Proposed law caps county borrowing at 20pc revenue

Although a number of counties say they need to borrow money to plug budget deficits, many are not collecting enough from local taxes —a key requirement for approval of loans by the national government.

The government has proposed to cap borrowing by devolved units at 20 per cent of their last audited accounts. The matter will be taken to the National Assembly for debate.

Experts in government financing want borrowing pegged to local taxes the devolved units collect. But according to the office of the Controller of Budget, most of these units did not meet their revenue collection targets for 2013/2014 financial year.

An analysis of local revenue collection by counties and former local authorities indicates that only Kericho, Marsabit, Tharaka Nithi and West Pokot counties met their targets.

But this does not necessarily mean the four are eligible to borrow as their level of current debt is also to be considered.

“Counties should be slow to borrow. They should demonstrate ability to pay, otherwise it is possible to mortgage the units to a point that any money disbursed goes to paying loans. Regimes will keep changing. We want to avoid a situation where heavy borrowing leaves subsequent regimes struggling to pay,” said Mr James Katule, director of fiscal affairs at the Commission of Revenue Allocation.

Nairobi County, which collected Sh10 billion against a target of Sh15.4 billion, will be eligible to borrow only Sh2 billion, going by the recommendations.

Most counties cannot borrow the huge amounts required to implement proposed mega-projects as their revenue collection is between Sh35 million and Sh250 million.

COUNTIES BORROWING CURBED

Mombasa County, which collected Sh1.72 billion against a target of Sh5 billion, can borrow only Sh344 million, going by the requirement. Kisumu had projected to collect Sh1.74 billion in 2013/2014 but collected Sh621 million so it can borrow only Sh124 million.

Others that can borrow substantial amounts because of collections between Sh1 billion and Sh1.8 billion are Machakos, Kiambu, Nakuru and Narok. The majority can borrow only tens of millions.

Even then, most of the counties cannot qualify for additional loans as they are servicing old loans. The proposed law also caps debt servicing at 15 per cent of the last county audit.

“The debt stock of a county government should not exceed 20 per cent of the last audited revenue, while the debt service cost is to be capped at 15 per cent of the county’s last audited revenue,” said a Budget Policy Statement released last month.

“Given that counties are still learning financial management skills, with reports of low absorption of development funds, it’s appropriate to deter borrowing to prevent abuse and ensure they are able to repay,” said Mr John Mutua of the Institute of Economic Affairs where he is in charge of budget matters. 

The national government has already indicated that counties will face close scrutiny when seeking Treasury approval to borrow from the private sector under the new regulations.

Last year, the government increased its debt ceiling to Sh2.5 trillion from Sh1.2 trillion to create room for borrowing to fund infrastructure projects. A law meant to fix the debt ceiling at 50 per cent of gross domestic product is also in the pipeline.

The new limit means counties might not find funding for all their big projects.

Some counties have expressed interest in external borrowing, but the government has insisted that a framework is required to prevent accumulation of debt.

“The public finance management regulations that have been submitted to Parliament for approval have further clarified the framework for county borrowing in terms of sources, purposes, procedures and borrowing limits,” the statement noted.