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Despite a budget deficit, a marked increase in domestic debt, the Central Bank of Kenya is predicting a rosy future, based on a projected growth rate of 5.5 per cent this year and low interest rates.
However, overall inflation dropped to 14.9 per cent in April compared with 19.1 per cent in March. In its monthly economic review for April released on Tuesday, Central Bank of Kenya (CBK) says the onset of the long rains should see inflation begin to level off and drop, after a prolonged drought pushed up food prices, and created a budget deficit of Sh30.9 billion. Domestic debt increased from Sh315.6 billion at end of June 2005 to Sh338.6 billion in February this year, as the Government borrowed heavily through the bond market to finance drought relief activities. External debt declined from Sh434 billion to Sh407.1 billion during the same period. The deficit was 2.2 per cent of the country's gross domestic product (GDP) – a measurement of locally-based economic activity – in the first eight months of the Government's current financial year, which ends on June 30. Notable among the events in the period under review was the improved performance of the Nairobi Stock Exchange equity market in March this year, largely due to the KenGen share offer of 659 million shares that was oversubscribed to the tune of Sh26 billion. The NSE 20 Share Index increased to 4,101.64 points from 4,056.6 in February, while turnover grew by 8.8 per cent to Sh3.69 billion from Sh3.4 billion in the same period. The number of shares traded rose 12 per cent to 69.2 million from 62 million shares, while market capitalisation increased by Sh14.5 billion to Sh484.2 billion from Sh469.7 billion in February 2006. TPS East Africa also listed 89 million shares during the month, following the integration of the Tanzanian hotels with the existing operations of the TPS Ltd Kenya. The Bond market turnover took a battering in March from falling interest rates, dropping to Sh2.8 billion from Sh4.7 billion in February. The most traded bond was the eight-year Treasury Bond with a coupon rate of 13.25 per cent per annum. From March to May 2006, Treasury bonds totalling Sh19.2 billion, and Treasury bills worth Sh58.6 billion will mature. At the end of February the Government owed non-bank investors 61.3 per cent of total domestic debt, with National Social Security Fund (NSSF) held the remaining 38.7 per cent. CBK says the economic outlook for its next financial year which begins on July 1, remains good, thanks largely to the onset of the long rains and stable domestic interest rates which have remained that way for over two years. Short-term interest rates declined in March, with the 91-day Treasury bill rate falling to 7.60 per cent, from 8.02 per cent in February, reflecting increased liquidity in the market. Another factor that serve to boost the current stability in domestic interest rates is the low expectations for inflation following the onset of March/April rains and due to consistently low underlying inflation. | 
