The Treasury has frozen loan guarantees and approvals for State corporations which have defaulted on repayment of debt and other statutory obligations, leaving many heavily-indebted public entities at the risk of collapse. Treasury secretary Ukur Yatani said State corporations in default of debt servicing and payments would be required to cut on operation costs and slow down on implementing new projects.
“The National Treasury and Planning will not give concurrence for borrowing or, where applicable, grant guarantees for State corporations which are in default of loan repayments and other statutory obligations,” he said in a circular to all Principal Secretaries and Chief Executive Officers of all State corporations and semi-autonomous agencies.
“State corporations in default of debt servicing and repayment of statutory obligations must reduce expenditures in other areas and go slow on implementation of new projects.
Investment of funds by State corporations in default of debt service and repayment of statutory obligations in encouraged.” The directive comes at a time when debt-saddled parastatals and corporations, such as the Mumias Sugar Company, East African Portland Cement Company (EAPCC) and Kenya Airways, continue to rely heavily on taxpayers for bail-outs.
A recent report by the International Monetary Fund (IMF) shows that the amount of loans that the State has guaranteed parastatals stands at Sh139 billion — underlining the huge burden that the poorly-performing entities are saddling taxpayers with.
The Sh75.6 billion ($750 million) in guaranteed debt to fund the recovery of the cash-strapped Kenya Airways in 2017 remains one of the biggest spending by the government to bail out its entities.
Last month, the government paid Sh330 million in guaranteed loans for EAPCC and Tarda, which was more than half of the total allocation of Sh617 million towards guaranteed debt to parastatals in the 2019/20 financial year.
Under the directive to guide Budget preparation for the 2020/21 financial year, Mr Yatani said that the Treasury will review the financial health of all parastatals and corporations for possible folding up, merging or restructuring, pointing to an uncertain future ahead for the entities.
This will be done as part of measures to reduce financial losses to the government.
The Treasury also barred the debt-ridden parastatals from investing any funds and instead allocate monies to honouring payment of the loans and other statutory deductions.
The freeze on fresh guarantees for the ailing parastatals is part of the move by the government to cut spending in an economy where perennial revenue misses by the Kenya Revenue Authority (KRA) have pushed the State to borrow for funding development projects. Last year, Parliament raised Kenya’s debt ceiling to Sh9 trillion, giving the Jubilee administration leeway to borrow more.
In the current fiscal year, which will end in June, the Treasury rejected the budgets of most State corporations, citing an overshoot in spending limits and ambiguous expenditure plans. It said that a review had shown that concise explanatory notes to the submitted budget and financial statements were not provided.
Explanatory notes are crucial disclosures that further explain numbers on the financial statements or budgets by providing details to justify the amount allocated per item.
The Treasury further noted that some State corporations had factored Government of Kenya grants for both recurrent and development budgets that are above what had been agreed on and allocated by line ministries during the financial year 2019-20 sector working groups.
Faced with a biting cash crunch, the Treasury plans to reduce the country’s Budget deficit by Sh100 billion in the 2020/21 financial year from the current Sh600 billion in cuts that target non-core spending like trips, entertainment and advertisements.