Economy
Counties turn to expensive bank overdrafts to pay delayed salaries
Thursday June 29 2023
Council of Governors Chairperson Ann Waiguru at Serena hotel, Nairobi on June 21, 2023. PHOTO | LUCY WANJIRU | NMG
Counties have turned to costly short-term loans with commercial banks to pay staff salaries amid delays in cash disbursements from the Treasury.
The latest report by the Controller of Budget shows that Homa Bay, Kisumu, Kakamega, Bungoma and Laikipia had overdrafts with KCB Group and Cooperative Bank, which stood at Sh906.3 million at the end of March.
Counties have been grappling with worsening cash flows in the wake of the Treasury delays to release billions of shilling as their share of the equitable share of revenues.
Read: How Treasury fell behind on releasing cash to counties
The overdrafts add to the financial burden of the counties given that they attract interest every month, just like any other credit facility from commercial banks.
The average interest rate on overdrafts stood at 12.7 percent as of March, according to data from the Central Bank of Kenya.
“The county has a short-term arrangement with the Cooperative Bank of Kenya to facilitate net salary payments to avoid any delay in paying salaries,” said CoB Margaret Nyakango on one of the counties.
The data shows that in the nine months to March, Homa Bay’s salary overdraft at KCB Group was Sh393.8 million, followed by Sh305.5 million for Bungoma’s similar facility at the same lender.
Kakamega’s salary overdraft at Coop Bank was Sh207 million as of March as the devolved units increasingly sought bank reprieve.
Kisumu borrowed Sh957.4 million in the nine months to March to pay salaries but has since repaid the facility.
The Treasury’s cash disbursements to the counties are lagging at least three months and the arrears were estimated at more than Sh90 billion last month, prompting governors to threaten a shutdown to force release of the money.
Delays in cash transfers to the counties highlight the burden of foreign debt repayment on the Exchequer, which is gobbling hundreds of billions every month.
Interest due for the overdrafts will pile more pressure on the already strained coffers of the counties amid struggles to free enough cash for development projects.
Besides bank overdrafts, the counties have had to divert funds from other budget items to ease the crises of delayed staff salaries.
The Treasury released Sh29.6 billion last month, partly easing the cash crunch at the counties that rely on the Exchequer for cash amid growing struggles to meet their targets for internal revenues.
Read: Senators approve Sh385bn for counties
Counties have over the years performed dismally in the collection of their internal revenues, forcing them to rely on the Exchequer for daily operations and salaries.
For example in the nine months that ended March, the 47 counties raised Sh28.9 billion in internal revenues, which is less than half of the Sh62.1 billion they target to raise in the current financial year.
