Auditor-General Nancy Gathungu and Controller of Budget (CoB) Margaret Nyakang’o have flagged Sh7.7 billion in commitment charges for loans tapped but not used over five years, warning of violations of prudent use of public funds.

The Auditor-General said the commitment fees relate to unused loans tapped between the 2020/21 and 2024/25 financial years for financial capital projects.

A commitment fee is a payment that is charged by a lender to a borrower to compensate the lender for keeping a credit line open. The fee also secures a lender's promise to provide the credit line on the agreed terms at specific dates, regardless of the conditions of the financial markets.

The commitment fees were paid to international lenders to reserve funds that ministries failed to utilise, sparking fresh concerns over the Treasury’s poor debt management strategies.

“Successive audits have identified recurring payment of commitment fees on undrawn loans, indicating instances where borrowing commitments were undertaken before projects were sufficiently ready for implementation,” says Ms Gathungu.

The amount paid in commitment fees and other charges is enough to cater for secondary education of 346,161 learners from poor backgrounds in senior secondary schools per term, at Sh22,244 per learner per term, as per the government capitation funding policy.

The capitation funding policy also has Sh15,042 allocated per learner per term in Junior Secondary Schools (JSS) and Sh2,330 per term for learners in primary schools.

Section 12 (2) of the Public Finance Management (PFM) Act provides that the Treasury shall promote transparency, effective management and accountability of public finances in the national government.

“The National Treasury shall ensure proper management and control of, and accounting for, the finances of the national government and its entities to promote the efficient and effective use of budgetary resources at the national level,” the PFM Act states.

The National Assembly Committee on Public Debt and Privatisation, in a report, has also warned that the continued accumulation of commitment fees on undrawn loans indicates low project readiness, slow disbursements and inefficiencies in loan execution.

To reduce the accumulation of the commitment fees, the committee, whose chairperson is Balambala MP Abdi Shurie, wants the Treasury to adopt and enforce performance-based benchmarks and disbursement readiness protocols.

“The government must ensure project readiness before contracting loans and actively track undisbursed funds to cancel idle loan tranches promptly,” reads the committee’s report.

The committee adds: “This will prevent accumulation of undrawn external loans, which continue to attract costly commitment fees.”

Dr Nyakang’o in her report to Parliament has also warned against continued accumulation and payment of commitment fees for undrawn loans. The CoB notes that this tendency leads to the high cost of borrowing, “characterised by peak interest rates on government securities,” which has significantly raised interest payments.

“There is a need to minimise commitment fees, penalties and other incidental borrowing as such charges do not contribute to the productive utilization of borrowed funds,” says Dr Nyakang’o in her budget implementation review reports.

The CoB notes that in the first six months of the fiscal year 2025/26, the National Treasury undertook a liability management operation targeting the $1 billion issued in 2018, due 2028.

Further, the government spent $657.9 million, about Sh86.2 billion, to buy back $628.4 million, about Sh82.3 billion, a premium of $23.57 million or Sh3.1 billion and accrued interest of $5.89 million, about Sh0.77 billion.

“... the transaction resulted in an additional cost of about ShSh3.86 billion above the principal amount,” says Dr Nyakang’o.

Previously, the CoB has recommended to MPs to consider proposing measures to strengthen parliamentary oversight throughout the entire public debt cycle, from borrowing and utilization to debt servicing and repayment.

According to the CoB, “the MPs may also consider proposing strengthening transparency through timely, comprehensive and citizen-friendly disclosure of public debt information and support the establishment of a comprehensive public debt registry anchored in law.”

→ dmwere@ke.nationmedia.com

Follow our WhatsApp channel for the latest business and markets updates