The Central Bank of Kenya (CBK) will receive a total benefit of Sh12.62 billion from emergency lending to the National Treasury in the financial year ending June 30, 2024, more than double original estimates after the policy rate hiked over the past 12 months.
A report on Consolidated Fund Services Expenditure published by the National Assembly’s Public Debt and Privatization Committee shows that the Treasury spent Sh7.03 billion in interest payments on the CBK overdraft facility in the nine months to March 2024, representing a 104 per cent increase. Over the nine months to March 2024. The corresponding period is in the 2022/2023 financial year.
The second supplementary budget published last month shows interest payments for the full year are expected to reach Sh12.62 billion, up from the original estimate of Sh5.6 billion in the June 2023 budget.
The upward revision in the cost of debt is due to increased use of the facility by the Treasury – indicating cyclical cash flow problems – and a rise in the Central Bank of Kuwait's base interest rate to the current 13 percent from 10.5 percent at the beginning of the fiscal year. .
The government usually turns to the Central Bank of Kuwait for short-term facilities when it faces a liquidity shortage, which alleviates urgent payment requirements such as salaries and other recurring expenses such as debt repayment. The Treasury pays an interest rate equal to the prevailing central bank interest rate on the facility, which must be repaid within 12 months from the date of borrowing.
Borrowing through overdrafts is legally limited to a maximum of five percent of recently revised revenue, with the current cap standing at Sh97.05 billion.
The parliamentary committee expressed concern about the high cost of the facility, while also questioning its use by the government as a borrowing instrument. It now wants the Treasury to conduct a review of the cost of overdraft facilities and submit a report to the National Assembly within 30 days of the report being adopted.
The committee is concerned about the increasing cost of the overdraft facility whose interest payments jumped to Sh12.62 billion in the 2023/2024 financial year, the committee said in its report.
“The report should review the use and cost structure of overdraft facilities and provide proposals for managing and reducing interest payments.”
At the end of May, the outstanding balance on the facility stood at Sh80.6 billion, and CBK records show it has rarely dipped below that level in the current financial cycle.
On occasions – including the middle of last month – the Treasury came close to exhausting its borrowing space in the facility, with the outstanding amount reaching Sh93 billion.
The cost of borrowing is likely to remain high for at least the next two months after the Monetary Policy Committee of the Central Bank of Kuwait decided to keep the interest rate unchanged at 13 percent at its meeting on Wednesday. The next meeting of the Monetary Policy Committee is expected to be held in August.