Keeping the government out of the domestic borrowing market will hurt the economy by creating a shortfall in financing of key infrastructure necessary for lowering the cost of doing business, a bank executive says.
Equity Bank chief executive officer James Mwangi said the business community expects the government to create an enabling environment by providing infrastructure such as electricity, roads, railways, security and a skilled labour force which require huge finances at a time tax revenues are failing to meet the target.
Mr Mwangi said it was necessary for the government to borrow from the banks-dominated market, adding that it is not automatic that the private sector will take up all the available credit were the government to keep off the market.
“This responsibility requires massive investment. Essentially it can be funded by taxes, but if the taxes are only coming from PAYE from salaried people it leaves a huge gap which means the government is confronted by two choices; either to raise tax or make global or domestic borrowing,” Mr Mwangi told the Business Daily on the sidelines of the Invest in Africa forum in Nairobi last week.
“The issue of global borrowing has some headwinds such as currency or exchange rate and pricing, where developing countries get to borrow at four to five times the rate offered to developed economies. There is nothing wrong with a government borrowing locally if the economy can support it.”
There has been debate on the effect of the government’s domestic borrowing on interest rates, as lenders are unlikely to offer cheaper credit to the private sector if they can get decent returns on more secure government bonds.
Rates such as the 15 per cent offered by the government on its latest bond issue have been cited as part of the reason banks continue to offer loans at between 18 and 25 per cent to retail borrowers.
Although the Treasury made efforts in the current fiscal year to scale back public spending in order to tame growing debt, the government is still exceeding its target for domestic borrowing as tax revenues fall behind.
Latest Central Bank of Kenya data shows that gross domestic debt has grown by Sh348.34 billion to Sh1.76 trillion since the start of the fiscal year in June 2015.
The target for the fiscal year that will end on Thursday had been set at Sh219 billion. Kenya’s public debt is currently at 52 per cent of the gross domestic product (GDP) having risen in the past few years partly because of the Sh280 billion ($2.8 billion) sovereign bond and the accelerated domestic borrowing in the past two fiscal years.
With the dollar expected to strengthen in coming months when the British exit the EU, external debt will come with additional exchange costs for Kenya.
Data compiled by Bloomberg shows that average yields on sub-Saharan sovereign dollar bonds are about 7.5 per cent, which becomes expensive when a country factors in the exchange costs on interest payments.
Credit: Business Daily