The Treasury wants the Central Bank of Kenya (CBK) stripped of its role of selling bonds and Treasury bills on behalf of the government, as part of proposed reforms aimed at reducing the State’s borrowing costs.
If the proposed amendments to the law are approved, the Public Debt Management Office (PDMO), a department of the Treasury, will be the one to issue the government securities.
“Support for legal amendments to ... empower PDMO to perform its functions as principal in issuance of government securities,” says the Treasury in its debt management plan for 2025.
“Consolidate auction functions under PDMO as the principal in domestic debt borrowing and not under a committee -- to make PDMO more accountable in public debt issuance.”
The proposals have set up Treasury Cabinet Secretary John Mbadi and CBK Governor Kamau Thugge for a potential clash.
Insiders at the CBK told the Business Daily that the apex bank would lobby to have the Treasury’s plan shelved.
Currently, Treasury bills, or short-term government debt, and bonds, which are medium to long-term government debt, are issued by the CBK, which also acts as the Treasury’s fiscal agent.
The government has an ambition of lowering the interest rate on the debt securities to below 10 percent and sees the status quo as an obstacle to realising this goal.
Currently, the Auction Management Committee (AMC) is responsible for determining individual auction results. It draws its membership from the Treasury and the CBK departments responsible for economic research, banking, monetary policy formulation and implementation.
The far-reaching policy proposal might move the country’s fiscal and monetary policy environment closer to the one of the United States.
In the US, government securities are issued by the US Treasury, while its central bank, the Federal Reserve, restricts itself to monetary policy.
Central banks in the Netherlands and France also do not act as the government’s fiscal agents in the issue of government debt instruments. However, central banks in African nations such as Uganda and Tanzania run the auctions of bonds and T-bills in their countries.
Last year, President William Ruto directed debt managers to ensure that interest rates do not rise above 10 percent, an uphill task given that interest rates are determined by the market through auctions.
Interest on Treasury bills and bonds hit highs of 18.4 percent and 16.9 percent respectively last year, reflecting a tight financial environment as the CBK raised rates to support the shilling and fight inflation.
The returns on most of the fixed income securities have since dropped significantly but are still in the double digits, above what the executive seeks to borrow at. At the end of January 14, the government’s domestic debt stood at Sh5.89 trillion, with a big chunk of this, Sh4.88 trillion or 85.25 percent, being Treasury bonds, or longer-dated government securities.
Short-term government papers, or Treasury bills, amounted to Sh844.84 billion, or 14.75 percent. Interest payment on domestic debt as a percentage of gross domestic product increased from 5.2 percent in 2023 to 5.4 percent in 2024, noted the Treasury.
To empower the PDMO in its expanded mandate, the Treasury wants to elevate it to a State Department with its own budget.
The Treasury fears that the current public debt legal framework does not provide the PDMO with the necessary autonomy to manage public debt. PDMO is headed by a Director-General.
Although the Treasury retains ultimate responsibility for the final decisions regarding the overall size of borrowing, the CBK makes decisions on issues relating to size and the details of the individual auctions, including interest rates.
Now, the Treasury wants such decisions as determining the cost of borrowing made by the exchequer through the PDMO during a primary auction.
By making it independent, the PDMO will have the power to approve or reject proposed loans, making it easier for it to perform its primary role of managing debt.
Already, the CBK has stopped placing agents —stockbrokers, custodian banks and authorised securities dealers— from selling government securities on behalf of the CBK, a move it believes will also help with debt management.
Placing agents received a commission of 0.15 percent of the values of Treasury bills and Treasury bonds they sold on behalf of the CBK.
“Eliminate commissions paid to third parties on primary auction transactions and on foreign payments,” said Treasury, noting this is part of the revised Fiscal Agency Agreement it has with the CBK.
The commission was introduced as an incentive to stockbrokers, authorised securities dealers and custodian banks to market bonds to their clients, especially high-net-worth investors and offshore buyers who faced hurdles accessing CBK offices.
However, there are fears that the process has been abused. “It’s easy to game the system and even corrupt the regulator,” said a Treasury insider who did not want to be named.
To have control of debt management, “PDMO wants to have greater say and autonomy on securities issuance,” says Churchill Ogutu, an economist at Mauritius-based IC Group.
