Treasury gets Sh2.5bn dividend from Central Bank

The Central Bank of Kenya Wednesday announced that it will pay the Treasury a Sh2.5 billion dividend, boosting the government’s cash position as it seeks to plug a widening budget deficit.

The banking sector regulator declared the dividend despite recording a net loss of Sh13.6 billion mainly attributed to a foreign currency revaluation loss of Sh28.2 billion this year, following the appreciation of the shilling.

CBK’s operating income closed the financial year with a surplus of Sh7.07 billion compared to Sh622 million the previous year driven by high interest income from increased lending to the government and commercial banks.

“On account of the improved net operating surplus, the board recommended a dividend of Sh2.5 billion to be paid to the Treasury compared with nil in the year to June 2011,” the CBK said in its annual report.

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The Treasury has been looking up to the regulatory agents and other state corporations to finance it to the tune of Sh8 billion as part of efforts to bridge the Sh40 billion Budget gap created by the award of salary increments to civil servants and the military incursion in Somalia.

READ: Treasury eyes Sh40bn from tax reforms

“I will be instructing all public entities to surrender excess surplus upon completion of auditing. I expect to raise additional Sh8 billion from this measure,” said Njeru Githae, the Finance minister.

Other regulators that the minister is expecting to help bridge the gap include the Capital Markets Authority and the Retirement Benefit Authority.

The request has, however, come under criticism for placing profit at the centre of the regulators’ operations instead of being the neutral arbitrator they are meant to be.

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“As regulators their main role is to ensure that the rules in play do not burden either the consumer or the players,” said Joseph Kieyah, a principal analyst at the Kenya Institute for Public Policy Research and Analysis (KIPPRA).

Prof Kieyah, however, acknowledged that the payout of dividends by regulators is an indication of improved efficiency that should be encouraged.

Last year the Capital Markets Authority paid a Sh63.8 million dividend to the Treasury and is expected to perform better this year helped by high level of activity in the equities market.

CBK has reported a Sh521 million interest income from banks that used the short term window, commonly referred to as overnight lending, and Sh1.4 billion from inverse repurchase orders, which is collateral-backed lending to banks.

However, the CBK has said in its notes that between June 2011 and June this year no bank sought an overnight loan.

“Commercial banks did not utilize this facility in the year under review compared to Sh19.8 billion borrowed in 2011,” reads the report by CBK.

In its ninth bi-annual report released last week, the regulator said banks had borrowed Sh23.4 billion from it in October last year to April.

Commercial bank borrowing from the Central Bank was at the core of a parliamentary inquiry into the causes of the rapid depreciation of the shilling in the fourth quarter of last year.

Banks were accused of misusing the short-term window to borrow from the CBK, fund their liquidity demands and using the excess cash to take a position against the shilling, leading to its depreciation.

The government paid an interest of Sh3.66 billion to the CBK for its reliance on overdraft to relieve its urgent cash requirements.

The CBK, as the government’s banker, is legally allowed to offer it overdraft up to a maximum of five per cent of the gross recurrent revenue reported in the latest audited financial statements.

The overdraft is priced at the Central Bank Rate, which rose to 18 per cent last year as the Monetary Policy Committee moved to reduce cash circulation to curb inflation.

The high amount of money that the government has paid to the CBK as interest is an indication of its heavy reliance on the overdrafts to run its business.
The Central Bank governor has warned against that position saying that it amounts to the printing of money.

The CBK has said that the adverse global economy characterised by currency volatility has adversely affected is performance.

“The financial performance of the Bank has over the past two years been about 60 per cent lower than normal owing to the effects of the sluggish World economy,” said the CBK.

Other sources of income for the regulator include the Kenya School of Monetary Studies which netted an income of Sh444 million and fines charged on banks at Sh34 million.

Heavy issuance of Treasury bill and bonds also raked in some Sh3 billion in commissions.

The CBK earns a commission of 1.5 per cent of amounts raised for its agency role in the issuance of government paper. However, this has been capped at Sh3 billion since 2007.

The Treasury is under pressure to increase revenues in view of the considerable increase in the wage bill following recent industrial unrest by teachers, lecturers and doctors.

In a circular issued recently to parastatal heads, the Treasury ordered State firms that had not submitted the previous financial year’s dividends to do so before they forward their proposals for the 2013-14 Budget at the end of next month.

The government also asked directors of the commercially-oriented corporations to submit dividend policy documents which could help it estimate how much revenue to expect from parastatals. State-linked firms, especially banks, have been giving fat dividends to the Treasury every year.

READ: Treasury orders State firms to pay up

In 2011, KCB gave Sh655 million while NBK paid Sh712 million in dividends. The Central Bank of Kenya paid Sh2 billion in the financial year ending June 2010, but did not pay a dividend in 2011.