Civil servants face pay delays on cash crunch

The Treasury has raised an alert over delays in paying civil servants salaries ahead of Christmas amid a cash crunch triggered by the coronavirus economic hardships.

Treasury Cabinet Secretary Ukur Yatani told MPs that increased demands and lower collections by the Kenya Revenue Authority (KRA) could force the government to either postpone or delay some payments to civil servants.

He also warned the National Assembly’s Finance and National Planning committee that the Treasury will table a supplementary budget in Parliament that will for the first time freeze some essential government services.

This signals the gravity of the country’s rapidly deteriorating cash-flow situation that is marked by falling State revenues and worsening debt service obligations.

“As we do this (payment of other essential services) …we are suspending or postponing some of the payments for salaries because exchequer is not there. Unfortunately we have no other words to say. It is not just there,” Mr Yatani told MPs while pitching for elimination of tax cuts imposed to ease financial misery resulting from Covid-19 economic fallout.

The Treasury, on average, requires more than Sh50 billion monthly for civil servants salary and another Sh8 billion for payment of pensions.

Retired government employees are yet to receive money despite receiving letters late November that their dues have been wired to their banks, underlining the cash crunch in government.

Most public servants receive pay slips ahead of December 20 that indicates the Treasury will wire cash to their accounts days before Christmas.

This looks set to delay, hurting more than 530,000 civil servants, including the police and teachers.

“Normally, I am used to getting my salary between December 15 to 20 so that I can prepare for my Christmas. I understand there has not been any release for salaries for Members of Parliament,” said Jimmy Angwenyi, the deputy leader of majority in the National Assembly and a five-term MP. County workers are also staring at a black Christmas as some of them are yet to receive previous months’ pay due to a cash crunch.

The Council of Governors recently lamented that the National Treasury was holding onto Sh78 billion meant for the counties since September, effectively grounding their operations.

“I can’t service you (MPs) because we do not have money and these are the things I want you to support us. Maybe things will improve as a result so that we the Treasury support you as required through payment of salaries and other expenditures as well as fund the CDF,” Mr Yatani told the committee.

Mr Yatani is pushing MPs to support the enforcement of the Treasury’s decision withdrawing income and value-added tax cuts imposed in April from January 1.

The lawmakers have been recalled from the Christmas recess to a special session tomorrow that will determine the fate of the tax relief through a fast-tracked debate.

Revenue collection for the first five months to November dropped by Sh100.72 billion to Sh527.7 billion due the coronavirus-related disruptions.

About 68.1 percent of the taxes or Sh359 billion was used to repay Kenya’s mounting public debt in the five months, leaving inadequate cash for payment of salaries, building of roads and stocking hospitals.

This has forced the State to borrow more to meet recurrent spending obligations like paying salaries and other services as well as transfer to counties, which stood at Sh114 billion in the period to November.

Kenya is discussing a $2.3 billion (Sh256 billion) lending programme with the International Monetary Fund (IMF) for budgetary support.

The fund hopes a deal on a new lending facility could be presented to its board in early 2021 for a loan that Kenya needed immediately.

For nearly two years now, Kenya has abandoned expensive commercial debt to cut back on ballooning repayments, while revenue collection has been squeezed by the pandemic.

As part of that strategy, it secured $1 billion (Sh111 billion) in May in the second ever such direct lending for the budget from the World Bank, after the first was processed last year.

Another loan from the World Bank is also under discussion.

The type of credit Kenya has sought from the IMF and the World Bank is a quick-disbursing facility where money flows straight into the budget to top up the public purse and is used at the discretion of the government.

Under the administration of former President Mwai Kibaki, Kenya kept away from this type of credit, with most of the support from institutions like the IMF and the World Bank coming in the form of project funding.

The budget support cash is not tied to specific projects and can be used to fund politically important activities like the Building Bridges Initiative or payment of salaries.

The Treasury says the tax reliefs introduced in the wake of Covid-19 were no longer sustainable owing to persistent revenue collection shortfalls amid a subdued economic activity which affected the implementation of government programmes.

VAT will return to 16 percent from 14 percent while businesses will pay corporate tax of 30 percent instead of 25 percent. The maximum personal income tax will be reinstated to 30 percent from the current 25 percent.

Small traders will also start paying tax at the rate of three percent from one percent of their gross sales when the Covid tax reliefs are scrapped.

The tax reliefs were aimed at lowering the cost of basic items while providing workers with additional income to spur consumption and boost retailers’ flagging sales.

The cost of basic goods like detergents, cooking oil, electricity, airtime and services like pay TV subscriptions will increase marginally with the reinstatement of the higher VAT.