How banks minted billions from State during Covid

How banks minted billions from State during Covid

The cash crisis that hit the national government last year made lending to the State the most lucrative venture in the pandemic year, a new report shows.

The Economic Survey 2021 released last week shows that, as other industries were battered by the effects of Covid-19, commercial banks took advantage of the government’s borrowing binge to mint billions of shillings.

Treasury’s borrowing from the domestic market shot up 50 per cent to Sh1.3 trillion, as the government sought to remain afloat. The borrowing spree suffocated the private sector, which was squeezed out of the debt market.

This handed banks and other investors a Sh450 billion windfall, explaining the huge profits that commercial banks have been reporting in recent months.

The survey, published by the Kenya National Bureau of Statistics (KNBS) on Thursday, shows that credit to the government grew 50.9 per cent to Sh1.35 trillion up from Sh900 billion in 2019.

Read: Kenya to cut domestic borrowing by half, Uhuru

This is a far cry from credit to the private sector, which grew by 8.4 per cent to stand at Sh2.89 trillion at the end of December 2020. This means that the national government out-competed the private sector, elbowing it out as it sought to plug the budget deficit worsened by the pandemic.

Counties borrowed Sh5.7 billion, a 31.5 percent jump from 2019. Parastatals borrowed Sh85.6 billion, a marginal drop from the Sh88 billion borrowed in the previous year.

Sh893 billion

Over the past five years, Kenya’s budget deficit has increased exponentially. The deficit rose from Sh573 billion in 2016 to Sh893 billion last year. The survey shows that total domestic credit grew by 18.6 per cent from Sh3.66 trillion in December 2019 to Sh4.3 trillion in December 2020. The data also shows how commercial banks slammed the brakes on lending to individuals due to the growing risk of default. This left them with excess cash, which they preferred to lend to the government, seen as a safer haven.

The report notes that the liquidity ratio for commercial banks rose to 56.5 per cent as of the end of December 2020, up from 52.6 per cent in December 2019.

“This was significantly higher than the statutory requirement of 20 per cent. The share of total credit advanced to private enterprises decreased from 54.7 per cent as at the end of December 2019 to 52.5 per cent as at the end of December 2020,” the survey notes.

Read also: Kenya borrowed Sh60bn every month this year, CBK report shows

Greater borrowing by the government gifted banks a major windfall, as they opted to lend to the State, given the huge deposits they were sitting on.

This saw the assets of the entire banking sector grow by 13.9 per cent from Sh4.46 trillion in December 2019 to Sh5 trillion in 2020.

Private sector

“The growth was mainly driven by a 50.9 per cent and 8.4 per cent increase in uptake of credit by the national government and the private sector, respectively,” the report notes.

By refusing to lend to the private sector, banks denied companies the cash they needed to keep afloat, partly leading to the high number of job losses that cut across all cadres of jobs in the informal and formal sectors.

In the last five years, total government debt has nearly doubled from Sh3.2 trillion in 2016 to over Sh6 trillion, KNBS data shows.

Broad money supply increased from Sh3.5 trillion in December 2019 to Sh3.9 billion in December 2020. Overall liquidity grew by 14.2 per cent in the review period to Sh5.7 trillion in December 2020.

The survey showed that 737,000 jobs were wiped away by the Covid-19 pandemic in Kenya last year as the economy contracted by 0.3 percent.

The contraction of the gross domestic product (GDP) coincided with the rebasing of the economy, neutralising the net effect of the shrinkage on the actual size of Kenya’s economy.

The revision expanded the total size of the economy by nearly Sh515 billion to Sh10.753 trillion in 2020 compared with Sh10.256 trillion in 2019.