IMF backs Kenya’s higher interest rates
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IMF backs return of higher interest rates to lift uptake of Treasury bonds to help the exchequer meet its domestic financing needs
IMF backs return of higher interest rates to lift uptake of Treasury bonds to help the exchequer meet its domestic financing needs.
The International Monetary Fund (IMF) has reiterated its position that greater interest rates should be paid to holders of government securities to encourage subscriptions.
In a new report, the fund indicated that challenges with the government’s net domestic financing program for the fiscal year 2022–2023 were caused in part by lesser rates for medium–to–long-term bonds.
This is as investors switched to shorter-dated securities represented by Treasury bills whose yields have increased by a faster rate in contrast.
“Treasury bill rates have gone up further but smaller increases in long-term domestic bond rates contributed to the government’s net domestic financing challenges as demand shifted to the shorter end of the yield curve, raising rollover needs,” said the IMF.
T-bill interest rates increased between 2.05 percent and 4.04 percent between the end of May and June 23, according to a fund analysis.
In contrast, the return on bonds with a maturity of two to five years increased by two percent to two and a half percent, while the return on bonds with a maturity of six to ten years increased by 1.2 to two percent.
In contrast, the increase in rates for bonds with longer maturities was limited to a 0.59 to 1.14 percent range.
The Treasury has avoided long-term assets in order to avoid locking in high-interest rates for many years, which has coincided with the slower revisions in returns on longer-dated bonds.
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The Central Bank of Kenya recently closed the sale of a new five-year bond, which set an interest rate of nearly 17 percent while yields on the shorter-timed T-bills are slowly edging towards 13 percent.
In the opening half of 2023, the average time to maturity for issued Treasury bonds stood at 7.4 years in contrast with a tenure of 12.9 years in a similar period in 2022.
The new IMF report reinforces the global lender’s view on government’s domestic financing where the institution previously backed higher returns to entice Treasury bond investors.
While on a country visit, IMF Managing Director Kristalina Georgieva said higher returns on bonds could help the exchequer meet its domestic financing needs.
“If the shilling is artificially held high, that suffocates the domestic market. Likewise, if you keep the reward for bondholders artificially low, what happens is you are likely to run out of money when you don’t have access to external financing,” she said.
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