Govt approves county borrowing from the Central Bank

The National Treasury and the Central Bank of Kenya have structured a borrowing framework that will allow counties to borrow from the CBK.

This is after clarification of the Public Finance Management Act by the attorney general paving the way for the devolved units to access debt.

According to CBK Governor Dr Patrick Njoroge, under the terms of the agreement Treasury will act as the guarantor of the loans payable in a maximum of one year.

“Actually we can provide an overdraft of up to five percent of gross recurrent revenue. In order to do that we, we would also need a guarantee from the treasury,” Dr Njorge said during a meeting with county governors organized by Deputy President William Ruto.

Under the agreed framework, county governments will borrow a maximum of five percent of their annual audited revenues.

The banking regulator said the limit would make county governments more prudent in managing funds.

“It’s very limited. It gives you some elbow room. It doesn’t become some sort of huge balloon that will be damaging to the economy,” he said.

Treasury and the central bank are expected to work on regulations that will guide counties on how the can access the overdraft.

The move comes despite opposition from the International Monetary Fund (IMF) which cautioned that lending to counties would complicate monetary policy.

The IMF’s concern is that counties would be only too eager to get the CBK overdraft based on complaints of slow disbursement of funds from the treasury.

Section 107(3) of the Public Finance Management Act, 2012, provides that short-term borrowing by county governments be restricted to the management of cash flows and shall not exceed five per cent of the most recently audited revenues of a devolved unit.

“A county government may borrow only if the national government guarantees the loan; and with the approval of the county assembly,” reads Article 212 of the Constitution.

The central bank is expected to introduce stringent regulations that ensure counties borrow cautiously.

Some counties have gotten away with securing bank laws without necessary approvals forcing the regulator to caution banks not to lend to county governments without treasury guarantees.

Mr Ruto said interpretation of the law had been a major hurdle with the government also offering the banking regulator assurances for repayment.

“Central bank did ask a few questions….. but it’s now agreed that subject to regulations that central bank will give, county governments will have access to short term borrowing,” Mr Ruto said.