IMF warns counties against Central Bank debts

Money Markets

The Central Bank of Kenya headquarters in Nairobi. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

The International Monetary Fund (IMF) has warned counties against borrowing from the Central Bank of Kenya (CBK), despite many facing spending pressures and uncertain revenue collection.

The fund said the debt would complicate monetary policy implementation given borrowing directly from the CBK is normally viewed as printing money that would require frequent mopping up to prevent demand-driven escalation of prices.

As things stand, counties are legally allowed to borrow from the CBK with the approval of the Treasury and county assemblies.

“Counties’ access to the Central Bank of Kenya’s overdraft facility could complicate monetary policy implementation,” said the IMF in a statement where it announced approval of an extra Sh8 billion for Kenya, to bring the total so far released to Sh65 billion, under the precautionary facility to stabilise the local currency.

The warning comes as it emerged a week ago the National Treasury had itself nearly used up its entitlement for overdraft at the CBK. As at September 4, the Treasury had borrowed just over Sh40 billion using the overdraft.

The counties have not borrowed any money so far from the CBK, said IMF Nairobi office resident representative Armando Morales in response to a query from the Business Daily.

“Counties have not borrowed from the Central Bank, but they are entitled to do so according to regulations,” said Mr Morales.

The Bretton Woods institution, however, commended the devolved units for their efforts to improve expenditure control and efficiency.

“The authorities have taken a number of steps to strengthen expenditure control and improve the efficiency of public spending,” said the IMF.

The IMF is concerned that the counties could decide to exploit the borrowing window given they have been complaining the National Treasury has not been releasing cash allocated to them in good time.

The fear may also have been sparked by the fact that some of the county governments have actually borrowed from commercial banks without the required authorisation.

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The law requires such loans be approved by county assemblies and guaranteed by the National Treasury. The Treasury Cabinet secretary is obligated to report to Parliament any loans incurred by either the national or county governments.

“A county government may borrow only (a) if the national government guarantees the loan; and (b) with the approval of the county government’s assembly,” says Article 212 of the Constitution.

The Controller of Budget has recently revealed that Machakos, Murang’a, Uasin Gishu and Trans Nzoia had borrowed cash without authorisation in the course of the first nine months of 2014-15 fiscal year.

“The challenges that hampered effective budget implementation [included] irregular borrowing from local banks through overdraft facilities,” said Controller of Budget Agnes Odhiambo in the report for the quarter ended March 2015.

Treasury secretary Henry Rotich has also warned counties to be careful when contracting debt given that they already have substantial liabilities. In the 2015/16 Budget Estimates, Mr Rotich revealed that old local authorities owe the National Treasury nearly Sh8 billion.

“As the county governments become more established, caution is required before they consider borrowing. Many of them have inherited substantial liabilities. It should be underscored that even if the national government takes over to write off the inherited debts and guarantee new borrowing, this will require Kenyans to forego other critical services,” said Mr Rotich.