Treasury overdraft at CBK hits legal limit of Sh34.2bn

Treasury Building in Nairobi. The State has raised its overdraft at the Central Bank to the legal limit of Sh34.2bn. FILE 

By George Ngigi

In Summary

• Latest data released by the CBK shows the Treasury’s overdraft has risen by Sh8.8 billion from the previous legal limit of Sh25.4 billion.
• The CBK report showed other domestic debt, which includes advances from commercial banks, also went up by Sh400 million.

he Treasury’s overdraft at the Central Bank of Kenya (CBK) has hit the legal limit of Sh34.2 billion, shutting a handy borrowing window for the State at a time when tax collection lags behind soaring expenditure.

Latest data released by the CBK shows the Treasury’s overdraft has risen by Sh8.8 billion from the previous legal limit of Sh25.4 billion. The government is allowed by law to overdraw from its CBK account an amount equal to five per cent of the last audited annual revenues.

Treasury officials said the government increased its overdraft following conclusion of audit for the 2010/11 financial year, but declined to be quoted discussing figures that have not been released publicly.

“The most recent audited government revenues allow room for overdraft of up to Sh34.2 billion,” said the senior Treasury official.

The 2010/11 audited revenues are estimated to have been Sh681.8 billion based on the new overdraft limit. The law, however, requires that the Treasury clears the overdraft by June 30 every year.

The decision by government to take up extra credit as soon as the opportunity arose has raised eyebrows, indicating a possible cash crunch at the Treasury.

(Read: Kenya’s new president to inherit a broke Treasury)

“Question is why the urgency to increase the overdraft at a time when it is doing a bond auction. It shows there is some kind of urgency,” said Alex Muiruri, a fixed income analyst at African Alliance Investment Bank.

The CBK report showed other domestic debt, which includes advances from commercial banks, also went up by Sh400 million.

A Treasury issue of five-year and 15-year bonds through which it targets to raise Sh25 billion is closing this week.

Overdraft uptake by the government is ordinarily equated to printing of money and is believed to trigger inflationary pressures. Overdraft is a short term debt which indicates that the money is not meant for development expenses but rather recurrent obligations such as payment of wages.

Its increase has pulled down the average age of domestic debt to four years and nine months from five years and four months at the end of June 2012. Long-term debt helps the Treasury to manage interest payment pressures.

“CBK should be lender of last resort but they (Treasury) are not getting a bad deal given the current rate of 12.5 per cent for one year T-bill,” said Mr Muiruri.

The overdraft position has yielded an interest of Sh2.2 billion from June last year. It is charged at the Central Bank Rate, currently 9.5 per cent. The government has held the maximum overdrawing position of Sh25.4 billion since September last year creating an impression of being in an illiquid position.

The Treasury tapped the overdraft facility in July last year before reducing the advance to Sh15.3 billion in August and later taking up the maximum amount in September.

Electoral and devolution demands have stretched the Treasury’s budgetary expenses. The Treasury had targeted to borrow Sh106 billion from the local market to finance the gap but had to raise the target to Sh137 billion in January in the glare of a widening deficit.

Domestic debt has now risen to a record one trillion shillings pushing the total public debt to more than Sh1.8 trillion.

(Read: The Sh1.8 trillion debt headache for Uhuru government)

Last year, the government further sought permission to increase the foreign debt ceiling to Sh1.2 trillion from Sh800 billion giving it room to turn to raise additional cash from the international markets.

The taxman has already stated it would be difficult to hit this year’s annual revenue target of Sh881.2 billion, revising it downwards to Sh789 billion. In the nine months to March Kenya Revenue Authority had collected Sh560.4 billion.

The poor performance in tax collection has been attributed to slow down of economic activity during the first quarter of the year due to March elections. To conduct the polls the electoral body was allocated Sh17.5 billion from the Treasury.