The impact of government trade debt and arrears (otherwise referred to as pending bills) on Kenya’s economy is something that has not received the required levels of attention. It is common knowledge that governments use private sector suppliers to provide public goods and services and in the process incur payment obligations.
But just like private sector entities, the government has some discretion in choosing when to pay its creditors, partly because the government sits in a unique position. First, it is both a creditor and debtor (and a distinct debtor) because most of the money it is owed is in the form of taxes.
Second, given its staggering size, the government has an edge in collecting its debt versus paying the same. Abusing this privilege by a government, which happens in several instance, can often lead to disastrous economic consequences. Consequently, in times of economic crisis (mostly orchestrated by the abuse), governments may decide to accelerate payments in a bid to release much-needed liquidity to the private sector.
In Kenya, the National Treasury, in a recent pending bills update, announced that both levels of government owed suppliers Sh227 billion (equivalent to 2.5 percent of the country’s GDP). County governments owed Sh89 billion, out of which a special audit by the Office of the Auditor General (OAG) in 2018 verified and approved payments of an amount of sh51.2 billion.
As for the national government, pending bills as at the end of the fiscal year 2018/19 amounted to Sh96.1 billion.
In addition, certain ministries, departments and agencies (MDAs) reported historical pending bills relating to prior years amounting to Sh42.7 billion.
These are quite elevated figures that are bound to negatively impact the economy. According to a 2015 empirical study by the International Monetary Fund (IMF) on the macroeconomic impact of public payment delays and arrears on European Union countries, arrears have an economically very significant impact on growth to the extent that an increase in arrears by one percent of GDP would reduce growth by 0.6 to 0.9 percentage points, depending on the specification (of the arrears).
Indeed, as the paper states, increased delays in public payments can affect private sector liquidity and profits and hence ultimately economic growth. But of more significant is the liquidity impact as, sometimes, firms may decide to sacrifice profit.
Not only do arrears impact the primary supplier, but also a chain of many other secondary suppliers, which exacerbates the multiplicity of the impact.
For instance, if one supplied food items to the government, then, apart from themselves, there are farmers, transport providers and even financiers who are also affected, in some kind of domino effect.
Consequently, the issue of pending bills calls for urgent fiscal attention. But more importantly, it also calls for two policy moves.
First, government budgeting, at both levels, should be conducted on accrual basis (as opposed to the current cash basis). With accrual, trade debt and arrears take the first charge on subsequent budgets. Second, county governments need to enhance collection of own-source revenues (OSRs).
Data from Controller of Budget shows that in fiscal year 2018/19, counties only raised 75 percent of the targeted OSRs. To this end, the Public Finance Management (PFM) Act of 2012 needs to be amended in section 160 to mandate only the Kenya Revenue Authority (KRA) to collect revenues at both levels of government.
Currently, the Act empowers a County Executive Committee member for finance to authorise the Kenya Revenue Authority or another collection agent to be a collector of county government revenue, which creates pilferages. It should actually be explicit that only KRA, and not any other entity, can collect revenues at both levels.