The government cannot show projects funded with Sh1.13 trillion of expensive loans it took in 11-and-a-half years to 2021, even as an audit reveals huge risks since the credit facilities were taken illegally.
Treasury took 13 expensive syndicated loans and sovereign bonds which the Auditor-General, in a special audit on utilisation of commercial loans in Kenya between July 2010 and December 2021, now reveals were used to settle recurrent expenditures in government, contrary to the law.
“The special audit established that although the proceeds from the 13 syndicated loans and sovereign bonds totaling Sh1,129,703,842,485 had been received in the Consolidated Fund, there was no evidence that the funding had been applied exclusively to finance development expenditure.
“It was noted that once the loan proceeds have been received in the Consolidated Fund, the monies are utilised for normal government expenditure that are falling due at the time of receipt of the said funds. No schedule is maintained on the expending of the loan proceeds,” Auditor-General Nancy Gathungu notes in the newly released report.
The audit examined how 39 commercial loans valued Sh1.36 trillion during the time were used, and whether they were borrowed legally.
During the period, Treasury borrowed 16 dollar-denominated loans valued Sh1 trillion at then prevailing exchange rates, 22 euro-denominated loans valued Sh288 billion and a South Korean Won-denominated loan valued Sh102 million, all from commercial markets.
Top lenders during included the China Development Bank (Sh60.5 billion), the Eastern and Southern Trade and Development Bank/PTA Bank (Sh51.6 billion), the Eastern and Southern Trade and Development Bank and Standard Bank of South Africa Ltd Isle of Man Branch (Sh142.3 billion), and CGMG (Sh107.8 billion).
Kenya also sought international sovereign bonds including the 2019 Citigroup Global Markets Deveschile (Sh91 billion), another by CGMG (JP Morgan) in 2019 (Sh121.3 billion) and the 10-year Sh174.8 billion international sovereign bond in 2014. The Treasury completed settling the latter in the year to June 2024.
Thirteen of the 39 were syndicated loans and sovereign bonds, while 26 were project funding loans to implement specific programmes. The audit established that out of the 39 loans, 26 were taken without a legal opinion from the Attorney-General, contrary to the law which places the procedure to avoid unnecessary commitment fees.
“The special audit established that 26 loans were contracted before the respective legal opinions of the AG were received. Of these loans, legal opinions for 25 loans were signed later while the remaining loan was outstanding as at the time of the audit. In absence of the legal opinion ahead of contracting of the loans, the country is at risk of entering into agreements whose terms may be unfavourable,” the audit notes.
By end of December 2021, the Sh1.36 trillion loans had cost taxpayers the equivalent of Sh621.8 billion in current exchange rate terms ($3.96 billion and 812 million euros), out of which 63 percent ($2.7 billion plus 325 million euros) were interest, commitment fees and other charges alone.
Money used to repay principal debts during the period constituted just 36.7 percent of the Sh621.8 billion (at current exchange rates) used in the service of the 39 loans.
Interest alone constituted 59.8 percent of the total debt service costs, commitment fees took up Sh1.6 billion of the Sh621.8 billion, and other charges accounted for three percent.
The audit has recommended that Treasury should adhere to the law and utilise all the loans on development expenditure, while also establishing an accountability framework for borrowed funds “that specifically identifies the projects or programmes the loans are applied to.”
