A bid by the National Treasury to regulate borrowing by county governments has raised a storm, with county governments saying the move is irregular and in bad faith.
The Central Bank of Kenya (CBK) on January 12 wrote a circular to chief executives of commercial banks, mortgage finance companies and micro finance banks instructing them to express caution in their lending to county governments.
The circular seen by the Sunday Nation has the regulator urging financial institutions to exercise due diligence in their lending options to counties, with CBK maintaining that such borrowings must not exceed five per cent of the most recent audited revenue of the county government and must be repaid in a year.
“It has come to the attention of the Central Bank of Kenya that some institutions have advanced credit facilities to county governments without the requisite national government guarantee, contrary to the law, said CBK in the circular.
The regulator went on to outline a raft of provisions of law concerning borrowing by county governments.
CBK cited article 212 of the Constitution, which states that a county government may borrow only if the national government guarantees the loan, and with the approval of the county government assembly.
CBK also cited section 107(3) of the Public Finance Management Act, 2012, which it noted provides that short term borrowing by county governments shall be restricted to management of cash flows and shall not exceed five per cent of the most recently audited county government revenues.
“Section 58 of the Public Finance Management Act, 2012, which inter alia, sets out the conditions before loans to county governments are guaranteed by the Cabinet Secretary and the National Treasury,” CBK says in the circular.
“Section 142 of the Public Finance Management empowers county assemblies to authorise short term borrowing for cash management purposes.
Such borrowing must not exceed five per cent of the most recent audited revenue of the county government and must be repaid within a year,” CBK said in the circular.”
ANGERED COUNTY GOVERNMENTS
But the move has angered county governments, with governors accusing the national government of micro managing their affairs and attempting to starve them of crucial emergency funds.
The Council of Governors’ finance committee said the cautionary circular to banks and other lenders amounted to sabotage, claiming the national Treasury was partly to blame for financial hiccups which often led county governments to run to banks for emergency bailouts.
“Counties do not just borrow. There is a procedure for borrowing. Before we borrow, it must be approved by the county assembly.
And because money does not come from the National Treasury on time, some counties go to the bank to borrow on short term basis to pay salaries.
When the money is finally received, the overdraft is wiped out,” said Kakamega governor Wycliffe Oparanya.
He added: “This is not an issue that warrants the national government to caution banks. We know very well there is no county that is reckless in borrowing.
The national government has borrowed left, right and centre and the fiscal problems we are having now is because of its excessive borrowing”.
The latest tiff between the Treasury and county governments is just one in many between the two since devolution came into place after the 2013 General Election.
Late last year, cash-strapped county governments called on Parliament and the National Treasury to urgently put in place missing legal framework to allow them to borrow from external sources.
Under the law, county governments can only access money from external sources if the national government guarantees the loan.