Government Overbudgeted for Loan Repayments Due to Fluctuating Exchange Rates - Auditor General

National Treasury
The National Treasury building in Nairobi County.
Photo
National Treasury

A report by Auditor General Nancy Gathungu has revealed that the Treasury overbudgeted for loan repayments in three financial years.

As detailed in the Debt Servicing of External Loans in Kenya, the auditor revealed that overbudgeting was witnessed between the 2020/2021 and 2022/2023 financial years when the Jubilee administration was in power.

The auditor noted that the government attributed the overbudgeting to expected fluctuations in the exchange rate.

It was noted that the fluctuations had to be factored in because most of Kenya's debt is borrowed in foreign currencies, especially in American dollars.

Auditor General Nancy Gathungu
Auditor General Nancy Gathungu before the Committee on National Cohesion and Equal Opportunity in October 2023
Photo
Parliament of Kenya

"In the period under review, estimates of debt servicing payments were over budgeted by an average of 10 per cent (including 8 per cent, 22 per cent and 0 per cent in FY 2020/2021,2021/2022 and 2022/2022 respectively) compared to actual CBK debt servicing payments.

"Interviews with the debt managers indicated that during budget preparation for debt service obligations, there is a 5 per cent provisioning to cater for foreign currency fluctuations as the loans fall due," read the report in part.

For instance, in the 2022/2021 financial year, the government had budgeted Ksh252.3 billion for external debt servicing. However, only Ksh233.8 was paid. This translates to an overbudget of 19.4 billion.

Equally, in the 2021/2022 financial year, the budget for external loan repayments was Ksh328.1 billion. This was against the Ksh255.7 billion which was paid. The overbudget was, therefore, Ksh72 billion.

In the 2022/2023 budget, the initial budget for debt servicing was Ksh389.4 billion against an actual payment of Ksh388 billion. The overbudget amounted to Ksh642 million.

"The 5 per cent is determined as an approximation of the long-term depreciation of the Kenya Shilling against other foreign currencies. However, in the last two years, this fluctuation has been more than 5 per cent.

"Interviews further indicated that the provision which is agreed upon together with the International Monetary Fund (IMF) is an assumption and keeps with regard to the prevailing market environment," read the report in part.

On the other hand, the Auditor revealed that some of the payments made were also less than the amounts approved by the Controller of Budget.

However, it was noted that the books are usually balanced with the excess amounts catering for any future repayments.

For the 2020/2021 and 2021/2022 financial years, the actual repayments were less than the CoB-approved amounts by Ksh1,430,434,340 and Ksh83,305,216,063 respectively.

Conversely, in the 2022/2023 financial year, the government paid more in comparison to the approved COB figure by Kshs77,085,634,037.

"From the review of Payment Advice (PAs) and The TNTs forwarding memo, it was established that the variance was attributed to the Exchequer requisition being done using the CBK published exchange rates while seeking the CoB approval of the payment.

"This is usually reconciled with the actual payments at the CBK on a monthly basis. The shortfall on exchange difference is normally approved by the CoB to replenish the account and to cushion for the subsequent month's payments," read the report in part.

Treasury Cabinet Secretary Njuguna Ndung'u and his team before presenting the budget at the National Assembly.
Former Treasury Cabinet Secretary Njuguna Ndung'u and his team before presenting the budget at the National Assembly.
Treasury