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Offering county governments overdraft facility is bad idea

Tuesday October 11 2016
Kisero Photo

Central Bank of Kenya (CBK) Governor Patrick Njoroge. PHOTO | FILE | NATION MEDIA GROUP

By JAINDI KISERO

Deputy President William Ruto recently convened a meeting at his Karen home that was attended by, among others, the governor of the Central Bank of Kenya (CBK), Dr Patrick Njoroge, and where it was reportedly decided that the CBK would start offering overdraft facilities to county governments.

Although I have opposed this decision elsewhere, I return to the subject because of the feedback I received in response to the views I expressed in an article that appeared in our sister paper the Business Daily in which I warned that the decision was likely to lead to unsustainable accumulation of public debt.

When I hear politicians proposing that we allow entities other than the National Treasury to gain access to overdraft facilities at the central bank, I sense danger.

We all know that Goldenberg came about because politicians allowed exporters access to overdraft facilities at the central bank.

We saw politically-correct companies being allowed access to billions of shillings from the central bank on the basis of fictitious exporting documents purporting to show that they had exported fish when we all knew that the country had never exported fish in such volumes.

When you allow politicians to order the CBK to open its overdraft facilities to entities other than the National Treasury, you are headed for trouble. In this country, Cabinet Secretaries pay lip service to the principle of the independence of the central bank. They regard the CBK as yet another parastatal under their docket whose chief executive they can summon at whim and give instructions to.

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IMPORTANT PILLAR

It is widely acknowledged that monetary policy is one of the most important pillars of economic management in a nation. Indeed, during the global financial crisis of 2008, monetary policy is what carried the burden of rescuing economies.

It took this administration nearly one-and-a-half years to appoint the board of directors of this critical institution. And, when it finally did two weeks ago, the choice of directors was nondescripts without name recognition in neither the private nor public sectors.

We expected the government to appoint well-known men and women of proven experience and calibre, individuals with deep domain knowledge of the inner workings of the financial sector.

Which brings me back to the proposal to allow county governments to have access to overdraft facilities at the central bank. The money the government uses comes from tax collection, with the remaining coming from domestic and external borrowing.

However, the money in the vaults of the central bank does not belong to the government. Admittedly, section 46(3) of the Central Bank Act allows the National Treasury to have access to overdraft facilities at the central bank. However, the National Treasury is only allowed to use the facility to fund shortfalls in the domestic borrowing programme and when it has cash flow problems. And that law sets a clear limit beyond which the National Treasury is not allowed to go.

Specifically, it says that the total amount outstanding in the facility at any time shall not exceed five per cent of the gross recurrent revenues of the government as shown in the appropriations account for the latest year.

WHAT LAW

Under what law is the deputy president and the governor of the CBK proposing to allow county governments access to overdraft facilities?

Since county governments are in a financial mess, why do we want to allow them to contaminate the balance sheet of the CBK?

The balance sheet of the CBK must remain sacrosanct. Beyond the bank being one of the key pillars of managing the economy of the country, it is supposed to be a hallowed institution.

In the US, the chairman of the Federal Reserve System is widely acknowledged as one of the most powerful people in the country. During Brexit, the governor of the Bank of England was in charge while the political elite and parties were in disarray. We saw the European Central Bank taking the lead in bailing out Greece while politicians took a back seat.

I belabour the point. If the deputy president is serious about helping county governments, let him push the National Treasury to introduce a treasury single account.

This is the way to get to the root of the problem of cash flow management for both the national and county governments.

The central bank is of critical importance in a nation. The cavalier attitude with which we treat this key institution amounts to criminal negligence.

We must renew our faith in the supremacy of institutions.

 

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