Kenya’s National Treasury Avoids Bond Switch Option in Debt Management Plan for Fiscal Year 2023/2024

Kenya’s National Treasury Avoids Bond Switch Option in Debt Management Plan

Kenya’s National Treasury has made the decision to avoid the bond switch option in its debt management plan for the 2023/2024 fiscal year. This decision comes as a response to rising interest rates on treasury bills and bonds, with investors demanding compensation for lending to a government facing cashflow constraints.

According to Haron Sirima, the director-in-charge of debt management, the bond switch option would add to higher interest costs, which would be inconsistent with the objectives of the 2023 medium-term debt strategy. Yields on government securities have remained elevated over the past 18 months, further complicating the debt management process.

A bond switch is a mechanism through which the government replaces existing shorter duration treasury bills and bonds with long-duration papers. However, with interest rates on treasury bills and bonds on the rise, the National Treasury has opted to avoid this strategy for now.

The government is seeking to raise Ksh60 billion ($458.01 million) through the re-opening of various bond issues in the June 2024 Primary Bond Auction. This funding is earmarked for budgetary support in the 2023/2024 fiscal year.

Overall, the government aims to raise a total of Ksh1.24 trillion ($9.46 billion) from treasury bills and Ksh432 billion ($3.29 billion) from treasury bonds for the fiscal year. Commercial banks control a significant portion of the government debt market, followed by pension funds, insurance companies, parastatals, and other investors.

While Kenya’s public debt remains sustainable, there is a high risk of debt distress, according to a Debt Sustainability Analysis conducted in December 2023. The National Treasury is working to minimize refinancing risk and interest rate risk through strategic debt management practices.

As the government continues to navigate its debt management strategy, the decision to avoid the bond switch option reflects a cautious approach to managing the country’s debt burden in the face of challenging economic conditions.