Businesses holding out for payments from the government for working capital are set for tougher times after the National Treasury did not allocate funds for the payment of pending bills running into hundreds of billions of shillings in the latest Supplementary Budget despite earlier promises to do so.
Private sector players had pegged their hopes on the Supplementary Budget II for the partial settlement of their dues following comments by Treasury principal secretary Chris Kiptoo earlier this year that the government would begin to pay claims once they were verified by a special committee President William Ruto created in June 2023.
The Pending Bills Verification Committee tabled its first report last month, showing that it has so far certified pending bills worth Sh110 billion.
By September last year, the national and county governments owed suppliers and contractors Sh631.56 billion. State corporations were the biggest debtors at Sh509.37 billion, with the balance owed by county governments and ministries, departments and agencies (MDAs).
The failure to make provisions for these dues in the second mini-budget of the fiscal year now risks hurting businesses struggling to service obligations to their creditors on cash flow constraints.
These obligations include servicing bank loans, where the stock of bad loans had climbed to an 18-year high of 16.1 percent of the banking sector’s loan book by the end of April from 15.5 percent in February, translating to more than Sh630 billion in defaults.
Last week, the Central Bank of Kenya (CBK) said that the increases in non-performing loans (NPLs) were noted in the agriculture, real estate, tourism, restaurant and hotels, trade and building and construction sectors.
Cash-strained businesses have also resorted to laying off staff or freezing hiring, negatively affecting economic growth and the ability of the government to collect enough taxes to meet the set budgetary expenditure.
The National Assembly’s Budget and Appropriations Committee, in its report of the Supplementary Budget, faulted the Treasury for failing to make a provision for paying part of the pending bills, terming it a significant risk for the stability of affected businesses.
“This lack of provision is worrisome because budget adjustments are likely to lead to the accumulation of pending bills. Such a scenario has significant implications for the balance sheet and economic growth, as it further squeezes liquidity from businesses,” said the Committee in its report.
“The accumulation of pending bills can hinder the financial health of these businesses, potentially leading to cash flow challenges and affecting their operational stability.”
The accumulation of pending bills indicates a failure by State agencies to adhere to the Treasury directives that they settle old debts before committing to new projects.
The Public Finance Management (National Government) Regulations 2015 require State agencies to settle pending bills as a first charge in their budgets.
In a statement to the National Assembly on the Supplementary Budget II, the Treasury cited challenges in revenue collection that have led to delays in exchequer releases, escalation of debt service costs, and settlement of expenditure carryovers from the 2022/2023 fiscal year and settlement of pending bills.
The Supplementary Appropriation Bill, which was assented to on Monday by the President, set the overall budget for 2023/2024 at Sh3.848 trillion.
This was an increase of Sh102 billion compared to the original estimate set in the June 2023 budget but also reflects a cut of Sh133 billion from the revised expenditure of Sh3.981 trillion that had been set in the Supplementary I Budget of November 2023.
The Treasury also cited expenditure pressure from increased demand for resources to cater for emerging priority spending interventions such as the El Nino and security operations.
In the 10 months to April, the government had collected a total revenue of Sh2.179 trillion against a pro-rated target of Sh2.402 trillion, therefore suffering a shortfall of Sh222.2 billion, as per disclosures in the budget committee report.
Taxes, or ordinary revenue, had yielded Sh1.826 trillion against a target of Sh2.094 trillion, indicating a shortfall of Sh267.9 billion. This shortfall in taxes was partially offset by an overperformance of Sh45.4 billion in ministerial appropriations-in-aid.
The revenue shortfall in the current year has been seen despite the government putting in place enhanced tax measures that were meant to expand tax revenue by Sh530 billion to Sh2.57 trillion in the 2023/2024 fiscal year.
The initial revenue estimate contained in the June 2023 Budget has, however, been scaled down by Sh119 billion in the second supplementary budget, which now projects taxes to yield Sh2.45 trillion.
