Broken public finances: Which repair shop?

The chilling report by pollsters Infotrak recently outlined the steep political price the government is paying for its rampant borrowing.

Hot on its heels came the furore over International Monetary Fund’s (IMF) loan of Sh255 billion, and Deutsche Welle’s quip on April 6: “Is there any logic to the IMF giving loans to governments, which have demonstrated a clear lack of accountability processes?”

The widespread disenchantment churns as Kenya’s public debt shot to over Sh7.06 trillion — about 65 per cent of GDP by June 2020.

The budget implementation review of the Controller of Budget reported that in 2020-21, Kenya was borrowing at the rate of Sh3.37 billion per day.

The President’s pronouncement beggars belief that some Sh2 billion reportedly leaks to theft daily, then, much of budget development votes lie unutilised in the two-tier government.

The nail in the coffin of this strategy is not borrowing per se. But our emergency conditions call for radical solutions.

Our defects are high costs, leakage to theft and a lack of output of goods and services from revenue amounts and borrowing.

Nothing short of shock treatment ‘out of the box’ and a new dawn of foundational thinking is called for to rein in the fiscal chaos and ignite economic revival.

Current failings increasingly bequeath future generations a negative inheritance — to repay the debts. We suggest hard measures within our grasp, some of which President Uhuru Kenyatta proposed.

As Mike Tyson famously observed, everybody has a plan until they get punched in the mouth. Kenya’s is a double punch — Covid-19 and the austerity attached to IMF loans. It’s how we react to the adversities that matters.

THESE ARE WAYS WE COULD STEADY THE SHIP:

Debt management: One measure to control the downfall and improve credibility is to embrace and strengthen the independent Public Debt Management Office that we avoided until IMF loan conditions forced it — to be implemented by July this year. If staffed with appropriate competencies, it can become a core activity with the mandate to manage debt and taper it out of the current wreckage. The Public Debt Management Office with a director-general has in the past reported to the CS Treasury. That carries as much credibility as the broken public finances the Treasury manages today.

A refurbished Public Debt Management Office should fly the flag for public finances in the financial markets. The best global example of how this is organised in Ireland. It used its smartest staff to repair debt from Irish financial collapse, to reshaping securities issues for government and tapering indebtedness, to managing pension funds and the country’s sovereign wealth fund. By the 1990s, Irish debt had climbed to AAA rating.

The agency helped shrink sovereign debt to a fraction of gross domestic product and has subsequently operated as a nexus between the public and private sector. It is the go-to institution when the government needs to interact with the financial sector.

Kenya’s Public Debt Management Office could also be transformed into an important tool for mediating in the markets by operating primary dealerships in securities. That would remove lingering suspicions of collusion among select players in the securities market.

In external debt, it could mediate debt relief, including the new Debt Service Suspension Initiative of the G-20.

Importantly, it could relieve the Central Bank of Kenya of its fiscal agent role, enhancing the latter’s focus on monetary policy.

Office of Management and Budget: A key government-wide measure is the establishment of the Office of Management and Budget (OMB), a missing link to Parliamentary Budget Office (PBO) that currently advises Parliament on the Budget, on a non-partisan, impartial analysis.

Interestingly, considering the deficiency on November 23, 2015, the President expressly requested the establishment of OMB, stating inter alia,

“I am tasking the Chief of Staff and Head of Public Service to design an Office of Management and Budget under the Presidency. The Presidency will produce a President’s Budget working with the Parliamentary Budget Office.

“This will ensure that I drive priorities, oversight, and reduce influence-peddling in budgeting, while ministries and departments concentrate on implementation and service delivery. I am of the mind fellow Kenyans that we in government should take better care of your money before we ask you for more taxes,” said Mr Kenyatta.

The OMB produces the President’s budget proposals to Parliament for passage and execution. And it would work with the PBO.

Kenya’s budget process and budget-making are currently provided for mainly in the Constitution, the Public Financial Management Act 2012 and the County Governments PFM Transition Act No.8 2013. The mandate has several key players.

The Treasury makes Budget proposals and separately by counties, Parliament, and Judiciary.

The Commission on Revenue Allocation submits to Parliament by January 1, every year its recommendations for the division of revenue between national and county governments.

The fragmented system is incapable of ridding Kenya of corruption mainly for the following reasons.

While the President wins elections as per the Constitution with an agenda and priorities that the majority vote for, and exercises power in the name of the people, they have no direct role in corresponding budget-making to apply public resources to achieve the priorities voted for.

The President signs or rejects the proposals of the Appropriations Act, the law authorising spending but could struggle to align execution with socio-economic agenda reflecting the will of the people.

The process should be moved in a firm political shift from the Treasury, which normally opposes, to the Office of the President as an OMB.

The key function in OMB would be budget formulation and execution under a monitorable results-based framework.

public spending

In the modern results-based frameworks, budget-making is a whole-of-government exercise spanning formulation, approval, implementation, and oversight.

It answers questions on transparency and accountability and what Kenya gets for each shilling of public spending. The system would retain the usual Treasury organs for garnering information from ministries, departments and agencies by issuing a circular, by August 30, and setting out guidelines for public participation.

The Office of Management and Budget would prepare an aggregated Budget Policy Statement, which the President approves and submits to Parliament by February 15.

The Budget Policy Statement would only set out the intended revenue and spending plans and priorities for the following fiscal year.

Parliament through the work of the Budget Committee would, as usual, issue its recommendations and a resolution to adopt BPS with or without amendments — within 14 days, by February 28. With BPS approved by Parliament, the OMB would prepare for the President and he would submit to Parliament — by April 30 — the detailed Finance Bill and Omnibus Budget Estimates — authorising tax and revenue collection — to be processed by the Budget Committee, with public input, along with the separate budget proposals of the Parliament and Judiciary which must meet the same deadline.

The President’s Finance Bill, according to the Public Financial Management Act, Act would need consideration and passage by the National Assembly with or without amendments, not later than 90 days after passage of the Appropriation Bill into the Appropriations Act.

From the submissions, the Parliament debates an Appropriations Bill, which on passage becomes the Appropriations Act, the approved law to spend.

For the implementation of the budget, the OMB would be vested with key functions such as management of the fiscal system, capabilities and competencies with oversight over performance, audit, procurement, e-government, and human resources. The system would be expanded from central to county governments.

There are precedents in presidential systems on the efficacy of presidential leadership in government-wide budgeting prioritisation and management.

The US has a highly reputed OMB aligning fiscal resources to the President’s policy agenda. It started via the Budget and Accounting Act of 1921, which set up the Bureau of the Budget in the Treasury. It was subsequently set up in the Executive Office of the President in 1939 and reorganised into the OMB in 1970.

Double entry-ledger System: A long-lasting weakness in public finances is the lack of accuracy of prepared financial statements of government and their vulnerability to financial manipulation. Detection of errors is weak. Sleaze and theft persist despite IFMIS operated as the sole accounting system since 2005.

Studies have concluded IFMIS does not provide the expected benefits of integrated financial planning, implementation, and control of public expenditure.

A far more effective hammer is a double entry-ledger system bequeathed to the world by the Romans and Jewish business owners in medieval times. It works seamlessly to stop theft and sleaze in businesses (including banking) and governments.

Variations of it operate in banking-Temenos or Oracle. It can be adopted or even outsourced by the government.

The double entry-ledger system has so lived up to its reputation that in countries where it is in use, such as South Africa, sleaze touches not the two-tier government, but appears as shenanigans in state-owned enterprises. Yet, many in Kenya swear by IFMIS when brought to courts or public inquiry.

A former Auditor-General described it as shot through with ‘loopholes’, a conduit for ‘budgeted corruption’. The horrors of Arror and Kamworor dams, Eurobond, aftermaths that find Treasury ‘hollowed out’ of expertise and technocratic capacity, and scandals such as National Youth Service happened under its watch.

Mbui Wagacha i s a former acting chair Board of Central Bank (CBK) and Senior Economic Adviser, Executive Office of the President