The Central Bank of Kenya (CBK) has informed Parliament that the government has already borrowed over three-quarters of its emergency funds at the apex bank in under six months, leaving only a quarter remaining.
The Sh97 billion emergency facility domiciled at the CBK is designed to alleviate the government’s financial strain by balancing out the fluctuations between income from budgeted revenue and expenses, offering temporary relief.
“As of October 30, 2023, available space is Sh23.1 billion (with) Sh73.9 billion utilised,” CBK Governor Kamau Thugge said in a public presentation before the National Assembly’s Public Debt and Privatisation Committee on Tuesday afternoon.
According to Section 46(1)(2) of the CBK Act, the current limit of the facility is set at five per cent of the gross recurrent revenue from the government’s audited accounts of the previous year.
The fund’s objective is to compensate for seasonal shortfalls in government revenues.
The significant borrowing demand from the fund indicates a continuous borrowing appetite from the Kenya Kwanza government amid financial difficulties.
The situation barely six months into the current financial year indicates potential financial distress for the government.
To promote transparency, any transactions involving Central Bank financing to the government should be regularly disclosed, including the loan amount and the financial conditions applied, the CBK Act says.
According to recent disclosures from the National Treasury, Kenya’s sovereign loan repayments have been increasing at a faster rate than tax revenue collections.
This indicates a potential new debt crisis for the country.
Treasury Cabinet Secretary Njuguna Ndung’u earlier said this is compounded by lower-than-expected revenues, which could impact the government’s ability to deliver on its ambitious bottom-up promises.
The growing gap between revenue and debt obligations has raised concerns about the strength of the economic recovery and the government’s ability to sustainably meet future debt repayments.
The International Monetary Fund (IMF) has frequently issued warnings about the risks associated with governments seeking bailout funds from their central banks.
Consequently, it is advocated that central bank financing of the government should be limited to the legal boundaries, as it is believed to be a persistent cause of inflation.
The IMF emphasises that restricting such financing is crucial for establishing the credibility of central banks, which is essential for the effectiveness of monetary policy.
The IMF highlights that when governments heavily rely on central bank funds to finance public spending, it inevitably undermines the political and operational independence of central banks, hindering their ability to achieve their primary objective of maintaining price stability.
The IMF further emphasises that central bank lending to the government should only be justified to smooth out fluctuations in tax revenues until tax reform is implemented to ensure a stable revenue stream or until the markets are sufficiently developed to mitigate revenue fluctuations.
It is considered best practice to prohibit central bank financing for other sectors of the government, such as county governments and public enterprises.
Additionally, as a measure of transparency, transactions involving central bank financing for the government should be regularly disclosed, including details about the amount and financial conditions associated with these loans.