Treasury seeks to seal loopholes in county borrowing

The central government guarantee on county loans opens up the risk of careless borrowing and lending, unless checked by law, a senior Treasury official has warned.

The Treasury public debt management office assistant director Livingstone Bumbe said a new framework set to be released soon guiding county borrowing will address these risks, once it is passed by Parliament.

In the debt market, borrowing is either guided by regulations or the market regulates itself whereby the lender does their own assessment of the borrower, Mr Bumbe said.

“Since now there is an ultimate risk taker in the form of National Treasury, the market may fail to do due diligence on things such as payment capability,” said Mr Bumbe.

He added that lender may not be very keen on the ability of the borrower to repay given that the State has guaranteed, leading to careless lending.

“For lenders, the option of a guarantee from the national government could see them soften their agreement, and may end up lending haphazardly. We need the good framework, which is still under discussion, on how these counties will be able to access borrowing,” he said.

He said that the regulations framework has been discussed in the Intergovernmental Budget and Economic Council (IBEC), which will forward it to Parliament.

The IBEC was created under the County Government Act and brings together the Council of Governors, the Treasury and Commission for Revenue Allocation and deliberates on the sharing of revenue between the national and county governments.

The Public Finance Management Act, from which the new regulations will derive their power, stipulates that the guarantee will only be for capital projects.

In the event that the State guarantee is effected and payment made, it will automatically become a debt owed to the national government by the county.

The national government is also expected to play an advisory role to county governments when they are taking on debt, advising on both the credibility of the lenders and the suitability of the terms on offer.

The national government is expected to ensure the credibility of the issued notes, given that any defaults have the capacity to spoil the entire market from which the national government is also borrowing.

Once counties start borrowing, eyes will be on their ability to absorb the funds into projects.

According to Mr Bumbe, the previous guarantees made for parastatals were not backed by regulations compelling the parastatals to reimburse the government once it undertook the payments.

Without the regulations, some parastatal defaults have been borne by the exchequer with little expectation of repayment.