In order to alleviate the budget deficits most county governments in Kenya are facing, the National Treasury recently issued guidelines on Borrowing by County Governments (the “Guidelines”). These Guidelines are issued further to existing legislation on county government borrowing under the Constitution of Kenya, 2010 and the Public Finance Management Act, 2012 (“PFMA”). We note that under the existing legislation, any county government borrowing must be guaranteed by the National Government and that such borrowing can only be used to finance development expenditure and not recurrent expenditure.
The Guidelines prescribe the criteria for the issuance of guarantees for county government borrowing/issuance of security. The county government would be required to demonstrate, among other criteria, that:
- the target project could not have been financed without such borrowing;
- it has adopted an acceptable project cycle management approach;
- the conditions precedent for project implementation have been met, eg, land acquisition, resettlement and compensation of persons affected, completion and approval of project designs, regulatory approvals and resource requirement planning (ie, sources of funding and personnel for the project); and
- not less than 15% of project funds will be contributed from their own resources.
Under the Guidelines, no guarantee will be issued where such borrowing would cause the Government of Kenya's borrowing to exceed the statutory public debt limits or where the county government does not demonstrate that it has the ability to repay the loan, interest and any other amount in respect of the borrowing. County governments will be required to provide the National Treasury with information on disbursements and repayments on a quarterly basis.
The Guidelines set out the procedure to be followed by county governments in making an application for a guarantee for a county government borrowing or a county government security (which includes a treasury bill, treasury bond, treasury note, government stock and any other debt instrument issued by the county government). Ultimately, any such guarantee must be approved by Parliament. Finally, the Guidelines provide for the recovery of payments made by the National Treasury under a guarantee in the event that the guaranteed county government defaults.
Under the PFMA, county governments are required to prove that they are compliant with the prescribed fiscal responsibility principles, in particular, that they are not spending more than 35% of their budget on recurrent expenditure and are spending at least 30% of their budget on development expenditure. County governments must also prove that they have sufficient revenue-generating activities or resources outside the National Treasury budget allocation that can service any borrowings.
Notably, from a practical perspective, only four out of 47 counties in Kenya have successfully met the prescribed financial responsibility principles and obtained satisfactory credit ratings. We understand that the Laikipia County Government intends to issue a KES1.4-billion infrastructure bond later this year. The issuance of these borrowing Guidelines comes amid heavy criticism of increased and allegedly unsustainable borrowing by the Government of Kenya and an increased tax burden on Kenyan citizens.
Originally Published by ENSafrica, March 2021
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