Interest paid on domestic loans up Sh89bn on higher rates, borrowing

Taxpayers paid an additional Sh89.4 billion in interest payments on the government’s domestic debt in the year to June 2024, reflecting higher interest rates on debt securities and increased domestic borrowing for budget purposes in the period.

National Treasury disclosures show that interest payments rose to Sh622.5 billion from Sh533.1 billion in the 2022/2023 financial year, increasing the debt service-to-revenue ratio and GDP – key metrics in measuring public debt. Sustainability.

Domestic interest rates rose during this period, partly because the Central Bank of Kenya tightened monetary policy and investors raised their perceptions of risks related to government debt due to concerns about the country’s ability to service its obligations.

Bond yields peaked at 18.4% by June 2024, compared with 14% a year ago, while Treasury yields rose 16% to 16.8% from 11.7% to 11.9% during the period.

Meanwhile, the government raised its net borrowing from the local market to Sh595.6 billion from Sh459.5 billion in the 2022/2023 financial year.

The increasing reliance on domestic lenders was guided by the need to bridge a widening budget deficit of Sh818.3 billion (2023: Sh770.3 billion) with the repayment of outstanding Eurobonds worth Sh260 billion, which limited the ability to raise budget financing from external lenders. .

“During the fiscal year under review, the ratio of domestic interest payments to total revenues rose to 27.2% from 26.1% in the 2022/2023 financial year, while the ratio of general domestic debt interest payments to GDP rose to 3.9% from 3.7%.” National Treasury said in its annual public debt management report 2023/2024.

By the end of the period, the government’s domestic public debt stock stood at Sh5.41 trillion, while outstanding external loans amounted to Sh5.17 trillion.

Interest charges on external loans rose by Sh62.3 billion to Sh218.2 billion, partly reflecting the weakness of the shilling against the dollar in the first three quarters of the financial year.

The shilling fell 21 percent against the dollar in 2023 and weakened further to touch an all-time low of 160 shillings to the dollar by February 2024, before turning the tide and rising to the current level of 129.19 shillings.

The weakness of the shilling had the effect of increasing the amount of units needed by the treasury when purchasing dollars from the Central Bank of Kuwait to service external loan obligations, as well as raising the local currency’s valuation for external loans.

In the current financial year, the Treasury estimates it will spend Sh750 billion on domestic interest payments, while foreign interest will spend Sh259.9 billion.

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