JULISHA FINANCES- A Summary of Business News.
Kenya's Treasury is seeking to strip the Central Bank of Kenya (CBK) of its role in selling government bonds and Treasury bills.
The Cs John Mbadi led Ministry, is instead proposing that the Public Debt Management Office (PDMO), a Treasury department, takes over the issuance of government securities.
The move, which is likely to face resistance from CBK, aims to reduce the State's borrowing costs below 10 percent and would bring Kenya's system closer to the US model, where the Treasury handles government securities while the Federal Reserve focuses on monetary policy.
As of January 14, Kenya's domestic debt stood at Sh5.89 trillion, with Treasury bonds accounting for 85.25 percent (Sh4.88 trillion) and Treasury bills at 14.75 percent (Sh844.84 billion).
The Treasury plans to elevate the PDMO to a State Department with its own budget and greater autonomy in debt management, including the power to approve or reject loans and determine borrowing costs during primary auctions.
Central Bank of Kenya has already stopped using placing agents for selling government securities, eliminating the 0.15 percent commission previously paid to stockbrokers, custodian banks, and authorized securities dealers.
Will this centralization of debt issuance under the Treasury lead to more efficient borrowing, or could it potentially undermine the checks and balances necessary for sound fiscal management?.
Meanwhile, Liquidity in the money market remained stable during the week ending January 16, supported by CBK’s open-market operations.
Commercial banks held excess reserves of Sh15.1 billion above the 4.25% cash reserve requirement (CRR).
The average interbank rate rose to 11.33% on January 16, up from 11.12% on January 9. The number of interbank deals increased from 46 to 55, with the average value traded rising from Sh30.9 billion to Sh34.4 billion.
In Treasury auctions, the January 16 Treasury bill auction received bids totaling Sh18.9 billion against an advertised Sh24 billion, achieving a performance rate of 78.6%.
Interest rates for the 91-day, 182-day, and 364-day Treasury bills continued to decline:
91-day bill: 9.56% (down from 15.9% mid-2024).
182-day bill: 10% (down from 16.7%).
364-day bill: 11.3%.
The January 15 Treasury bond auction for reopened 15-year and 25-year fixed-rate bonds was oversubscribed, receiving bids worth Sh59 billion against an advertised Sh30 billion, representing a performance rate of 196.7%.
Interest rates for these bonds, which peaked at 19% mid-2024, have since declined to 15.68%.
In other news, the Central Bank of Kenya (CBK) demonstrated resilient performance in FY 2023/24 despite significant economic challenges.
The Bank recorded a net deficit of KSh 24,342 million compared to a surplus of KSh 150,494 million in FY 2022/23, primarily due to an unrealized exchange loss of KSh 73,555 million as the Kenya Shilling strengthened against the US Dollar.
However, the Bank's operating surplus improved to KSh 49,213 million from KSh 19,005 million the previous year, driven by higher average returns on securities portfolio and deposits.
Under the leadership of Governor Dr. Kamau Thugge, CBK implemented reforms to enhance market efficiency and macroeconomic stability, including introducing a new inflation-targeting monetary policy framework, the Kenya Foreign Exchange Code, and launching the Dhow Central Securities Depository.
These measures helped maintain overall inflation within the target range of 5±2.5%, with inflation declining to 4.6% in June 2024 from 7.9% in June 2023, while the Kenya Shilling appreciated by 17% in early 2024.
The banking sector remained stable and resilient during the period, with strong liquidity and capital adequacy ratios.
Gross loans and advances increased by 1.5% to KSh 4.04 trillion, though gross non-performing loans rose to KSh 657.6 billion from KSh 576.1 billion. CBK’s consolidated assets grew to KSh 1,960,317 million from KSh 1,783,209 million, with liabilities increasing to KSh 1,560,359 million.
The DhowCSD has significantly improved market efficiency and financial inclusion, garnering international recognition.
Looking ahead, CBK’s 2024-2027 Strategic Plan, themed 'Good to Great,' focuses on resilience, digital transformation, service excellence, and human capital development.
Elsewhere, The National Treasury is implementing the Treasury Single Account (TSA) to consolidate all government funds and improve public cash management.
Starting in July, all 47 counties will be migrated to the TSA, aiming to gain visibility of public finances and control to improve budget execution speed and transparency.
The TSA is a unified structure of government bank accounts that enables the consolidation and optimal utilization of government cash resources.
The implementation will be rolled out in three phases, with the first phase involving the migration of all state organs and the second phase involving county governments in consultation with the Intergovernmental Budget and Economic Council.
The implementation of Kenya's Treasury Single Account marks a significant milestone in East Africa's public financial management reforms, building on similar initiatives in Tanzania that demonstrated improved fiscal discipline and reduced borrowing costs.
With over 33,000 government bank accounts currently scattered across Kenya's banking sector holding approximately KSh 509.8 billion (10.4% of total banking sector deposits), this consolidation represents the most ambitious public finance reform since the 2012 Public Finance Management Act.
Kenya's hybrid TSA model allows agencies to maintain linked accounts, but the 24-hour transfer of funds to the main TSA account will fundamentally change government banking relationships.
Commercial banks must find new deposit sources to replace their large government funds, which could affect their liquidity and lending.
Tanzania's experience suggests that well-capitalized banks can adapt through efficiency and diversification.
However, potential pitfalls remain. Will the TSA be sufficiently flexible to accommodate the unique needs of different counties? How will the government address concerns about potential delays in fund disbursement, particularly for essential services at the county level? And critically, will this increased transparency translate into genuine accountability and reduced corruption?.
The true measure of success will lie not just in consolidating funds, but in fostering a culture of fiscal discipline and efficient resource utilization across all levels of government.
Finally, Commercial bank lending to Kenya's private sector contracted by 1.1 percent in the year to November 2024, marking the first annual decline since September 2002, with outstanding loans falling by Sh41.1 billion to Sh3.813 trillion from Sh3.854 trillion a year earlier.
The contraction, particularly affecting manufacturing, finance and insurance, trade exports, and construction sectors, is attributed to high borrowing costs and the strengthening shilling's impact on foreign currency-denominated loans, despite the Central Bank of Kenya (CBK) reducing its benchmark rate from 13 percent to 11.25 percent since August.
Despite CBK's rate cuts, commercial banks have maintained elevated lending rates, with average rates rising from 16.84 percent in August to 17.22 percent in November, prompting criticism from CBK Governor Kamau Thugge over banks' quick response to rate increases but slow adaptation to decreases.
The Kenya Bankers Association has committed to reducing lending rates following meetings with CBK, citing structural challenges such as rising loan defaults and competition from government securities as factors in their delayed response, though deposit rates have already decreased from peaks of 11.28 percent in July to 10.41 percent in December 2024.