Economy

Cash-strapped parastatals turn to debt to pay workers

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National Treasury building. FILE PHOTO | NMG

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Summary

  • The financial woes facing State owned enterprises (SOEs)deepened last year as they sunk onto loss making territory.
  • Financial regulators say in a new sector stability report that the parastatals’ financial problems pose a real risk to the wider economy.

The financial woes facing State owned enterprises (SOEs)deepened last year as they sunk onto loss making territory which saw them rely on debt to finance normal operational expenses such as paying salaries and rent.

Financial regulators say in a new sector stability report that the parastatals’ financial problems pose a real risk to the wider economy due to their huge footprint on the business value chain, where thousands of small firms survive on supplying goods and services to these institutions.

They also pose a risk to the banking sector, where they are among the top 10 largest borrowers and depositors, and the largest payers of insurance premiums and source of Sacco societies membership.

Their return on assets and return on equity declined from 2.4 percent and 4.3 percent in 2019, to negative 1.9 percent and 3.7 percent in 2020.

A negative return on assets means that an institution or company is generating losses from its assets.

“Financial viability of SOEs affects financial institutions, households and non–financial businesses through their interconnectedness and value chain. SOEs borrowing and spending decisions affect the overall economy, hence financial stability,” said the regulators in the report.

The regulators include Central Bank of Kenya (CBK), Capital Markets Authority (CMA), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and the Sacco Societies Regulatory Authority (Sasra).

The report cites corporate governance problems as a contributor to the problems facing parastatals, as well as a challenging economic environment and competition from competition from cheaper imports.

The cash flow problems have forced the parastatals into reliance on the National Treasury or long-term debt for financing of normal operations, leading to concerns over their viability.

The SOEs long-term debt to assets and long-term debt to equity ratios declined by 1.3 percentage points and 10.1 percentage points, to 69.9 percent and 134.2 percent in 2020, respectively.

“This may indicate that SOEs used long-term debt to meet operational expenses other than growing their assets, thus limiting productivity, expansion capacity and profitability,” said the regulators.