Kenya: Guidelines released for county governments seeking to tap the loan and debt market

In order to alleviate the budget deficits that most of Kenya’s county governments face, the National Treasury recently issued guidelines on borrowing by county governments (the “”Guidelines“). These guidelines are issued as a result of existing legislation on county government borrowing under the Constitution of Kenya, 2010 and the Financial Administration Act, 2012 (“PFMA“). We note that under current legislation any county government borrowing must be guaranteed by the national government and such borrowing can only be used to finance development spending and not recurrent spending.

The Guidelines prescribe the criteria for issuing collateral for the borrowing / issuance of securities by the county government. The county government would be required to demonstrate, among other criteria, that:

  1. the target project could not have been financed without such a loan;
  2. it has adopted an acceptable approach to project cycle management;
  3. preconditions for project implementation have been met, for example, land acquisition, resettlement and compensation of affected people, completion and approval of project designs, regulatory approvals and planning of resource requirements (ie funding sources and personnel for the project); and
  4. at least 15% of the project funds will come from their own resources.

Under the Guidelines, no collateral will be issued when such borrowing would cause the Government of Kenya borrowing to exceed statutory public debt limits or when the county government does not demonstrate that it has the capacity to repay the debt. loan, interest and any other amount in respect of the loan. County governments will be required to provide information on disbursements and repayments to the national treasury on a quarterly basis.

The Guidelines set out the procedure to be followed by county governments when applying for a guarantee for a county government loan or a county government guarantee (which includes a treasury bill, treasury bill, government bond). Treasury, state stocks and any other debt securities issued by the county government). Ultimately, such a guarantee must be approved by Parliament. Finally, the guidelines provide for the recovery of payments made by the national treasury under a guarantee in the event of default of the guaranteed county government.

Under the PFMA, county governments are required to demonstrate that they comply with prescribed principles of fiscal responsibility, in particular that they do not spend more than 35% of their budget on current expenditure and that they spend on minus 30% of their development budget. County governments must also demonstrate that they have sufficient income-generating activities or resources outside of the national treasury budget allocation that can be used for borrowing.

Notably, from a practical standpoint, only four of Kenya’s 47 counties have successfully adhered to prescribed principles of financial responsibility and achieved satisfactory credit ratings. We understand that the Laikipia County government intends to issue a KES 1.4 billion infrastructure bond later this year. The release of these borrowing guidelines comes amid strong criticism of increased and allegedly unsustainable borrowing by the government of Kenya and the increasing tax burden on Kenyan citizens.

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