Parastatals on the spot in trillion-shilling loans row

 Kenya Airways

A Kenya Airways plane.

Photo credit: File | Nation Media Group

Broke parastatals have come under scrutiny following concerns they could default on repaying government-guaranteed loans.

The National Treasury says the government is exposed to fiscal a risk of Sh2.75 trillion should state-owned enterprises (SOEs) default on loans they took from both commercial and multilateral lenders against guarantees by the government.

Treasury Principal Secretary Chris Kiptoo said Kenya has 263 parastatals, most of which are struggling financially and rely on state bailouts, necessitating urgent reforms to reduce fiscal risks they pose to the government.

Many of these parastatals perform obsolete functions or overlapping roles, while some have failed to compete favourably with private entities, leading to accumulation of losses.

Mr Kiptoo has now promised extensive reforms in the SOEs sector that will see some parastatals privatised, others merged and those that play strategic roles in the economy structurally strengthened to reduce fiscal risks to the exchequer.

“We must rid ourselves of their dependence on the exchequer,” Dr Kiptoo said on Friday.

He added that SOEs preside over stalled projects valued at Sh1.1 trillion through poor management and decision-making.

“We have been talking about reforms of the sector for too long. Our fiscal space is so tight and I saw we have stalled projects worth Sh1.1 trillion. How can you preside over stalled assets of that magnitude?” Mr Kiptoo posed.

Treasury, in the draft 2023 Budget Policy Statement, said debt-stricken state corporations constitute significant financial risks to the government.

“During the review period FY 2022/23 the stock of risk exposure is estimated to be Sh2.751 trillion, where Sh2.661 trillion is from SOEs, and Sh90.64 billion is from government linked corporations (GLCs),” Treasury said. It said that, by June 2022, the total outstanding government-guaranteed debt to SOEs and government-linked agencies hit Sh1.08 trillion. This includes direct government loans of Sh120.75 billion, on-lent foreign loans amounting to Sh769 billion, direct commercial loans of Sh165.06 billion and contingent liabilities amounting to Sh135.6 billion.

“State corporations can be a major source of fiscal risk to public finances if they underperform financially. While the government has a stake in state-owned enterprises and other investments in public companies, its contractual obligations may be limited,” said Treasury.

“However, due to the strategic nature of [SOEs] and public companies, the government may be morally obligated to bail [them] out. This may pose serious fiscal risk and challenge to budget implementation.”

The largest beneficiary of state bailouts by far is national carrier Kenya Airways (KQ). The government has promised to end bailouts to KQ — which will receive Sh34.95 billion in bailout in the current financial year — by December this year.

This, as the Central Bank of Kenya (CBK) last year also sounded the alarm over increased borrowing by parastatals to pay salaries, wages and other operational expenses weakening their ability to repay back the loans. CBK said the accumulation of long-term debt by parastatals relative to equity increased from 134.2 per cent in 2020 to 135.3 per cent in 2021 placing them at a greater risk of defaulting on their loans.