Treasury decries high loan commitment fees

The National Treasury, Nairobi in this picture taken on Wednesday, March 15, 2023. PHOTO | DENNIS ONSONGO | NMG

The Treasury officials have expressed concern over the high commitment fees they are forced to pay for undisbursed external loans, a situation they say has been aggravated by the weakening of the Kenyan shilling.

President William Ruto’s administration has suspended dozens of projects initiated by the previous regime, a move that has seen a number of ministries fail to absorb their development funds.

This has led to a buildup in undrawn external loans that have continued to incur commitment fees annually, a National Treasury official told Business Daily.

“With the weakening of the shilling, we are paying a lot of money for commitment. That (commitment fees) and interest,” said the source, who added that foreign interest payments have also been a source of pressure.

Read: Treasury saves Sh32bn on lower debt repayment

A weaker shilling against other foreign currencies such as dollars and euros has meant that the country is also taking a hit via exchange losses when servicing these foreign obligations, including interest and fees.

The commitment fee is paid by a borrower to compensate the lender for their commitment to lend. The fee is charged because the lender has set aside funds for the loan but cannot yet charge interest pending drawdown.

Roads and energy projects suffered the steepest cuts in President Ruto’s budget reorganization, which slashed Sh106.3 billion from the development budget but increased recurrent spending in various offices including the State House.

The road transport budget was trimmed by Sh47.29 billion while the budget for power generation, transmission and distribution fell by Sh40.56 billion as the new administration moved to tighten government purses.

At least 19 major projects took a hit from tweaks in government spending with their foreign funding for the current financial year being by at least Sh66.8 billion.

Funding by multilateral institutions such as the World Bank and the African Development Bank (AfDB) was affected by the cutbacks, leading to a buildup in idle funds that had already been approved.

The World Bank, one of Kenya’s largest financiers, charges a commitment fee of 0.25 percent every year for its loans given under the International Development Association (IDA), the group’s platform for fighting extreme poverty in the world’s lowest-income countries. 

Read: Treasury cash data fails to reveal a broke government

The government has paid Sh3.35 billion in commitment fees on undrawn loans contracted by the Treasury with foreign lenders in the last three years, the National Assembly’s committee on Public Debt and Privatisation said in a report in February.

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