The Controller of Budget (CoB) has flagged Sh745.3 million overdrawn by the County Government of Mombasa from its Equity Bank account, which was consequently converted irregularly to a term loan by the end of the 2023/24 financial year (FY) in June.

This overdraft loan set up the devolved unit to higher pending bills at a time when tier-one commercial banks have been hiking interest rates as the Central Bank of Kenya (CBK) tightened its grip on monetary policy.

The Sh745.3 million term loan was part of the total Sh856.09 million Equity Bank overdraft. By the end of last June, the Mombasa County government had not settled an outstanding loan balance of Sh213.37 million.

Review report

In the County Government Budget Implementation Review report, Controller of Budget, Margaret Nyakang’o notes the term loan was neither approved by the County Assembly nor guaranteed by the national government in accordance with Article 212 of the Constitution.

“The County had an outstanding Equity Bank overdraft of Kshs.856.09 million, which was converted into a term loan of Kshs.745.30 million. The outstanding loan balance was Kshs. 213,371,240.45 as of 30th June 2023. This loan facility was, however, not processed in line with Article 212 of the Constitution,” reads the report.

Banks often allow customers to borrow money through their current account by taking out more than what they hold but at a fee, enabling big customers like businesses and county governments to continue with routine expenses such as paying salaries or suppliers in anticipation of cash flow in the short term.

During the reporting period, expenditure on employee compensation was Sh6.9 billion, representing Sh1.34 billion or a 24 per cent increase compared to the previous fiscal year, partly attributed to the cost of financing the Equity Bank loan.

Employee compensation consumed 53.3 per cent of the Sh12.96 billion revenues for FY 2022/23. “The 24.1 per cent increase in the wage bill is attributed to the payment of the outstanding Equity Bank loan and the payment of outstanding staff pensions and gratuities,” the CoB report stated.

The CoB did not state the interest rate that Equity Bank charged Mombasa County but by the end of March 2023, its overdraft facility was attracting an average lending rate of 13.4 per cent for corporate customers, according to CBK data. This was just before the apex bank hiked the base rate to 9.5 per cent in March and effected by commercial banks from April 2023.

Equitable share

Delays by the National Treasury to release on time counties’ equitable share of revenue have seen the devolved units fall back in paying salaries, settling staff bank loans, and remitting taxes and other statutory deductions. The share, which was allocated Sh370 billion in the last budget cycle, is the major source of revenue for the county government.