The National Treasury will freeze increases in allowances paid to civil servants even as it drops intention to sack thousands of them as earlier planned.
The allowances will eventually be made part of the basic pay, according to a joint memorandum sent by Treasury secretary Henry Rotich and the Central Bank of Kenya (CBK) governor Patrick Njoroge to the International Monetary Fund (IMF).
The freeze will mainly affect those who are in the high job grades. The allowances include medical, commuter, entertainment and housing have tended to be paid on the basis of position a civil servant holds.
“We intend to tighten eligibility for allowances (especially those at the high end of the job scale), freeze them in nominal terms pending their review, and eventually include them as part of the base pay,” said Mr Rotich and Dr Njoroge.
At the same time, the Treasury has dropped the promise to cut down on the number of civil servants to hew the wage bill as earlier agreed in the IMF programme that ended early this month.
The two wrote to the IMF as they sought the Bretton Woods institution’s commitment for the precautionary financing amounting to Sh153 billion ($1.5 billion). The facility is an insurance policy from which Kenya can draw in the event of an external shock that hits the local currency.
The freeze in allowances is expected to reduce the wage bill in the long term while the inclusion in the basic pay should also means that the government cannot just introduce new allowances in an arbitrary fashion as has been the case in the past.
The Treasury is under pressure to cut spending in order to also progressively reduce public debt as a percentage of the gross domestic product (GDP).
According to the agreement with the IMF, the Treasury intends to slash the budget deficit to 6.5 per cent from nearly 10 per cent last year and eight per cent this year.
“We are committed to gradually adjusting fiscal policy, through a combination of lower spending and higher revenues.
“We target a reduction in the fiscal deficit to 6.5 per cent of GDP in 2016/17 and five per cent in 2017/18, from our unchanged deficit target of eight per cent of GDP in 2015/16,” said the Treasury.
Public debt is also to be pushed down gradually from the current 52 per cent in line with the fall in the fiscal deficit.
“Our fiscal anchor is to reduce the present value of gross public debt to 45 per cent of GDP in the medium term. Consistent with this objective,” said the Treasury and the CBK.
The Treasury also noted that as part of the fiscal consolidation, it had reduced overall spending by Sh84 billion as indicated in the Budget Policy Statement 2016/17.
The spending cuts are also being done in view of the fall in tax collections. In the first half of this financial year, tax revenues fell by nearly Sh50 billion on account of delay in the enactment of the law on excise duties as well as lower payroll-related and value add tax collections.