The Office of the Auditor General has revealed concerns about the possible mismanagement of loans and funds allocated to Kenya for development over the past decade. A Special Audit by Auditor General Nancy Gathungu, covering loans taken between 2010 and 2021, indicates that Kenya received Sh1.13 trillion in the consolidated funds accounts, but the accountability of these funds is in question.
These findings emerge as President William Ruto has already established the Presidential Taskforce on Forensic Audit of Public Debt to conduct a fresh analysis of Kenya’s obligations. The special audit indicates that although proceeds from 13 syndicated loans and sovereign bonds totaling Sh1.13 trillion were received in the Consolidated Fund, there was no evidence that the funding had been used exclusively for development expenditure.
“Although proceeds from syndicated loans and sovereign borrowings were being deposited into the Consolidated Fund in accordance with the provisions of Section 50 of the Public Finance Management Act, 2012, there is no proper accountability on the extent of application of the loans to development expenditure,” said Gathungu in the report.
The Office of the Auditor General (OAG) raised concerns about drawdowns for three loans from BELFIUS Bank and Unicredit totaling €29,510,462 (Sh4.1 billion) that were missing. Loans with no drawdown typically refer to loan agreements where the borrower has not yet accessed or withdrawn any of the funds available under the loan.
The audit examined how 39 commercial loans valued at Sh1.36 trillion during the period were used and whether they were borrowed legally. The top lenders in the review period included the Eastern and Southern Trade and Development Bank and Standard Bank of South Africa Ltd Isle of Man Branch (Sh142.3 billion), and CGMG (Sh107.8 billion). Additionally, the China Development Bank issued Sh60.5 billion, and the Eastern and Southern Trade and Development Bank provided Sh51.6 billion.
“Once the loan proceeds have been received in the Consolidated Fund, the monies are utilised for normal Government expenditure that are falling due at the time of receipt of the said funds. No schedule is maintained on the expending of the loan proceeds,” said Gathungu.
Euros dominated Kenya’s borrowing in the commercial market during the period. Records indicate that the Treasury borrowed 16 dollar-denominated loans valued at Sh1 trillion at the then-prevailing exchange rates, 22 euro-denominated loans valued at Sh288 billion, and a South Korean Won-denominated loan valued at Sh102 million, all from commercial markets.
Adding to the financial concerns, the Auditor General revealed that the National Treasury does not perform periodic reconciliations of its records against those of the creditors. Auditor General Gathungu further noted inconsistencies in adhering to the due borrowing process. For example, some loans were contracted before the Attorney General’s legal opinion was rendered.
The special audit established that 26 loans were contracted before receiving the respective legal opinions from the Attorney General. Of these, legal opinions for 25 loans were signed later, while one loan was still outstanding at the time of the audit. Without the legal opinion before contracting loans, the country risks entering into agreements with potentially unfavorable terms.
“The special audit circularized the creditors for the 36 of the 39 loans to obtain an independent confirmation of the outstanding balances, principal, interest and any other charges paid as at 31 December 2021.”
“Responses were received from 21 creditors of the 36 circularized. There were unexplained discrepancies between the loan balances as per the National Treasury records and the individual creditor confined balances as at 31 December 2021,” said Gathungu.
Going forward the Auditor is recommending that the National Treasury to carry out periodic reconciliations of the loan balances in the system with those of the creditors, with a view of tracing and fully reconciling any differences.
Further it should also establish an accountability framework for borrowed funds that specifically identifies the projects or programmes the loans are applied to.
