Next president set to inherit huge public debt

Kenya’s next president will inherit a heavily indebted government struggling to pay its debts but must borrow more to stay in business, the latest report on the state of public finance indicates.

The report by the Controller of Budget shows a massive shortfall in revenue collection and slow disbursement of donor funds have pushed the government into a deep financial hole, throwing a number of programmes in disarray.

The situation has particularly become dire in recent months, forcing the government to dishonour its public debt obligations worth Sh32.6 billion.

The revenue shortfall has also forced the Treasury to suspend exchequer requisitions by ministries, departments and agencies amounting to Sh56.7 billion.

“This is likely to affect budget implementation in the affected MDAs [ministries, departments and agencies],” Agnes Odhiambo, the Controller of Budget, says in the report for the second quarter of the current financial year.

The combination of failed budget spending and intense electoral pressure that has nearly brought private sector spending to a standstill is expected to dampen the economic outlook in the near future, making it difficult for the new government to deliver on some of the lavish promises in the manifestos.

Kenya’s total public debt already stands at a whopping Sh1.8 trillion or 50 per cent of the total annual output (GDP), leaving little headroom for government to sort out the cash crunch without polluting the business environment.

“The Treasury may deny it but the truth is that the government is in dire financial straits and will need a complete departure from the current policy to keep the economy on a stable growth path,” said Mwalimu Mati of Mars Group, a non-governmental public finance watchdog.

“The government is bursting the bank at a time when we need funds for the devolution challenges ahead.”

(Read: Treasury faces cash crunch as KRA tax income falls short)

The Controller of Budget’s report shows that the total revenue collection stood at Sh360.3 billion in the first half of the current financial year ended December 31 against a target of Sh404.3 billion.

That outcome left the government with a financial shortfall of Sh44 billion that the Treasury is struggling to manage through borrowing and suspension of spending programmes.

Mrs Odhiambo attributes the revenue shortfall to a slowdown in economic growth to 4.7 per cent in the first half of the current financial year against a forecast of 5.5 per cent.

The government’s financial plan has particularly been derailed by the huge growth of the public wage bill following the award of salary increments to striking or restless teachers, lecturers, police officers and nurses.

The spending plan has also been starved of critical donor support, which the report says has not been forthcoming despite the commitments made in the budget.

Kenya’s development partners committed to finance the Sh1.5 trillion budget to the tune of Sh226 billion but had disbursed only Sh26.6 billion or 11.8 per cent of total commitments by end of December.

These shortfalls have continued to pile pressure on the exchequer, undermining the government’s ability to meet some of its most pressing obligations, including the servicing of debt.

The Controller of Budget says that between October and December 2012, the government made exchequer issues worth Sh486.6 billion or 57.1 per cent of the net estimates mainly to the education, energy and national security sectors.

The report shows that the spending crisis has hit the Roads ministry hardest, seeing it miss out on some Sh16.1 billion that had been earmarked for it in the period under review.

The Teachers Service Commission (TSC) also missed out on part of its financing after the government failed to disburse the Sh2.5 billion for recurrent expenditure.

Economic Secretary Geoffrey Mwau blames the poor state of government finances on slow disbursement of donors funds and inability of state agencies to absorb the money.

“The main challenge is the inability of ministries to absorb funds as fast and as efficiently as they ought to do,” Dr Mwau said, adding that the Treasury had taken to funding priority projects in the wake of the slowdown in revenue collection.

Financial pressure on the government is expected to intensify in the next couple of months as Kenya moves to a devolved system of government with additional spending obligations.

The Treasury last month raised the red flag on the mounting financial strains and warned of massive public service job cuts and salary reviews starting July.
Finance minister Njeru Githae said the huge public wage bill had eaten deeply into government finances, leaving little for development programmes.

“Choosing between competing objectives under tight fiscal strains is needed at this moment. Difficult choices must be made to ensure that scarce resources are directed to priority areas of economic development,” he said in the budget policy paper.

(Read: Treasury plans civil service job cuts in wage bill purge)

The Treasury reckons that new recruitments and recent pay increments to certain cadres of the civil service raised the wage bill by Sh40 billion to Sh420 billion a year or 40 per cent of the revenue, up from 30 per cent three years ago.

The Treasury expects Sh956.9 billion in total revenue collection in the current financial year.

Mrs Odhiambo says the current financial situation had affected implementation of key programmes and urges the government to find new ways of boosting revenue collection.

“There is need to enhance revenue collection mechanisms to ensure that all exchequer requisitions from MDAs are funded,” she says.

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