Medium Term Debt Management Strategy (MTDS) has been designed as a public finance management tool to facilitate decision making based on the evaluation and management of public debt related risks and fiscal deficit financing through a cost-risk analytical framework. To that extent, the MTDS is required to provide the following information:
- The total of debt as at the date of statement
- The sources of loans made to the national government and the nature of guarantees given by the national government
- The principal risks associated with those loans and guarantees
- The assumptions underlying the debt management strategy
- Analysis of the sustainability of the amount of debt, both actual and potential.
The 2022 MTDS provided the basis for the chosen strategy for financing the fiscal deficit of KES 846.1 billion for FY 2022/23. The MTDS evaluated various borrowing strategies mix of external and domestic sources, while taking into the account the inherent risks in the existing stock debt. The purpose of this evaluation is to ensure specific debt management objectives are met which include:
- Reduction of costs and risks
- Development of domestic financial market institutions
- Ensuring equitable sharing of debt burden between current and future generations
In light of the debt management objectives, the 2022 MTDS considered four financing alternative strategies mix of external and domestic sources {Gross Foreign Financing-25%, and Gross domestic financing-75%; and Net Foreign Financing-32% and Net Domestic Financing-68%} to fund the fiscal deficit for the FY 2022/23 of KES846.1 billion to guide medium term borrowing. The four financing alternative strategies mix include;
- Gradual reduction of T-Bills stock: This is an alternative strategy to finance the fiscal deficit over the medium term in that on the external gross financing, concessional and commercial borrowing were considered at 16 percent and 6 percent respectively with no borrowing from the semi concessional sources. Treasury bonds remain the main source of net domestic financing while the stock of Treasury bills which is a cash management instrument was considered to gradually decline from KES 748,841million in June 2022 to KES 659,615 million in June 2025.
The assumption underlying this strategy was pegged on the following factors:
- Concessional external loans priced at an average fixed rate of 0.75 percent, with a 35-year tenor and up to 10-year grace period.
- Commercial borrowings relating to Export Credit Agencies financing contracted at a reference rate plus a margin.
The reason for the choice of this strategy is government reducing refinancing risks on the budget by domestic borrowing costs to long term concessional and commercial borrowing with a longer repayment period.
- Increased Concessional Borrowing and Constant Treasury Bills Stock: This option leans more on the use of concessional funding and reducing commercial borrowing, thereby reducing the cost of debt. This strategy is based on the assumption that commercial borrowings relate to Export Credit Agencies financing contracted at a reference rate plus a margin and are susceptible to unpredictable market volatility raising the costs of debt financing arising from foreign exchange rates. This therefore is a reason for the chosen strategy.
- Increased Concessional borrowing and Reduction of T-Bills Stock: This strategy would maximize external concessional borrowing and reduce refinancing risk in the domestic debt portfolio. The option involves issuing medium to long term Treasury bonds and reduce the stock of Treasury bills over the medium term. In terms of net financing, the option assumes 70 percent domestic and 30 percent external financing.
This strategy is based on the assumption that pricing on the domestic debt instruments is based on the prevailing market yield curve hence a refinancing risk since it falls due in the short-term constraining the budget.
- Debt Refinancing and Reprofiling Strategy: The strategy targets debt reprofiling through gradual increase in medium term Treasury bonds issuance and liability management operations on external debt. This option would be composed of 62 percent and 38 percent net financing from the domestic and external sources, respectively. In terms of gross borrowing, external and domestic financing would account for 25 percent and 75 percent, respectively. On the external financing, concessional, semi concessional and commercial would account for 8 percent, 5 percent and 13 percent, respectively. Domestic financing would be mainly through medium to long term instruments.
Author: Eddie Opiyo