The Central Bank of Kenya (CBK) has increased its monthly target for bond sales to over Sh100 billion in the current fiscal year, up from an average of Sh70 billion in the previous year. This move highlights the growing pressure on the domestic market to fund the budget deficit. The Treasury is now conducting two bond sales per month to meet its domestic borrowing target of Sh987 billion set in the June 2026 budget.
To meet the domestic borrowing target, the CBK is selling Sh100 billion bonds this month in two tranches of Sh50 billion each. The first sale, which comprised reopened 15 and 20-year papers from 2019, raised Sh57.5 billion from offers of Sh80.6 billion. The second issuance, which opened on Tuesday, comprises reopened 30-year bonds initially floated in February 2011 and March 2026.
The local market is expected to provide 80 percent of the State's full-year borrowing target of Sh1.2 trillion, with external lenders contributing Sh247.2 billion. The CBK governor, Kamau Thugge, believes that local lenders have room to lend higher amounts to the government without distorting the growth of lending to the private sector.
Governor Thugge expressed confidence that the government can achieve its budget deficit financing even without a funding programme from the International Monetary Fund (IMF). He attributed this confidence to Kenya's fairly deep domestic financial market, which enables the mobilization of required resources.
To address refinancing pressure, the State has started issuing one switch bond per month, targeting between Sh10 billion and Sh20 billion. This move aims to ease pressure on repaying maturing debt. The Treasury's strategy involves managing debt repayment and meeting the budget deficit target.
The increased bond sales target reflects the government's efforts to finance its budget deficit through the domestic market. The CBK's approach involves balancing the need for funding with concerns about crowding out businesses and households from bank loans. The governor emphasized that local lenders can accommodate the higher lending amounts without negatively impacting the private sector.
The CBK's bond sales strategy is crucial in meeting the government's domestic borrowing target. With the local market expected to provide a significant portion of the funding, the CBK's efforts to manage debt repayment and maintain a stable financial market are essential. The government's ability to achieve its budget deficit financing goals will depend on the success of these bond sales.
Key points
- The Central Bank of Kenya has raised its monthly bond sales target to over Sh100 billion to fund the budget deficit.
- The local market is expected to provide 80 percent of the State's full-year borrowing target of Sh1.2 trillion.
- The government is confident of achieving its budget deficit financing without a funding programme from the International Monetary Fund.
