Tough rules to cap counties’ debt

County governments will have their external borrowing restricted to 20 per cent of their last audited accounts if new rules before the National Assembly are passed.

The move is meant to avoid burdening the devolved units with debts in future.

The county governments would also face tight scrutiny when seeking the Treasury’s green-light to borrow from the private sector under the fresh regulations that are designed to help check ballooning public debt.

“It has been proposed that the debt stock of a county government should not exceed 20 per cent of that county government’s last audited revenue, while the debt service cost are to be capped at 15 per cent of the county government last audited revenue,” said a budget policy statement released last week.

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 peg the debt ceiling at 50 per cent of the gross domestic product is also in the pipeline.

The new limit means counties’ may not get funds for all of their big projects.

Some counties have already expressed interest in external borrowing to seal budget deficits, but the government has insisted that a framework is required to prevent the devolved units from amassing debts.

“In readiness for the borrowing by the county governments, 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, purpose, procedures and borrowing limits,” the statement noted.

Last year, the Treasury said fresh regulations to guide the assessment of counties’ creditworthiness and their ability to repay debts were being developed.

Demonstrate ability to pay

“The counties will have to demonstrate their ability to pay. This is not just through the funds provided by the national government but through rating revenue collection at the counties,” Mr Livingstone Bunde, assistant director in charge of public debt management at National Treasury said during a seminar on fiscal policy and debt management.

The seminar brought together officials from county governments, the National Treasury and the Central Bank.

According to the Constitution, counties are allowed to borrow directly from external sources but they must be guaranteed by the national government.

Faced with insufficient funding from the national government, however, some counties have been turning to the private sector and other development institutions for cash.

Experts have warned that such borrowing should be strictly controlled to be in line with the government’s overall policy of keeping debt within manageable levels.

“Devolved units in Latin America, Brazil and India sank into the deep sea (financially) before they came up with legal framework to guide the borrowing,” Mr Bunde said while underscoring the importance of the proposed regulations.

There are concerns that unlimited borrowing could saddle the local units with huge debts because commercial loans are usually expensive.

“Guarantees can be implied or not implied and the government will scrutinise the lenders as some might not be stringent in giving loans as they know the national government will pay if the county defaults,” the Treasury said.

Limiting wage bill

A Bill aimed at limiting the wage bill will be tabled in the National Assembly in the next financial year and the county governments will be required to comply.

The Treasury said it would introduce performance-based grants to reward counties that are prudent in budgeting and execution of their development plans.

This is after some of the counties were found to be overestimating their budget, pushing themselves into huge deficits.

“It’s not possible to tell from the many county budgets the basis of revenue and whether they are realistic,” said the budget policy statement.

Some county budgets do not separate development and recurrent expenditure and have failed to adhere to section 107 of Public Finance Management Act 2012 that limits development spending at 30 per cent of total budget.

The rivalry between the Executive and the county assemblies over the budget allocation is another area of concern that could put the success of devolution at stake.