The Treasury Building in Nairobi. The Treasury has applied for an IMF waiver on repayment of public debt. FILE
What you need to know:
The application comes barely a month after the Controller of Budget revealed that the State had failed to pay some Sh23.4b owed to creditors.
The state of government finances has come under close scrutiny since last year when expenditure related to the creation of new structures of government under the Constitution began to impact on the exchequer issues.
The Treasury has for the second time in six months applied for an IMF waiver on repayment of public debt, shining a spotlight on the state of the government’s finances as President Uhuru Kenyatta takes the reins of power.
The application comes barely a month after the Controller of Budget revealed that the State had failed to pay some Sh23.4 billion owed to creditors.
The International Monetary Fund (IMF) says in a report released late Tuesday that the Treasury was late in the payment of “external arrears”, breaching a key condition in the deal the Kenya signed with the Bretton Woods institution for the disbursement of a Sh65 billion ($760.6 million) foreign exchange support loan in December 2011.
This is the second time that the IMF is granting Kenya the waiver having allowed the initial suspension in October last year.
“The executive board granted a waiver for the non-observance of the continuous performance criterion on new central government and central government-guaranteed external payment arrears,” the IMF said while announcing release of Sh9.2 billion ($108.5 million) under the three-year loan programme.
The Treasury and IMF Kenya country office, however, downplayed the matter blaming it on “a technical issue”.
“This is not a matter that warrants concern, we only had a slight delay because of challenges in processing obligations that fall due at the end of the month,” said Henry Rotich, the deputy director of economic affairs at the Treasury.
“We cleared our dues to the IMF just a few days after the December 31 due-date and that should not be misconstrued as inability to pay. The waivers are a formality to help one move to the next phase of the review process once all conditions are met.”
Mr Rotich further attributed delayed payment in October 2012 to the establishment of new offices such as that of the Controller of Budget that required time to acquaint themselves with the processes of handling such tasks.
IMF’s resident representative Ragnar Gudmundsson said that Kenya has so far cleared its dues. “Kenya has fully met these obligations and adopted corrective measures,” said Mr Gudmundsson.
But some analysts maintained that the waivers are a pointer to the difficulties the government is facing on repayment of public debts.
“It is a fact that the government had a rough ride through 2012 and falling behind [schedule] in payment is highly likely. It is ridiculous to blame default in payment on issues such as staffing because government is a continuous entity with systems to operate round-the-clock,” said Mwalimu Mati of Mars Group.
The state of government finances has come under close scrutiny since last year when expenditure related to the General Election and the creation of new structures of government under the Constitution began to impact on the exchequer issues.
Kenya’s total public debt rose during the period to Sh1.83 trillion or about half of the GDP and above the IMF recommended ratio of 45 per cent of the annual economic output.
In a report covering the first three quarters of the current financial year, the Controller of Budget Agnes Odhiambo says that a massive shortfall in revenue collection and slow disbursement of donor funds pushed the government into a deep financial hole that partly delayed the servicing of public debt.
Ms Odhiambo also reported that for the period up to March 28, the Treasury has not honoured exchequer requisitions by government ministries, departments and agencies amounting to Sh44 billion.
“This is likely to affect budget implementation in the affected ministries, departments and agencies,” Ms Odhiambo says in her quarterly report covering the first half of the current financial year.
The government is generally seen as a risk-free borrower, and any default in repayment of debts ordinarily affects the sovereign ratings of a country.
Public debt repayment breaches could particularly affect the Treasury’s planned issuance of a Sh85 billion ($1 billion) sovereign bond later this year as investors take cue from IMF assessment reports when evaluating a country’s creditworthiness.
“Image is important to investors and news of default in payment sends wrong signals,” Mr Mati said. Although Kenya has taken bold steps towards fiscal consolidation in the recent years, implementation of the devolved system of governance is expected to exert additional pressure on public spending, leaving the government with the challenge of financing its overall budget.
The Constitution demands that a minimum of 15 per cent of the national revenue be disbursed to the 47 counties, meaning the revenue collection targets must be set high enough to avoid stagnating growth in the counties.
But revenue collection has not been impressive since the start of the current fiscal year, partly due to a slowdown in economic activity during electioneering.
The gravity of the situation is captured by the fact that Kenya Revenue Authority (KRA) now has a formidable challenge of collecting Sh365 billion in the next four months if the government is to meet this year’s revenue target.
The Ministry of Finance’s Statement of Actual Revenue and Net Exchequer Issues for February 2013 indicates that the taxman had collected Sh452 billion in the first eight months of the year out of the Sh817 billion target for the year.
“Fiscal consolidation should continue by lowering non-priority expenditures and boosting revenue mobilisation through improvements in tax administration, introduction of a new value-added tax law and a financial transaction tax,” the IMF recommended in its assessment of the Kenyan economy.
The government is currently battling pressures from recurrent expenditures such as a ballooning wage bill. The Salaries and Remuneration Commission (SRC) estimates that the public wage bill stands at Sh458.7 billion or more than half of the total domestic revenues. That also amounts to 30.2 per cent of the total government expenditure or more than 12 per cent of the GDP.
This scenario could force the State to cap its development budget to balance out the pressures of recurrent expenditure.
President Uhuru Kenyatta in his address to a joint sitting of Parliament of Tuesday said his government would strive to tame the swelling wage bill and redirect funds to core growth programmes.
“This wage bill at slightly over 12 per cent of our GDP, is well above the internationally accepted standard of seven per cent and accounts for almost half of the revenue collected by government.
“This is unsustainable and poses a serious threat to the funding of important development projects, and has the potential to severely affect the country’s economic prospects,” he said.
