Emergency loans the Treasury has tapped directly borrowing from the Central Bank of Kenya (CBK) have hit a historical record Sh91.13 billion, revealing the extent of the exchequer’s cash crunch.
The overdraft facility largely helps the Treasury to finance short-term needs when it faces a cash shortage, including urgent payment requirements such as salaries and other priority recurrent expenditures like debt repayments.
The National Treasury has been running up its overdraft balance at the reserve bank in recent months with the facility representing a last-resort avenue to fund the budget deficit.
According to data from CBK, the government’s overdraft has grown from a lower Sh61.12 billion at the end of July and rose at the fastest pace in November when it moved from Sh73.93 billion at the end of October to Sh88.33 billion on December 1.
“The overdraft facility is a temporary source of cash to fund the deficit in payments of domestic instruments such as matured Treasury bills,” notes the Controller of Budget.
The facility is restricted to a maximum of five percent of the most recent audited revenues and is expected to be paid off at the end of the financial year, according to the Public Finance Management Act.
The running balance of the overdraft at present is higher than the last limit set at Sh80 billion, which covered the 2022/23 financial year.
According to economists, the exchequer’s reliance on the CBK overdraft in recent weeks is an image of a cash-strapped government that continues to run in a tight fiscal space, defined by expanded expenditures amidst slacking revenue sources, including subdued taxes and constrained external financing.
“The overdraft facility is a plug to short-term cash-flow difficulties. Over the last few months, the balance on this facility has been running very high informing of the tight fiscal space we are running. There is less and less money for running basic government services where most of everything recurrent outside paying salaries may be funded out of the overdraft,” noted International Budget Partnership’s Country Manager for Kenya, Dr Abraham Rugo.
Interest on the overdraft facility is usually charged at the rate equivalent to the Central Bank Rate which currently runs at 12.5 percent.
Spending on repayments to the overdraft facility usually runs in the billions of shillings every year with data from the Controller of Budget placing charges on the facility in the first three months of the current 2023/24 fiscal year to September at Sh980.7 million.
Deficit financing from the CBK overdraft has come under sharp scrutiny in the past with critics likening the borrowings to the monetisation of the funding gap which is usually equated to the printing of cash by the government out of thin air.
Ironically, current Treasury Cabinet Secretary, Prof Njuguna Ndung’u, then the CBK governor, said borrowing from the reserve bank was inflationary, equating the practice to printing money which has dire macroeconomic effects, including generating inflationary pressures.
CBK overdrafts are expected to remain the norm as the government strives to deliver services on emaciated funds, which has already seen it delaying the payment of salaries to civil servants throughout 2023.
Earlier this month, CS Ndung’u reverberated the funding concerns which have been against the promise of more external financing from multilateral lenders and increased taxation.
