The recent approval by the Cabinet on 15th January 2024 to implement the Treasury Single Account (TSA) sets the stage for the consolidation of government finances in Kenya. Government funds have traditionally been spread across numerous bank accounts under the names of various government MDAs. As of June 2023, the banking sector held Kshs. 509.8 billion in deposits from the national government and other public sector entities, constituting 10.4% of the sector’s total deposits during that period.

The TSA aims to provide the government with a consolidated view of its total available cash balances at any given time, spanning across Ministries, State Organs, State Departments, State Agencies/Corporations, and other government entities. This is in a bid to enhance public finance management. The consolidation is expected to simplify government banking, enhance the visibility of cash resources, increase transparency, and help control expenditure while minimising fragmentation of government accounts in commercial banks. Additionally, the initiative is projected to reduce administrative costs by eliminating fees and charges associated with maintaining multiple bank accounts.

TSAs follow a two-model system. The first is a centralised arrangement where all transactions flow through a single account, typically maintained at the Central Bank. The second model is a hybrid arrangement. This allows Ministries, Departments, and Agencies (MDAs) to maintain separate accounts linked to a central account, with all funds required to be transferred to the primary TSA account at the end of each day. In September 2023, the National Treasury’s Director-General in charge of accounting services and quality assurance, Mr Bernard Ndung’u, indicated that Kenya will pursue the second TSA model. The structure of Kenya’s TSA includes the National Exchequer Account, the TSA Sub-Account, and the County Revenue Fund. The system is designed to seal loopholes and leakages in government finances, provide real-time, daily information on government cash resources, and eliminate ambiguity regarding the volume and location of government funds.

The TSA builds on similar reforms in government cash management, such as the consolidation of all payments for government services to one paybill. As with the TSA, the directive is part of the government’s efforts to ensure better management and transparency in revenue collection and to stem leakages from numerous collection points. Owing to the consolidation, the revenue collected by the government on the eCitizen portal in a single day crossed the Ksh 900 million mark. The successful implementation of the TSA will contribute to an increase in funds available to the government by accessing deposits in commercial banks that are currently unmonitored by the National Treasury (NT). The government currently lacks visibility on funds scattered across more than 10,000 accounts. The situation is further exacerbated owing to the substantial amount of deposits in these unmonitored accounts, weighed against the government’s significant borrowing, all while paying a premium for its own money. 

Banks entrusted with government deposits face a notable threat to their interest income. This consolidation results in a potential reduction in interest income generated from holding these funds, thereby impacting the overall profitability of these financial institutions. Additionally, the restructuring of financial processes within the TSA contributes to a decline in transactional activity, directly affecting the fee-based income banks traditionally earn when processing payments for government MDAs. The absence of extra cash liquidity derived from government cash balances in commercial banks, typically utilised to extend credit and generate interest, further exacerbates the revenue loss for banks.

As a consequence of reduced access to government deposits, banks are compelled to navigate an environment where the cost of funds is heightened. This necessitates a more competitive approach to attract deposits from the private sector, potentially resulting in increased interest rates on loans. The shift of funds to the TSA additionally diminishes the availability of funds for investment portfolios, jeopardising the operational efficiency of banks and compromising their investing capabilities.

Moreover, banks are confronted with the need to adapt their operations and upgrade systems to align with TSA requirements, presenting operational challenges that may require substantial adjustments. In summary, the impact of government deposit consolidation into the TSA is multifaceted, affecting various facets of banks’ financial health, operational processes, and competitive dynamics within the broader financial landscape.

With signs indicating Kenya’s inclination towards adopting the decentralised TSA model, commercial banks could emerge as trustworthy financial partners in facilitating the daily transfer of funds to the central account. The daily cash transfers inherent in the decentralised TSA model present a lucrative avenue for commercial banks to generate revenue through transaction fees. By implementing a transparent and competitive fee structure, the bank can attract government transactions, thereby contributing to a robust income stream. 

Furthermore, banks ought to consider offering innovative technology and digital solutions for bank transfers, along with user-friendly platforms tailored for MDAs to seamlessly interact with the central account. This strategic move not only enhances the efficiency of government financial transactions but also reinforces the security of the overall process. The implementation of the decentralised TSA model additionally opens doors for exploring innovative avenues for revenue acquisition. This may involve the development and offering of new financial products, exploration of investment opportunities, and enhancement of fee-based services. 

The implementation of the TSA will call for amendments to the relevant legal frameworks, such as the Public Finance Management (PFM) Act. Commercial banks should consider initiating engagements with relevant government officials to actively participate in discussions about the implementation of the decentralised TSA system and explore opportunities. Similarly, the TSA  presents a good opportunity for commercial banks to deploy tech infrastructure and branch networks as receiving banks. 

Sidebar: National Debt Management strategy in light of Dr. Sirima’s exit

Against the backdrop of escalating debt sustainability concerns, the Kenya Kwanza government is undergoing a significant change in leadership within the Treasury, marked by the departure of the director-general in charge of debt management, Dr Haron Sirima. Kenya’s national debt has now surpassed Sh10 trillion, with an alarming 50 percent of government revenues allocated to debt repayment. Dr. Sirima’s signal of a U-turn from the original plan to settle part of the Eurobond maturity scheduled for June 2024 underscores the gravity of the nation’s debt situation, indicating a higher risk of debt distress.

The government’s response to these challenges involves a tight fiscal stance, aiming to reduce debt vulnerabilities through the implementation of reforms geared towards broadening the domestic tax base and improving tax compliance. However, the nation faces external shocks, such as global supply chain disruptions due to global conflict, alongside high interest rates that limit access to credit and exacerbate debt servicing costs.

While there is optimism about the improvement of Kenya’s debt indicators as the economy recovers from global shocks and fiscal consolidation efforts persist, it is crucial to acknowledge the vulnerability of Kenya’s debt sustainability to unforeseen exogenous shocks.