Home Business Treasury teeters on brink of breaching new overdraft limit

Treasury teeters on brink of breaching new overdraft limit

0
Treasury teeters on brink of breaching new overdraft limit


Economy

Treasury teeters on brink of breaching new overdraft limit


DNTreasury1503f

The National Treasury building in Nairobi in this picture taken on March 15, 2023. PHOTO | DENNIS ONSONGO | NMG

The Treasury teetered on the verge of breaching the new limit on emergency loan facility at the Central Bank earlier in the month amid rising cash flow pressures.

The latest data from the Central Bank of Kenya shows that outstanding overdrafts reached a record of Sh78.53 billion on May 5.

This is just short of the Sh80 billion limit set at the beginning of the current financial year from a previous ceiling of Sh75 billion.

Read: Treasury cash data fails to reveal a broke government

The overdraft facility —a temporary source of cash to cater for priority payments and emergencies — is usually tapped by the Treasury when revenue streams such as tax and borrowing receipts do not flow into the government’s main account at a pace that matches expenditure needs.

The facility largely helps the Treasury to finance short-term needs when it faces a cash shortage, including urgent payments such as salaries and other priority recurrent expenditures such as debt repayments.

Increased use of the facility is a pointer to cash flow challenges being faced by the Treasury after domestic borrowing via bonds and bills fell short of the Sh407.72 billion target for the nine-month through March 2023 by Sh169.36 billion.

Tapping of the overdraft facility attracts an annual interest of seven percent of the outstanding amount at the end of each month, according to the Office of the Controller of Budget.

The Treasury is behind its domestic borrowing target with investors demanding more return than what the CBK, the government’s fiscal agent, is offering for Treasury bills which mature in six and 12 months as well as bonds.

Continued aggressive bidding by investors amid stubbornly tight global markets has seen interest on Treasury bills with a tenure of three months cross 10 percent this year for the first time since February 2016.

This is despite President William Ruto saying on November 11, 2022, that his administration will in future be looking to cap interest on domestic borrowing at 10 percent.

The overdrafts, which are seen as the direct creation of cash by the CBK, are supposed to be repaid by the end of the fiscal year.

Economists, however, warn against excessive use of the overdraft facility, arguing that it’s tantamount to printing money – with the attendant risks of creating inflationary pressures.

Read: Treasury to slap noodles firms with 20pc tax

For example, the current Treasury Secretary governor Njuguna Ndung’u wrote in the Kenya Financial Sector Stability report back in 2012 when he was the CBK governor: “Accelerated borrowing from the central bank is inflationary as it is equated to the printing of money and therefore leads to macroeconomic instability through inflationary pressures.”

→ [email protected]


LEAVE A REPLY

Please enter your comment!
Please enter your name here

Translate »