Financial crisis looms as Treasury asks banks to recall county loans

The National Treasury building in Nairobi. PHOTO | FILE 

By ALLAN ODHIAMBO, aodhiambo@ke.nationmedia.com

In Summary

• Move follows reports by the Auditor-General Edward Ouko which indicated that some counties are borrowing domestically without the national government’s guarantee.
• There is growing concern over mounting liabilities by county government amid fears that the trend could spiral to the national economy.

Counties face a financial storm after the National Treasury asked banks to immediately recover loans advanced to the devolved units without its consent.

The directive effectively closes the financing window that counties have exploited as stop-gap measure as they await the release of money meant for the financial year from the national government.

The move follows reports by the Auditor-General Edward Ouko which indicated that some counties are borrowing domestically without the national government’s guarantee. Mr Ouko has called for an audit of such debt.

Official data indicates that four counties procured commercial loans totaling Sh1.9 billion in the fiscal year to June 2014, majority of it accruing to Nairobi County which, in 2014/15, took out additional Sh300 million debt.

“This raises several concerns, most critically that the debt is not guaranteed by the national government as required by the Constitution (Article 212) and the Public Finance Management Act(PFMA) (Sections 58 and 59),” the Treasury said.

It added: “Neither has the debt been approved by Parliament. Secondly, the purposes for the borrowings are unclear -- legally, counties may only borrow for capital projects with high economic growth potential.”

The Treasury further said significant county resources, averaging about Sh1 billion annually over the last two financial years are being redirected from service delivery towards loan repayment and interest and warned it would audit such debt.

“In the meantime, all bank and non-bank financial institutions are being alerted to cease plans for further extension of credit to counties, commence recovery of un-guaranteed loans, and familiarise themselves with constitutional, legal and regulatory provisions on county borrowing,” it said and urged county Treasuries to put in place mechanisms to ensure full compliance with the PFMA provisions on such liabilities.

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There is growing concern over mounting liabilities by county government amid fears that the trend could spiral to the national economy.

Statistics showed that in the fiscal year 2014/15, financial liabilities of counties grew to Sh 1.1 billion, from Sh 0.5 billion in the previous years. The liabilities comprise deposits and retentions held on behalf of third parties.

“Fourteen counties accounted for the entire stock of liabilities, with Migori County being responsible for nearly 60 per cent. It is imperative that counties make commitments against their budgets, and that amounts relating to outstanding contracted services and works be re-voted in subsequent budgets,” the Treasury said.

As part of the effort to discourage the growth in liabilities, the Treasury said, the cash accounting policy already being used by Government Ministries Departments and Agencies(MDAs) will be fully enforced at the county level.