BY DOMINIC OMONDI
National and county governments have engaged in a spending contest, which has seen them duplicate each other’s functions and worsened Kenya’s fiscal position according to the latest report from the World Bank.
This comes at a time when the Government is straddled in a cash-crunch that has seen it struggle to meet some of its financial obligations including settling power bills for both legislative chambers.
The overzealous spending by the two levels of Government has wiped out the fiscal space with the public debt to Gross Domestic Product (GDP) reaching the staggering level of 50% threshold in FY 2015/16, according to the global lender.
It is not the first time that Kenya’s runway spending has come into question. Last month, ratings agency Fitch downgraded Kenya’s credit outlook to Negative from Stable, citing a steady deterioration of the country’s public finances. The agency said the downgrading reflected the country’s “weak revenue performance, increasing infrastructure spending and persistently high current expenditure.”
In its latest report ominously titled “Storm Clouds Gathering,” the Bretton Woods institution agrees with what some skeptics of devolution have always held – devolution has put added pressure on the fiscal position of the country.
However, the bank does not think that the greater problem lies in putting money in devolution, but how and where money is being used.
According to the report, it is the lack of rationalization of spending after devolution, the duplication of functions at the national and county level, and the strong appetite for spending at both levels of government that have worsened Kenya’s fiscal position.
“Although heavy infrastructural spending is a boon for Kenya’s production space and future growth, the short- to medium-term macro-fiscal framework is vulnerable to a macroeconomic shock,” said the World Bank which downgraded the country’s economic growth projections from 6% in 2015 and 6.3% in 2016 to 5.4% and 5.7% respectively.
The World Bank capped total government expenditures in the current financial year at Sh2 trillion – about 30.7% of the GDP, 23.1% of which (Sh1.5 trillion) was allocated to the national government while the 47 county governments got 4.1% GDP (Sh264 billion).
The national government’s capital and recurrent expenditures were almost unprecedentedly at par. The national Government pumped about Sh721 billion on capital and Sh782.2 billion to recurrent expenditure. Much of the capital spending was on infrastructure and security, which the lender described as “a new urgent priority.” A lion-share of the infrastructure spending went to the Standard Gauge Railway that received Sh118 billion in the FY 2015/2016. Geothermal power development got Sh13 billion.
The national government allocated an additional Sh27.1 billion to the security sector in 2015/16, bringing the total to Sh224 billion.
Other infrastructural spending went to generation and transmission of new electricity, and continued expansion of roads.
The World Bank welcomed the allocation of spending on development programs but emphasized that such spending can only be sustainable when there is a commensurate increase in revenue collections.
However, revenue collection in FY 2014/15 underperformed. This made fiscal consolidation a challenge. Total revenue declined 0.4 percentage points, to 18.9 % of GDP in 2014/15. Income tax (including pay as you earn [PAYE]) and value added tax (VAT) were the main sources of revenue, accounting for about 50% and 25%, respectively. Income tax remained stagnant at 8.9% of GDP. VAT fell marginally, from 4.6% of GDP in 2013/14 to 4.5% in 2014/15.
Import duties and excise duties as a share of GDP stood at 1.3% and 2.1%.
Both the national government and county governments fell short on the execution of their budget allocations.
For the national government, budget execution reached 76.1 percent in June 2015, down significantly from the 85.6 percent executed during the same period in 2014. This was attributed to low spending by energy, infrastructure and ICT sector. Expenditure on these sectors, which accounted for the larger share of the total ministerial budget – about 30% – stood at 49.3%. “Lower execution rates undermines governments goal to turn ambitious plans into tangible deliverables,” notes the report.
County Governments did not fare better either. Although County budget showed an expansion of both spending and revenue collection by county governments, the counties’ overall fiscal balance remaining positive and thus helping improve Kenya’s overall fiscal position, they fell short on budget execution of development expenditure. This undermined their ambitious efforts to deliver promises, according to the report.
Moreover, County Governments’ expenditures, the report says, were neither transparent nor accountable. County government revenue rose from Sh224 billion (4.4% of GDP) to Sh338.1 billion, accounting for 5.9% of GDP. Sh227 billions of it was in the form of the equitable share. Based on the local revenue outturn for the previous fiscal year, county governments revised local revenue collection potential downward.
County revenue stood at Sh62.5 billion (1.1 percent of GDP) for 2014/15, lower than the Sh67.4 billion (1.3% of GDP) budgeted for 2013/14.
With the cases of county governments putting money in some ‘mundane’ expenditure, the report lauded the involvement of the public, which it notes increased pressure on county governments to deliver. Such public participation may improve accountability, stated the report.
“However, challenges continue to hinder full implementation of the budget at the county level. They include reliance on manual entry of financial transactions instead of fully adoption of the Integrated Financial Management Information & System (IFIMIS), the lack of an internal audit function, and use of local revenue at source before depositing it into county revenue funds,” read the report in part.
Indeed, misplaced spending is not restricted to the county governments only. A recent Auditor General’s report revealed that the national Government could not account for about Sh67 billions of its expenditure.
