The Central Bank of Kenya (CBK) will earn a total of Sh12.62 billion in interest from emergency lending to the National Treasury in the financial year ending June 30, 2024, more than twice the original estimates following a rise in the base rate over the last 12 months.
A report on consolidated fund services expenditure published by the National Assembly’s Public Debt and Privatisation Committee shows that the Treasury had spent Sh7.03 billion in interest payments on the CBK overdraft facility in the nine months to March 2024, representing an increase of 104 percent over the corresponding period in the 2022/2023 fiscal year.
The Supplementary Budget II published last month shows that the full-year interest payments are expected to hit Sh12.62 billion, up from the original estimates of Sh5.6 billion in the June 2023 budget.
The upward revision of the cost of the debt is due to higher usage of the facility by the Treasury—indicating periodic cash flow problems— and the rise in the CBK’s base rate to the current 13 percent from 10.5 percent at the beginning of the fiscal year.
The government normally turns to the CBK for the short-term facility when it faces a liquidity shortage, easing urgent payment requirements such as salaries and other recurrent expenditures such as debt repayments. Treasury pays an interest rate equivalent to the prevailing Central Bank Rate (CBR) on the facility, which must be repaid within 12 months of the date of borrowing.
Borrowing through the overdraft is legally restricted to a maximum of five percent of the most recently audited revenues, with the current cap standing at Sh97.05 billion.
The parliamentary committee expressed concern over the high cost of the facility, while also questioning its usage by the government as a borrowing instrument. It now wants the Treasury to undertake a review of the cost of the overdraft facility and submit a report to the National Assembly within 30 days of the adoption of the report.
The committee is concerned over the increased cost of the overdraft facility whose interest payments have jumped to Sh12.62 billion in the 2023/2024 fiscal year,” said the Committee in its report.
“The report should review the use and the cost structure of the overdraft facility and make proposals to manage and reduce interest payments.”
At the end of May, the outstanding balance on the facility stood at Sh80.6 billion, with CBK records showing that it has rarely fallen below this level in the current fiscal cycle.
On occasions—including mid-last month—the Treasury came close to exhausting the borrowing headroom on the facility, where the outstanding amount hit Sh93 billion.
The borrowing cost is likely to remain elevated for the next two months at least following the decision of the CBK’s monetary policy committee to keep the base rate unchanged at 13 percent in its meeting on Wednesday. The next MPC meeting is expected to come in August.
