The government will spend Sh253.725 billion on interest payments on domestic loans alone in the current financial year, pointing to increased borrowing costs from local investors who are demanding higher rates amid weakening shilling.

Projections by the National Treasury before the National Assembly’s Debt and Privatisation Committee show that domestic debt interest payments, which essentially dictate the cost of borrowing, will rise sharply to hit Sh628.264 billion by the end of June 2024.

This is 67 per cent on top of the expected Sh374.539 billion bond redemption, which is the principal amount that investors loaned the government. In total, domestic debt service is projected to be Sh1.003 trillion during the period.

Recurrent expense

The hike in interest payments — a recurrent expense settled through taxes — continues to inflate the budget size of President William Ruto’s administration, which has been forced to introduce a raft of new tax measures to meet budget pressures.

Domestic debt service will account for about 62 per cent of total public debt service in the current financial year even though it accounts for only 47 per cent of total debt stock. External debt service is projected to be 622.47 billion, bringing the total debt service to Sh1.625 trillion by June 2024.

Treasury says it will gradually move to issuing bonds that are due for payment in 15 to 25 years as part of debt management, a strategy that will offer reprieve and reduce debt maturing in the short term.

“From the domestic sources, the objective is to lengthen the maturity and deepen the domestic markets through the issuance of medium to long-term debt securities,” Natiopnal Treasury Cabinet Secretary Njuguna Ndung’u (pictured) told the Committee.

An increase in interest payments in the current budget cycle, coupled with a budget rollover from the previous year, has seen the total budget expand to Sh3.9 trillion.

Interest rates on Treasury bills –which mature in three to 12 months— currently range between 14.8 per cent and 15.0 per cent— while the coupon on most bonds is now averaging 17.9 per cent.

Although this implies that the bondholders are earning higher returns, it reduces the risk of a large number of T-bills being replaced within a short timeframe.

“Minimising refinancing risks by lengthening the Average Time to Maturity (ATM) of the total portfolio and reducing the debt maturing in one year as a percentage of the total debt and GDP (gross domestic product),” says Treasury.

For instance, the average time in which the domestic debt will be due for repayment stood at 7.4 years in June 2023, but this is projected to extend to 8.5 years in the next three years ending June 2026.

Local investors

The hike in the cost of lending from local investors has forced the treasury to trim its domestic borrowing target by Sh172 billion from the previously approved budget estimate of Sh583 billion.

The reduced local borrowing targets are expected to cool off investors’ appetite, thus giving the government a leeway to spend less in financing internal debt.

Issuance of longer-dated bonds has seen pension funds, currently owning 32 per cent of domestic debt, grow their investments in the fixed income securities at a faster rate than commercial banks, which largely rely on deposits.

This is because pension schemes prefer long-term investment since their customers will require their money after many years, giving them space to invest and recoup the returns.