KENYA`S EXTERNAL BORROWING DECISION

The government of Kenya has opted to go for external funding in order to bridge its budget deficit. The government hopes to raise Ksh. 45bn ($500M) through issuance of a 10yrs Eurobond. Treasury claims that this is in line with the government policy of maintaining a stable and affordable interest rate within the economy.

This might sound alarming to many, considering the current debt crisis in Greece; but the policy makers are wise and I tend to support them on this.

Internal borrowing goes in form of the treasury bills and bonds. These government papers attract a high rate of interest (about 9%-12%) as compared to fixed deposit or savings investments which offer much lower returns.

When the government borrows internally, many people run down their savings in order to buy the government papers which offer high returns. Institutional investors such as the insurance companies and the commercial bank too run for the same treasury bills.

The resultant effect of this rush to the government papers is less deposits in the commercial banks to lend to the borrowing public and firms. As usual, the forces of demand and supply take charge, and since money is in short supply but in high demand, the interest rates charged by the commercial banks rises. This is the chain of events that the government wants to avoid by borrowing externally.

Another advantage of this external borrowing is the fact that the government will be able to borrow at lower rates as compared to borrowing internally. As foresaid, internal borrowing will attract interest rates of not les than 9%. However, external borrowing might turn to be much cheaper.

Taking Nigeria for instance, they issued a 10yrs Eurobond on January this year which will attract an interest rate of 6.75%. Senegal on the other hand issued also a 10yrs Eurobond on 2007 which attracts an interest rate of 8.25% and it carried a premium with it.

Now considering our situation in Kenya, and assuming we will be charged the high rate of 8.25%, the external borrowing will of course be 0.75% cheaper than internal borrowing and that is a plus.

The only challenging bit will be to ensure that the money borrowed is well utilized, in order to generate enough revenue to pay the interests and the principle when due.

We believe as Kenyans and with the new constitution, we can count on our government to do that, even as we aim at reducing the budget deficit through other monetary and fiscal policies.