Part XIV – PUBLIC DEBT MANAGEMENT · PFM Regulations

183Guiding Principles for national government borrowing

National government borrowing shall be guided by the following principles—

(a) need to ensure stability of domestic financial markets;

(b) promotion of inter-generational equity in the sharing of burdens and benefits of public borrowing;

(d) use of objective criteria for evaluating national government entities or county government eligibility for national government debt guarantee; and

(e) prudence and equity in setting limits for debt stock levels for each county government.

184Policy frameworks in public debt management

The policy framework in the management of public debt shall comprise of the medium term debt management strategy.

185Medium term debt management strategy

(1) Any borrowing by the national government shall be informed by the medium term debt management strategy, which shall be reviewed annually, prepared and executed by the Public Debt Management Office in accordance with the delegated authority by the Cabinet Secretary.

(2) Medium term debt management strategy shall be formulated annually on a three year rolling basis.

(3) The Strategy shall be approved by the Cabinet.

(4) The medium term debt management strategy shall be prepared taking into account—

(a) the borrowing needs of the Republic of Kenya;
(b) prevailing macro-economic conditions;
(c) prevailing conditions of the financial markets; and
(d) any other relevant factors.

(5) The public debt management strategy shall entail minimising borrowing costs with a prudent degree of risks.

186Annual national government borrowing programme

(1) The medium term debt management strategy shall be implemented through the annual borrowing programme for each fiscal year.

(2) The annual borrowing programme shall include issuance of government securities and disbursement of external loans for the fiscal year and show indicative dates of such issuance and disbursements.

187Borrowing powers of the government

(1) The Cabinet Secretary shall derive powers to raise loans for the Government of Kenya from section 49 of the Act.

(2) The national government may from time to time borrow within and outside Kenya such sums of money in such amount and on such terms and conditions as to interest, repayment, disbursement or otherwise as the Cabinet Secretary may think fit, in any of the following manners—

(a) by issuing external government securities; or
(b) by issuing Treasury Bills or Treasury Bond or stock; or
(c) by advances from Central Bank of Kenya under the Central Bank of Kenya Act ( Cap. 491 ); or
(d) by bank overdraft on Exchequer Account or any other public account; or by any other loan or credit evidenced by instruments in writing.

188Use of moneys borrowed and credits obtained

All sums borrowed under the Act shall be expended only on the activities included in the approved estimates of expenditure of the national government entities.

189Formalisation of agreements for loans

Negotiation with foreign governments and agencies for external loans shall culminate into and shall be formalised into one of the following recognised instruments—

(a) loan agreements;

(b) exchange of letters that constitute an agreement;

(d) national government guarantee.

190Credit purchases

Where development partner have opted to give loans through credit purchase or commodity loan arrangements, for the purposes of budgeting and accounting the following procedures shall be followed—

(a) the amount of expenditure and matching direct payment as agreed and as applicable, shall be included in the development estimates under separate items;

(b) accounting officer shall apply through the National Treasury for utilisation of the credit purchase facility in the prescribed manner as set-out in the loan instrument;

(c) after supplying goods or services, the development partner shall notify National Treasury of the amount disbursed against the loan;

(d) the National Treasury shall record the amounts disbursed as a drawing against each loan facility;

(e) the National Treasury shall forward invoices and debit advices to the accounting officer concerned to bring the expenditure involved into account; and

(f) the accounting officer shall, on satisfying herself or himself of receipt of goods and services, record the transactions in the stores ledger card and the accounting officer shall notify the National Treasury on the receipt of goods and services.

191Modes of payment (disbursement) loan funds

The procedure to be followed in the disbursement of loan funds shall be defined in the respective agreement and shall generally assume one or more of the following methods—

(a) credit purchase; or

(b) direct disbursement to the Consolidated Fund or any other public fund established by an Act of Parliament for a specific purpose; or

(c) reimbursement, where the government pays for goods and services supplied and later on claim reimbursement from the financier.

192Borrowing purposes

The national government may borrow in pursuant to the requirements of section 49 of the Act for the purpose of—

(a) financing national government budget deficits;

(b) borrowing for purposes of cash management;

(d) refinancing outstanding debt or repaying a loan prior to its date of repayment;

(e) mitigation against adverse effects caused by an urgent and unforeseen event in cases where the contingency fund has been depleted;

(f) mitigation against significant balance of payment imbalances; and

(g) meeting any other development policy objectives that the Cabinet Secretary shall deem necessary, consistent with the law, and as Parliament may approve.

193Objectives of public debt management

The objectives of public debt management are to ensure that the government's financing needs and its payment obligations are met at the lowest possible cost over the medium to long term, with a prudent degree of risk, and to promote development of the domestic debt market while ensuring the equitable sharing of benefits and burdens of public debt between the current and future generation.

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PUBLIC DEBT MANAGEMENT OFFICE

194Functions of public debt management office

In addition to the provisions of section 63 of the Act, the functions of the Public Debt Management Office established under section 62 shall be to—

(a) prepare and update an annual medium-term debt management strategy including debt sustainability analysis in accordance with regulations;

(b) prepare and review an annual borrowing programme as appropriate including the auction calendar to facilitate auction of government debt securities;

(c) participate in negotiation meetings with government creditors, and provide technical support to the Cabinet Secretary on public debt operations;

(d) assess the risks in issuing any guarantees including contingent liabilities inherent in public private partnership projects, and prepare reports on the method used for assessment and the results thereof for the attention of the Cabinet Secretary;

(e) facilitate the recovery of any payments including interest and other costs incurred by Government due to the honouring of outstanding guarantees;

(f) prepare annual debt management report which shall include outstanding guarantees, outstanding lending and government on-lending by Government;

(g) monitor and keep track of debt levels;

(h) to keep timely, comprehensive and accurate records of outstanding Government debt, guarantees and lending in an appropriate database;

(i) advise on all debt servicing obligations of Government;

(j) prepare and publish debt statistical bulletins regularly;

(k) prepare forecasts on Government debt servicing and disbursements as part of the yearly budget preparation;

(l) compile, verify and report on all Government debt arrears and design a strategy for the settlement of those arrears;

(m) monitor that the disbursements of loans raised by Government are in accordance with agreed disbursement schedules;

(n) formulate External Resources Policy;

(o) assess, mobilize, negotiate and allocate all external resources including the consolidation of the donor commitment register in the annual national budget;

(p) examine and scrutinise proposals for financing projects of a national government entity from an accounting officer;

(q) formulate and harmonize policies and coordinate matters relating to employment of Kenyan nationals and appointment of expatriate consultants and technical assistance as experts and consultants in projects supported by development partners;

(r) ensure adherence to the accepted guidelines and procedures for procurement involving funds provided under foreign aid;

(s) coordinate, review and monitor the utilization of external resources including joint programming, joint work plans, joint visits, joint implementation, and monitoring and evaluation;

(t) profile external resources and maintain the accounts thereof;

(u) formulate an external resource, mobilization strategy to guide the national and county governments in external resource mobilization including monitoring;

(v) liaise for external economic relations with international development agencies;

(w) coordinate all international agreements involving financial economic and technical co-operation dealing predominantly with economic and financial issues;

(x) programme and manage financing of fellowships, scholarships and foreign training offers from bilateral and multilateral sources;

(y) ensure harmonization, alignment and coordination of external resources in line with international conventions of which Kenya is a member state thereof;

(z) monitor disbursement and absorption of external resources including reporting of the same by both national and county governments;

(aa) formulate guidelines and procedures for reporting and recording budget estimates and expenditure for external resource;

(bb) provide guidance and capacity development to county governments in the assessment, mobilization, negotiation and allocation of all multilateral and bilateral external resources for implementation of development partners;

(cc) support aid effectiveness initiatives and to use country systems in the management of external resources and where there is need, support in strengthening them rather than avoiding them;

(dd) ensure linkages of the National Treasury with NGOs and coordination of NGOs through the formation of a National Consultative Forum; and

(ee) perform such other functions as may be determined by the Cabinet Secretary.

195Redemption, conversion and consolidation of loans

The Cabinet Secretary may, on such terms and conditions as he or she may determine, and, when necessary, with the concurrence of the lender—

(a) repay any loan prior to the redemption date of that loan; or

(b) convert the loan into any other loan; or

196Setting debt limit

(1) Pursuant to section 50(2) of the Act, the debt limit at any given time shall not exceed the set limits determined in accordance with fiscal responsibility principles under regulation 26(1)(c) of these Regulations.

(2) In addition to the debt limit under paragraph (1), the annual thresholds for the annual borrowing by the national and county governments and their entities as required by section 50(5) of the Act shall be set by Parliament.

(3) The debt limit under paragraph (1) of this regulation shall be specified annually in the budget policy statement and the medium term debt management strategy paper.

(4) The annual new government debt and guarantees shall be consistent with the debt limits set out under paragraph (1) of this regulation.

(5) For the purposes of monitoring compliance with the limits under paragraph (1), the amount of government debt and government guarantees which are not denominated in shillings shall be recalculated at the prevailing exchange rate of the Central Bank of Kenya. [ L.N. 155/2019, r. 2.]

197Criteria for issuance of government securities

(1) The issuance of government securities to raise debt capital shall be by way of auction or such other method as Cabinet Secretary may determine.

(2) Despite the provisions of paragraph (1) of this regulation, the auction of domestic government securities shall take into account the following factors—

(a) pricing of the domestic government securities;
(b) refinancing risk of the domestic governance securities;
(c) the market stability when taking up domestic government securities; and
(d) the borrowing programme which is consistent with the medium term debt strategy and budget policy statement.

(3) The Cabinet Secretary may establish an auction committee responsible for the issuance of government securities for the purpose of financing the budget deficit comprised of—

(a) Head of Public Debt Management Office;
(b) the Governor, Central Bank of Kenya or his or her nominee;
(c) Head of the accounting policy within the National Treasury; and
(d) Head of Economic Affairs.

(4) The Cabinet Secretary shall appoint a chairperson among the members mentioned under paragraph (3) in this regulation.

(5) The Public Debt Management Office shall provide the secretariat to the Committee.

(6) Where national government securities are to be issued other than by auction, their terms and conditions shall be subject to the prior approval of the Cabinet Secretary.

(7) The Committee may co-opt the relevant County Executive Committee Member or his or her representative on need basis.

198Issuance of government securities outside Kenya

(1) The issuance of government securities outside Kenya shall be in such mode as the Cabinet Secretary shall approve in accordance with the Act.

(2) Despite the provisions of paragraph (1) in this regulation, the issuance of external government securities shall take into account the following factors—

(a) pricing of the foreign government securities;
(b) refinancing risk of the foreign governance securities;
(c) the impact on exchange rate stability when taking up foreign government securities; and
(d) the borrowing programme which is consistent with the medium term debt strategy and budget policy statement.

199Reporting on public debt by counties and national government entities

(1) National government entities and each County Treasury shall submit to the National Treasury a report on public debt in a format prescribed by the Accounting Standards Board within two months after the end of the financial year.

(2) The report to be submitted under paragraph (1), shall include at the minimum the following information—

(a) review of previous year's financing of budget deficit;
(b) composition of domestic debt;
(c) composition of external debt;
(d) on-lent loans and contingent liabilities;
(e) debt strategy and debt sustainability;
(f) outlook for the medium term; and
(g) any commitment fees and penalties paid on any undisbursed amounts of a loan.

200Annual debt reporting

(1) Not later than three months after the end of each financial year, the Cabinet Secretary shall prepare and submit an annual report to Parliament on public debt in the format set by the Cabinet Secretary.

(2) The annual public debt report under paragraph (1) shall include the following information—

(a) Review of previous year's financing of budget deficit;
(b) composition of External debt;
(c) publicly guaranteed debt;
(d) on-lent loans and contingent liabilities;
(e) debt strategy and debt sustainability;
(f) outlook for the medium term; and
(g) any commitment fees and penalties paid on any undisbursed amounts of a loan.

201Government guaranteed debt

(1) All financial obligations for which the National Treasury has issued guarantees on behalf of and for the account of the government in full compliance with the Act shall be government guaranteed debt.

(2) The Cabinet Secretary shall participate in the negotiations on the contracting of a guaranteed loan by advising the borrower on the best financial terms available, and shall sign on behalf of the national government agreements on the issuance of a government guarantees or guarantee letters.

(3) Any proposals for amendments to the loan agreement for which a guarantee is already issued shall be done with prior approval of the Cabinet Secretary.

(4) Borrowers under government guaranteed loans shall provide to the Cabinet Secretary, on a quarterly basis, information on the disbursements and repayments of funds under the loan.

(5) Where necessary, the Cabinet Secretary may request additional information on National Government guaranteed loans from the national government entities and county governments.

(6) The terms and conditions for national government entities applying for government guaranteed financing and the government guarantee issuance procedures shall be determined by the Cabinet Secretary with the approval of Parliament.

(7) Call under a national government entity guarantee or county governments guarantee shall be due only in the event—

(a) a borrower has not effected a full or partial payment on a loan in accordance with the loan agreement terms and conditions; and
(b) a creditor has notified the Cabinet Secretary after taking steps and actions provided for in the loan agreement for collection of the amounts due from the borrower within a period of one month from the date of default.

(8) The Cabinet Secretary shall require the borrower to explain the circumstances surrounding the default and the measures being taken to correct the situation within fifteen after notification by the creditor.

(9) Where the requirements under paragraph 7(b) have not been provided for in the government guarantee issuance agreement, the Cabinet Secretary shall determine together with the creditor the actions to be taken where a payment on a national government guarantee is due, as well as the time limits within which the national government should pay the overdue amount.

(10) The national government shall, from the date of the payment under a national government guarantee, enter into the creditor's rights under the loan agreement to the amount of then payment made.

(11) The Cabinet Secretary shall take necessary actions provided for under sections 61 and 94 of the Act.

202Eligibility and evaluation criteria for national government guarantees

Pursuant to the provisions of section 58 of the Act, the capital project expenditures of—

(a) county governments for which a guarantee is requested, shall meet the following requirements—
(i) the borrower shall demonstrate that the project could not be financed on reasonable terms and conditions without a government loan; (ii) provide the projected cash flow clearly setting out projected disbursement schedule and repayment plan; (iii) the borrower shall contribute a substantial portion of project funds from their own resources and in any case not less than fifteen (15) percent; (iv) a national government entity or county government that defaults on a loan shall be put on an agreed financial recovery programme by the National Treasury;
(v) it is a feasible project that has been approved by the national government entity or county government entity as may be required by national or county legislation; (vi) the application of the guarantee shall be submitted with a draft loan agreement; and (vii) any other guidelines consistent with the Act as may be gazetted by the Cabinet Secretary;

(b) national governments entities for which a guarantee is requested, shall meet the following requirements—
(i) the national government entity shall demonstrate that the project could not be financed on reasonable terms and conditions without a loan; (ii) provide the projected cash flow clearly setting out a projected disbursement schedule and repayment plan; (iii) the national government entity shall contribute at least fifteen (15) percent of the project cost from their own resources; (iv) it is a feasible project that has been approved by the governing body as required under these Regulations;
(v) concessionality of the proposed loan is fully evaluated by the national government and is determined to be at the acceptable level of grant element as per the borrowing strategy; (vi) satifies all the fiscal responsibility principles set out in the Act and these Regulations; (vii) the National Treasury has confirmed that the lender is of good credibility and standing with the Government of Kenya; and (viii) any other guidelines as Cabinet Secretary to the National Treasury may prescribe in a government gazette.

203Process for approving a guarantee for a national government entity

Pursuant to the provisions of section 58(2)(a) of the Act, and in addition to provisions under regulation 202, the following procedures shall apply in relation to a national government entity—

(a) before seeking a national government guarantee, the entity governing body of the national government entity shall approve the borrowing including its terms and conditions;

(b) after approval by the governing body, the Chief Executive Officer of the entity shall submit the proposed loan agreement and a sessional paper to the Cabinet Secretary responsible for the national government entity for approval of the borrowing, including its broad terms and conditions;

(c) upon approval under paragraph (b), the Chief Executive Officer shall submit the final, draft loan financing agreement and the approval of the governing body and the Cabinet Secretary responsible for the entity to the Cabinet Secretary requesting for the guarantee of the final loan financing agreement;

(d) the Cabinet Secretary may reject a request for loan guarantee with reasons and communicate the same to the concerned chief executive officer;

(e) upon approval of a loan guarantee request, the Cabinet Secretary shall seek the legal opinion of the Attorney General.

(f) upon receiving the views of the Attorney-General and taking them into account, the Cabinet Secretary to the National Treasury shall submit a sessional paper to Parliament with recommendations seeking its approval.

(g) the Cabinet Secretary shall communicate the decision of Parliament on the draft loan guarantee to the respective chief executive officer; and

(h) upon approval by Parliament the Cabinet Secretary to the National Treasury shall issue a loan guarantee.

204Approval of draft loan guarantee by Parliament

Upon recommendation by the Cabinet Secretary to the National Treasury, Parliament may approve a draft loan guarantee document as provided under section 58(2)(f) of the Act, only if it is satisfied that—

(a) the guarantee is in the public interest;

(b) the borrowers financial position is strong enough to enable the borrower to repay the loan proposed to be guaranteed and to pay interest and other charges based on projected revenue streams;

(c) concessionality of the proposed loan is fully evaluated by the national and county governments and is determined to be at the acceptable level of grant element as per the borrowing strategy;

(d) the loan investments are geared towards stimulating economic growth in a county government; and

(e) all legal issues relating to financial agreements tripartite signing, and subsidiary agreements are fully addressed.

205Roles and responsibilities of accounting officers in debt management operations and loan administration

For the purposes of debt management operations and loan administration, the accounting officers of a national government entity shall be responsible for the following—

(a) preparing project proposals and submitting them for approval to the National Treasury;

(b) where authorisation has been granted for the project to start, the Accounting Officer shall ensure public disclosure to intended beneficiaries within thirty days of the allocation and disbursement of the loan;

(c) after disbursement of loans, the loan recipients accounting officer shall report within fifteen days after the end of each quarter to the intended beneficiaries on the expenditures and performance achieved in relation to the loan;

(d) ensuring that during the project identification and design, the intended beneficiaries are involved through the public participatory approach to planning through public forums to enhance leadership, ownership, social accountability and sustainability of the project;

(e) preparing expected disbursements profiles;

(f) submitting loan disbursement claims for approval by the National Treasury;

(g) making comments on draft loan agreement from the National Treasury;

(h) participating in all consultations and negotiations of all loan agreements for projects and programmes under their jurisdiction; and

(i) implementing, monitoring and evaluating, in close collaboration with the national government entity responsible for National Planning, all projects and programmes within their jurisdiction.

SINKING FUND

206Establishment of Sinking Fund

(1) There is hereby established a national government fund to be known as the Sinking Fund to be administered by the Head of the Public Debt Management Office.

(2) The purposes of Sinking Fund shall be the payment of expenses of, or incidental to, redemption of an issue of Government securities and the redemption of an issue of Government securities.

(3) The Cabinet Secretary shall, upon approval of these Regulations, publish in the Kenya Gazette the guidelines for the management of the Fund.

PFM Regulations

Part XIV – PUBLIC DEBT MANAGEMENT