Rotich’s budget fraught with big revenue gaps

The Kenya Revenue Authority (KRA) is expected to play a critical role in helping President Uhuru Kenyatta’s Jubilee administration realise the development targets it has set in budget proposals that Treasury secretary Henry Rotich tabled in Parliament on June 11, 2015.

This is because a large fraction of the budget programmes are financed by tax revenues whose collection is solely KRA’s.

Ordinarily, the taxman operates two revenue collection targets. There is the one that the Treasury sets and there is a second one that the KRA sets for itself. The latter is normally higher than the former for obvious reasons.

Keen observers of the going-ons at KRA’s Times Tower headquarters must have seen an intriguing phenomenon that has almost developed into a norm in recent times.

That neither of the two targets have been met in the past five years and it is all left to quietly pass with no explanation from the Treasury or the KRA.

This results in the catastrophe of huge revenue shortfalls that the government only plugs through debt financing, leading to the ballooning of public debt.

Only an insensitive government would not bother about an explosion of public debt, making Mr Rotich’s shabby treatment of the budget deficit and plans to plug it worrying.

Mr Rotich’s plan or what we can call Rotichnomics intends to plug the budget deficit by employing a multi-pronged approach that includes donor funding.

There is also a large segment of it to be financed through local borrowing, complete with the planned reduction in the amount of money an individual can lend to government through fixed debt instruments such as Treasury bills and bonds.

Finally, Mr Rotich also plans to borrow from the international financial markets as he did recently with the issuance of the Eurobond which raised more than $2.7 billion (about Sh250 billion).

All options appear rational, enticing and innocent until one begins to interrogate them.

Donor funding is usually a dicey affair often coming with strict, punitive and transient conditionalities that are becoming ever unpalatable to many borrowers.

Most politicians and senior bureaucrats across the world see donor funding as a sure recipe for handing over the sovereignty of their countries.

Donors gloat over the exposition of a country in a beggarly posture. And they surely enjoy lording it over the recipients of their largesse.

On the domestic front, commercial banks are often the big time lenders to government. Ordinarily, banks exist to facilitate economic growth through lending to the productive sectors of the economy that create jobs, spur growth and broaden the tax base.

The tragedy begins when the government starts to compete with individuals, small, medium and big businesses for commercial bank loans.

Banks obviously prefer lending to the government because the debt comes with sovereign guarantees, giving them near total payment comfort.

In any case, lenders prefer to deal with one stable, reliable and predictable entity like the government. Even if the government defaults, loan repayment programmes can always be renegotiated with less acrimony.

It saves the lenders the pain of running after thousands of individual loan defaulters.

But that is not all. Most governments often use very seductive interest rates to entice commercial banks to lend them money. This is backed by the fact that the government, as the custodian of public funds, has the sole discretion of deciding how to spend it.

The government would consequently out-manoeuvre individuals and businesses and annihilate the national goals and visions of fighting poverty, illiteracy, disease and unemployment.

Effectively, a large presence of government in the debt market crowds out lending to private enterprise, raises the cost of borrowing and ultimately pollutes the investment climate, forcing investors to flee to the fairer and more prosperous climates.

As a proportion of GDP, Kenya’s revenue collection has stayed on the path of decline since 2013 due to the many factors negatively affecting the economy, including a stagnation of the tax base in an economy that is barely growing. 

But all is not lost. The national and county governments have decided to stamp out manual financial systems of revenue collections —promising  more efficient methods driven by technology.

Section 12(1) (e) of the Public Financial Management Act, 2012 provides that the National Treasury shall design and prescribe an efficient financial management system for the national and county governments to ensure transparent, reliable and sustainable financial management and standard financial reporting.

This is in the spirit of Article 226 of the Constitution of Kenya,  which stipulates that an Act of Parliament shall provide for the keeping of financial records and the auditing of accounts of all governments and other public entities, and prescribe other measures of securing efficient and transparent fiscal management.

It is in this regard that the National Treasury has designed, developed and designated the Integrated Financial Management Information System (Ifmis), which should be used by all government ministries, departments and agencies (MDAs).

What remains to be fixed are the challenges facing operationalisation of Ifmis, especially in the area of connectivity and inadequate capacities of the intended users.

Once Ifmis is successfully rolled out, the vehicle of financial mismanagement and misappropriation of public funds shall be seriously deflated.

At the county level, for instance, it will disable the ghost of revenues being spent at source without reference to the County Revenue Fund.

It should also attack the lapses in controls over revenue collections and general apathy of county staff associated with uncertainties of the transition.

Fixing the avenues of revenue leakage should put Kenya in a place where it is able to meet set targets, and improve efficiency of spending to produce desirable results.

Mr Oliewo is an analyst with Public Research & Development Consultants (PRAD). E-mail: [email protected]