The Dos and Don’ts on borrowing among county governments; what the law says

Article 212 of the constitution of Kenya states that a county government may borrow, but gives approving conditions among them county assemblies authorizing the borrowing and that a county must be a non-sovereign entity, hence further approvals from the National Government.

The Public Finance Management Act (PFMA) further gives two more conditions to borrowing by the county government as

  1. Borrowing must be to finance capital projects and
  2. A County must show the ability to repay.

The act further gives obligations and restrictions with respect to county borrowing. The related regulations provide the procedure and processes for county borrowing.

The National Treasury issued the ‘Treasury Circular NO.1/2021’, stipulating the county borrowing framework/guidelines.

This was after the Laikipia County, under the reign of Ndiritu Muriith,i sought to borrow through the issuance of the Infrastructure Bond, necessitating the Intergovernmental Budget and Economic Forum (IBEC) to instruct the NT to prepare the framework for the transaction and other related county future borrowing.

The guideline heavily borrows from the PFM Regulations (counties), and summarizes the procedure for borrowing.

Before a county borrows there are some conditions and procedures to follow;

It includes all the ratios relating to a budget that includes Wage bill Revenue ratio (35%), Development Revenue ratio (30%), the amount to be borrowed set at 20% of revenues from the latest approved county audit report, County contribution to the proposed projects pegged at 15%.

The devolved government should further demonstrate its ability to improve on the collection and management of its own source revenue – this will be the basis for showing the ability to pay.

The Audit report shows a county’s fiscal responsibility and the financial statements of the county intending to borrow which should have minimum if not zero audit queries.

Besides, the county should demonstrate that there exists a budget deficit, including the fact that the resources available able to finance the planned expenditures are not sufficient and that the county executive may opt to explore borrowing.

Through public participation, the county executive identifies the projects to finance by borrowing which should be capital projects.

The county executive should further prepare a cash plan, indicating the borrowing requirement by the county, and a repayment plan to demonstrate the plan to pay covering the facility’s tenure.

The Cabinet Secretary for Treasury gives the county the required guarantee to proceed and borrow.

The County’s request for short-term ‘borrowing’ to finance cash flow problems is actually not considered borrowing and the above processes do not apply.

In this case, the county will only require approval from the County Executive Committee Members and the respective County Assembly to ‘borrow’ up to 5% to finance the cash flow problem and not to finance the budget deficit.

Borrowing would help unlock the enormous potential within a county where, for instance, water projects would be initiated for production.

The water project may include the reticulation and metering and the citizens – from my own experience, would be willing to pay the resource for increased production. The same would be for financing energy and other infrastructure items.

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Murungi Ndai

Mr. Ndai is an experienced public sector economist, experienced in sub-nationals having greatly influenced development of policies relating to revenue mobilization by Counties Governments. He collaborates with the private sector, governments and NGOs to address critical topics, including county growth strategies, borrowing and leasing by counties, MSME support and public finance management.

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