The National Treasury has laid the ground for county governments to take out loans externally or internally to fund projects.
Counties have been suffering from lack of cash but have been unable to borrow.
The government has put into effect the Public Debt and Borrowing Policy 2020 that was approved by the Cabinet in March.
Now the National Treasury Cabinet Secretary or a county Executive Committee member for Finance may initiate the process of obtaining a loan.
“All borrowing by the national and county governments will be issued or contracted by the Cabinet Secretary (Treasury) or County CECs (Finance),” the policy reads.
This means counties can now venture into the markets to access funds to undertake development projects with payments to be made over time, as can the national government.
The monies will be applied to “fund projects that demonstrate potential compensating revenue streams or credible environmental protection value.”
Environmental rehabilitation projects or refinancing debt related to green-eligible projects will also be prioritised.
Counties will either have their loans guaranteed by the National Treasury or the Treasury will borrow and on-lend to the devolved units - at their request.
“The entity for which the Treasury will occasion a borrowing will be required to demonstrate that it is financially capable of meeting debt service obligations,” the policy reads.
Counties have been unable to borrow after the Intergovernmental Budget and Economic Council (IBEC) rejected their proposal for short-term loans from the Central Bank of Kenya.
This was after East African Community member states agreed that governments should avoid borrowing from their central banks.
To access loans, county assemblies would have to approve the county strategy paper, medium-term debt strategy and annual budget estimates.
National government entities would need the Budget Policy Statement, annual budget estimates and medium-term debt strategy.
The policy also entrenches the Public Debt Management Office (PDMO) responsible for day-today operations on public debt.
The PDMO will monitor county government debt operations and maintain a debt database, including a report on performance of county government guarantees.
“The PDMO will assist a county government at its request in its debt management and borrowing,” the policy reads.
The National Treasury will institute a recovery mechanism for any on-lent or guaranteed debt in the event of default by any entity.
This is the first formal document to manage public debt in the country, hence, a departure from the ad hoc public debt policy pronouncements.
Treasury CS Ukur Yatani Yatani says with the policy, “there will be improvement in the quality of decisions and better articulation of policy goals.”
He adds the policy provides “clearer guidelines for the structure of debt issuance, and a demonstration of commitment to long-term capital and financial planning".
Yatani says the document will effectively guide public borrowing practices and coordinate decisions in debt management.
Even so, with the policy paving way for counties to borrow, taxpayers would be exposed to an ever-increasing debt stock.
“Any expenses incurred by the CS in respect of the guarantee shall be a debt due to the national government from the borrower whose loan was guaranteed," it says.
Public debt stood at Sh6.7 trillion as of June 30 - almost six times its value of Sh1.2 trillion 10 years ago.
Of these, Sh3.5 trillion is in foreign debt and Sh3.2 trillion from domestic borrowings. Interest payments on loans amounted to Sh441.4 billion as of June 30.
The debt is set to increase as the Treasury would have to borrow Sh657.4 billion more to fund the budget deficit for 2019-20 financial year.
MPs in October last year voted to increase the public debt ceiling to Sh9 trillion.
Only two MPs - Patrick Musimba (Kibwezi East) and Mohamed Mohamud (Wajir South) - opposed the higher ceiling, citing the need to ‘salvage Kenya from loans.’
But Treasury PS Julius Muia says the policy would be the cure as it will play a major role in guiding the optimal process of procuring debts or loans.
“It will guide the management of the same in a way that optimises benefits and minimises costs and risks,” the PS said.
County governments have had challenges with funding their budget deficits, a situation that has been worsened by delayed Exchequer disbursements.
This has caused many development projects to stall even as a chunk of the funds to counties cater for recurrent expenditures.
Council of Governors chairman Wycliffe Oparanya said on Sunday the situation is yet to improve, revealing the 47 counties are yet to receive Sh68 billion in the 2019-20 budget.
“This means that salaries will not be paid on time and unfortunately the fight against Covid-19 will be compromised,” the Kakamega governor said.
He said a number of counties have thus finalised their borrowing framework which will allow them “to qualify for guarantees by the National Treasury for external and long-term borrowing".
Oparanya said the devolved units have also finalised the transfer of assets and liabilities relating to devolved functions – which may be used as security for loans.
All the same, finance experts are wary about opening a window for counties to borrow, especially in the face of the country’s dire debt situation.
Minority leader John Mbadi says the policy needs serious discussions to improve it and fill gaps.
The Suba South MP said the hope is that the Building Bridges Initiative will usher in an independent Treasury, which will thus assure Kenyans of discipline in terms of managing public debt.
“If we were in a healthy debt position, it would make sense. But where Kenya is on debt, we are too cautious so that we can’t just give space for counties to borrow anyhow and only rely on the hawk-eyed CS to determine this,” Mbadi said.
The lawmaker further questioned why the policy has no mention of the Senate, which is mandated to protect devolution.
“Where does the Senate come in? How would it protect devolution if there is no nexus where they are coming in to determine the level of indebtedness of counties?” Mbadi asked.
The Treasury, however, appears to be banking on mandatory checks and conditions that precede borrowing to tame the entities’ appetite for borrowing.
Any entity that seeks to borrow will have to provide a feasibility study report inspected and approved by the relevant government entity.
The study should inform the project’s economic viability, costing and design and social and environmental risks mitigation plans.
Entities seeking Treasury approval for their loans will also need to provide confirmation of the land and way-leave acquisition for the project.
They are also expected to show commitment to relocate public utilities and confirm they have adequate human resources to implement projects.
Other checks would be the prioritisation and commitment of the counterpart funding by all ministries, state departments and agencies as well as county governments.
State agencies and counties will also be required to provide due diligence reports to ascertain the financial, technical and legal competency of firms procured competitively to execute projects.
“This will mainly apply to the projects that are undertaken under the Engineering, Procurement, Construction and Financing model,” the policy reads.
The policy further bars contractors or financiers from approaching the Treasury with project proposals.