin-ice in bid to finance 2019/20 budget deficit

The National Treasury is walking a tight rope in its quest to finance the 2019/20 budget deficit as it seeks to avoid the issuance of expensive commercial debt instruments.

This is as the planning Ministry turns away from the high interest accumulating debt instruments inscribed in large part in syndicated loans and Eurobonds.

Tasked on the options on the table, National Treasury Senior Macroeconomic Advisor Geoffrey Mwau said the Ministry still favors cheaper funding sources at all cost in its bid to eliminate the scope for external commercial financing,

“The key is going for the low and manageable option. We have revised our framework. It wouldn’t just be World Bank, we also have domestic borrowing,” he said.

According to data contained in the 2020 draft budget policy statement (BPS) and statements on net exchequer issues, at least Ksh.200 billion of the net Ksh.700 billion deficit is allocated to external commercial sources with the government yet to tap onto the enterprise sources so far in the financial year.

The National Treasury has instead reached out to the World Bank for a new credit facility ranging between Ksh.50 and Ksh.100 billion which if successful would offset the need for commercial loans.

According to the Treasury, the talks with the multi-lateral lender are at an advanced stage as the government hopes to land a consecutive open ended facility from the institution to follow up 2019’s capture of a Ksh.75 billion facility.

Further to the proposed World Bank facility, the government is planning to issue a Ksh.150 billion infrastructure bond to support capital projects with the issue presenting a further potential easing on commercial financing.

Additionally, the government is due to float its first sovereign green bond in an endeavour to lock in growing investor sentiments in sustainable financing.

Nevertheless, Dr. Mwau expects the green issue to premier much later in the year as the National Treasury first establishes the accompanying framework.

“We are yet to determine the timings for the bond issue and will probably see this in the next financial year,” he added.

However, the bias for domestic funding sources may exert interest rates pressures with the government now facing up to the private sector for credit following the lifting of lending terms in November.

Net domestic borrowing is already pinned at a gross Ksh.514 billion to cover Ksh.391.4 billion in net domestic borrowing and Ksh.122.6 billion in rollovers.

Moreover, the projected fiscal deficit could be potential higher at the close of the 2020/21 financial year with revenue performance in six months to December 2019 registering a Ksh.138.7 billion shortfall.

The National Treasury has however backed ongoing austerity measures to deliver a narrowed 6.3 percent deficit to Gross Domestic Product (GDP) to revert last year’s slippage of 7.7 percent.

The fiscal deficit to December slimmed to Ksh.214 billion beating its Ksh.232.2 billion projection. However the public stock debt during the review period crossed over the Ksh.6 trillion mark from Ksh.5.8 trillion at the end of June.