Kenya is expected to meet its targeted domestic borrowing in the financial 2017/2018 following reduced credit to private sector amid interest rate caps on commercial banks loans.

The caps have made banks to cut lending to high-risk private businesses and individuals and channel their funds to government securities, with the institutions currently holding 56 percent of the 20 billion U.S. dollars domestic debt.

Nairobi-based investment firm Cytonn noted Monday that the credit squeeze to private businesses would, therefore, enable the government to easily attain internal borrowing target.

“The government is expected to meet its domestic borrowing target for the 2017/2018 fiscal year, as reduced credit to private sector following the capping of interest rates will make it easier for government to meet the target, as institutions channel funds more actively towards government securities,” said the firm in a fixed income brief.

In the last fiscal year, data from the Central Bank showed the government borrowed some 3.7 billion U.S. dollars against a target of 2.7 billion dollars.

A similar target has been placed in this fiscal year as the government accelerates domestic borrowing to fund its activities amid surging appetite from investors.

Last week, investors swarmed the Central Bank with 379 million dollars’ worth of bids for a 291 million dollars bond. The apex bank, however, picked only 254 million dollars of investors’ bids, with most of them being from commercial banks.

Similarly, Cytonn noted the government is expected to meet its foreign borrowing target in the 2017/2018 fiscal year, with budget estimates projected to decline from 4.4 billion dollars to 2 billion dollars, which is the amount that the government has collected so far in the foreign market for this fiscal year.

The government in the fiscal year 2016/2017 borrowed more from internal than external sources despite plans to borrow more from the latter.

Analysts noted the change was due to lengthy borrowing process in the foreign market which made the government turn to the domestic sources to plug a budget deficit.

However, massive internal borrowing comes with various consequences.

According to Cytonn, it creates uncertainty in the domestic interest rate environment by exerting upward pressure on yields, resulting in longer term papers not offering investors the best returns on a risk-adjusted basis. Enditem

Source: Xinhua/NewsGhana.com.gh