Small businesses to bear costly credit as state seeks local loans

Small businesses risk losing out on cheap credit in the local market after the National Assembly adopted the 2022 Medium-Term Debt Management Strategy (MTDMS) yesterday.

The MPs approved a report of the Budget and Appropriations Committee (BAC) on the document that is prepared by the National Treasury, which allows the government to borrow more from the local market at the expense of micro, small and medium- sized enterprises (MSMEs).

The 2022 MTDMS is a shift from previous borrowing strategies. It favours government borrowing from the domestic market over the external concessional loans to finance the Sh846 billion deficit in the Sh3.34 trillion budget for the 2022/23 financial year.

The MTDMS recommends a gross foreign financing at 25 percent and gross domestic financing of 75 percent. This means that local commercial banks will find it more profitable to lend to the government at high interest rates because it is less risky.

The adoption of the MDTMS will also see the debt ceiling surpass the Sh9 trillion limit that was enacted by Parliament in November 2019. 

Attempts by the BAC to slash the country’s fiscal deficit to Sh400 billion in the 2022/23 financial year so as to avoid the risk of violating the debt ceiling was overturned by the House via an amendment to the committee’s report.

As of December 31, 2021, the country’s debt stock stood at Sh8.2 trillion. It is projected to shoot to Sh8.6 trillion by the end of June, only Sh400 billion to the legal limit. This is if Parliament does not amend the Public Finance Management (National Government) Regulations to increase the country’s debt ceiling beyond the Sh9 trillion mark.

But even as BAC, which is chaired by Kieni MP Kanini Kega, recommended that the House approves the MTDMS, it warned that increased borrowing by the government from the local market will raise the cost of loans for MSMEs.

A recent National Economic Survey report by the Central Bank of Kenya (CBK) shows that MSMEs constitute 98 per cent of all businesses and contribute three per cent of the GDP.

Domestic debt

The MTDS evaluates various borrowing strategies, taking into account the inherent risks in the existing debt stock.

This is to ensure that specific debt management objectives are met. BAC noted that a review of MTDS indicates a higher interest rate and refinancing risks of the domestic debt portfolio compared to the external debt as the reason the government should borrow more from the local market.

The committee said the risks are attributed to domestic debt having a much lower average time to maturity of 6.9 years compared to the 10.8 years for exxternal debt.

While the National Treasury argues that borrowing more from the local market will cushion the debt stock from volatility in the global financial markets, this goes against previous recommendation by the Parliamentary Budget Office (PBO).

“Given increased caution in lending by commercial banks and the increased borrowing by the government, the private sector credit will be negatively affected hampering private sector growth,” PBO, which advises parliament and its committees on fiscal matters, warns in a report to the House. “The government should avoid crowding out the private sector in the market,” the report adds.

In November 2019, Parliament amended the Public Finance Management (National Government) Regulations to increase the country’s debt ceiling from 50 per cent of the GDP to an absolute numerical figure of Sh9 trillion. 

Part of the push by the National Treasury to amend the regulations was to free up the local borrowing space to MSMEs.

Mr Tony Watima, an economist, said increased domestic borrowing remains a huge challenge for the country. 

“The National Treasury always goes for local borrowing because it is the easy way out, but it is expensive compared to foreign borrowing. It shows that the fiscal consolidation that the government keeps talking about never takes effect,” Mr Watima told the Nation. 

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