Increased borrowing of billions of shillings by parastatals to cover salaries, wages, and other operating costs has alarmed the Central Bank of Kenya (CBK), which is concerned that this will make it harder for the parastatals to repay the loans.
According to the CBK, the parastatals find themselves in a bad financial position owing to the effects of Covid-19, other issues arising from cheap imports, legacy problems and bad leadership that derails the recovery of the state-owned enterprises.
The bad economic situation in the state-owned enterprises has forced most of them to borrow bank overdrafts in order to sustain themselves.
“The SOEs, therefore, used long-term debt to finance operational expenses rather than for investments to generate revenues to service future debt. This limits productivity, capacity, and profitability of SOEs, and in turn their viability,” the CBK said.
Further CBK notes that parastatals’ buildup of long-term debt as a percentage of equity climbed from 134.2 to 135.3 in 2021, putting them at a higher risk of loan default.
The high borrowing by state agencies will now pose a significant risk to the budget because of the heavy borrowing.
This is despite the fact that the loans are being utilized for ongoing expenses, which do little to help the businesses address their inefficiencies, rather than investing in workable development initiatives that will guarantee they become successful and independent.
CBK now warns that the reliance by state-owned enterprises will not be sustainable.
“Reliance on fiscal support by SOEs is no longer viable due to declining fiscal space. Hence the need to increase efficiency and profitability,” CBK said.