This article first appeared in the Business Daily on February 7, 2016
The National Treasury has expressed concern over counties borrowing money domestically without permission from national government. In the 2014/15 Financial Year four counties borrowed a total of Sh1.9 billion, with Nairobi being the biggest borrower at Sh300 million. Technically, counties are only allowed to borrow from the domestic market to fund capital projects with high economic growth potential in line with the Public Finance Management Act. As a result, Treasury has instructed all bank and non-bank financial institutions to stop lending to counties and start recovery of un-guaranteed loans.
Counties however argue that they are being forced to borrow because government routinely fails to send money in on time to meet their financial obligations. In fact a county official with whom I talked to about this issue said that if government released funds on time, counties would have no need to seek commercial loans to finance their activities. The official further added that the process of government releasing county funds to county accounts is long, cumbersome and bureaucratic and thus counties always find themselves with pending payments they cannot meet thus pushing them to seek loans to meet their obligations. The Treasury argues that there is no need for counties to seek credit because counties have been leaving billions of shillings idle in their reserve fund accounts at the Central Bank of Kenya. The county official asserted that this is not the whole story; for example some counties have activities that need to funded such as arrears in bills left by previous county governments that need to be settled urgently, yet the procedures for applying for funds are so long and laborious that they have to borrow to meet short term costs. However, the real issue here is not the bickering between central and county government, the issue is uncovering the implications for the country in counties racking up debt in an unchecked manner.
Firstly, a real concern is that the rates at which counties are getting access to credit and whether these are sustainable and realistically serviceable. Indeed, if left unchecked county debt could create a scenario where money is siphoned away from required expenditure to meet debt obligations.
Linked to the point above, borrowing by counties does not seem to be informed by the ability of counties to generate independent revenue to not only finance local activities, but debt obligations as well. County revenue generation at county level in Kenya is anemic; in the financial year 2013/2014 county generated revenue accounted for a mere 25 percent of their budgets. Further, counties have been lazy in gunning for the tax option to raise revenue and the resistance they face on this means it may take time for counties to raise significant revenue locally. Yet counties have already started borrowing in a manner not necessarily informed by their revenue generation capacity. Thus, a scenario could unfold where counties have to seek bail outs from central government to meet their debt obligations.
Thirdly, the potential escalation of county government debt in the regions with little transparency is particularly problematic. Until county governments demonstrate a commitment to transparency and anti-corruption, county level indebtedness may not lead to development or economic growth. As a result county governments may find themselves servicing what has been essentially dead debt.
Finally, county government debt accumulation may mean that the government as a whole becomes increasingly leveraged, the extent of which is uncertain. It is crucial that central government keeps track of total government debt divided between central and county governments. A threshold level of debt accrued by county governments has to be determined so that any county level borrowing does not cross an upper limit that could over leverage the country.
Anzetse Were is a development economist; email@example.com