Experts: Firms to miss out on cheap loans on State's appetite for domestic debt

The government’s appetite for domestic debt will determine if the private sector will benefit from the low rates offered by banks following a further drop in the Central Bank Rate (CBR).

Christopher Legilisho, an economist at the Standard Bank Group, said despite the continued drop of the benchmark rate, which has, in turn, seen lenders compelled to reduce interest on loans, the trend may be reversed if the government’s appetite for domestic debt is unchecked.

However, National Treasury and Economic Planning Cabinet Secretary John Mbadi has maintained that the government is in no way looking to crowd out the private sector, citing the reduced rates for the 91-day Treasury Bills.

The CS, in a recent interview with Standard Group’s Spice FM, said the reduced rates for T-Bills saved the government Sh24 billion in interest on domestic debt in the 2024-25 financial year.

“That is the advantage you get when you manage your economy better to reduce the rate of borrowing,” he said.

According to the CS, the government’s domestic debt currently stands at Sh5.6 trillion compared to Sh5.1 trillion for external debt.

Standard Bank’s Legilisho, during a recent meeting with pension industry experts organised by Enwealth Financial Services, said while the market has seen a drop in interest rates over the past three months, there is an expectation that they may start going up if the government borrows more domestically.

“If we see the government trying to restrain how much they borrow, you will have lower interest rates. If we see the government’s appetite for borrowing increasing, the interest rates will likely start picking up again,” he said.

The economic expert said the expectation is the rates will oscillate between eight and 10 per cent. If the government increases its borrowing, then these gains accrued so far may start to dwindle in the next two years.

The Monetary Policy Committee’s (MPC) meeting, chaired by Central Bank of Kenya (CBK) Governor Kamau Thugge on February 5, cut the CBR by 50 basis points from 11.25 to 10.75 per cent and reduced the Cash Reserve Ratio (CRR) requirement by 100 basis points. Reduction of CRR injected close to sh57 billion into the market.

CRR is the amount of deposits that banks are required to have with CBK at any given time. Apart from CBR, CBK can use CRR to dictate how much liquidity flows into the market, which is also a key determinant of inflation.

“With these measures, banks are expected to take the necessary steps to lower their lending rates further, to stimulate growth in credit to the private sector and support economic activity,” said the Central Bank’s decision-making organ following its meeting.

Financial institutions have, in recent weeks following MPC’s move, reduced their lending rates, with Equity leading the way with a 300-basis reduction (three per cent).

Co-operative Bank of Kenya reduced its borrowing cost by two per cent, followed by Family Bank (1.30 per cent), KCB Bank Kenya (1.0 per cent) and DTB (0.37 per cent).

“The idea is they want to see increased pick up in lending to the private sector but at the moment that liquidity is still going towards governments securities,” said Mr Legilisho, adding that there is still more room for CBK to lower the CBR further.

“Interest rates are likely to remain lower in the short term because of the excess liquidity, but then in the medium term, they could begin to pick up if government’s borrowing remains high.”

Currently, returns from the Treasury-bills have come down to below 10 per cent. This is from a high of 18 per cent almost a year ago, which was very attractive to financial institutions.

However, diaspora remittances and an infrastructure bond that was well received by foreign investors aided the CBK in replenishing its foreign cash reserves, strengthening the local currency and injecting more liquidity into the market.

CS Mbadi said there is not much pressure when it comes to domestic debt.

“In domestic debt borrowing, we roll over most of it. When it matures, we again offer T-bills and roll it over,” he said. “Fortunately for us, we are now rolling over cheaply.”

The CS noted that at one point, the government was borrowing from the public like a shylock, citing a time when the returns for government paper was 18 per cent.