The government spent Sh415.7 billion or more than half of the cash it borrowed in the financial year ended June 2024 on recurrent expenses such as payment of salaries and utilities in breach of the law, highlighting the impact of missed tax collections amid spending pressure.
Latest Treasury disclosures in the draft 2024 Budget Review and Outlook Paper (BROP) show that of the Sh766.4 billion loans the State tapped in the review period, just Sh350.7 billion or 45.8 percent was used to fund development projects, leaving the rest for recurrent spending.
The Sh415.7 billion was an 82.5 percent rise from Sh227.7 billion or 23.1 percent of borrowed money that went to recurrent spending in the previous year.
This breaches Section 15(2) (c) Public Finance Management (PMF) Act 2012, which dictates that the government should use borrowed funds only to finance development projects.
The diversion of borrowed money to recurrent spending came in the period when revenue grew by 14.5 percent to amount to Sh2.702 trillion but missed the target by Sh204.9 billion on account of ordinary revenue collection and ministerial appropriation-in-aid missing the target by Sh172.1 billion and Sh32.8 billion respectively.
Despite the fall in revenue collection, the government stepped up recurrent expenditure by Sh430.63 billion or 19.2 percent to Sh2.678 trillion when compared with the previous year, even as it cut development spending by Sh109.16 billion or 16.7 percent to Sh546.38 billion.
The latest spending of borrowed money on recurrent expenses is 2.4 times what was spent in the year ended June 2021 when the government directed 19.1 percent of loans to Covid-19 interventions including cushioning the poor and the vulnerable, purchasing vaccines and hiring additional healthcare workers.
“Over the medium term, the national government’s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure,” reads the PFM Act, which defines “medium term” as a period of between three and five years.
This means that the government should have ensured that after 2017, no borrowed funds are directed to paying salaries and utilities.
Diverting loan money for recurrent spending has the prospect of weakening the government’s ability to dial down on borrowing since the projects that ought to unlock growth in the economy and stimulate tax revenue collection are either foregone or delayed.
Treasury PS Chris Kiptoo says cash flow challenges on the back of reduced revenue collections, hit the implementation of the 2023-24 financial year.
“Budget execution for the financial year 2023/24 was hampered by challenges in revenue mobilisation and financing that led to cash flow problems and associated build-up in unpaid bills. By the end of June 2024, revenue collection was affected by the sharp drop in business activity amid widespread economic challenges that included higher inflation and exchange rate depreciation in the first half of the FY 2023/24,” said Mr Kiptoo in the BROP.
The State had started complying with this PFM Act, with a Treasury document saying all the money borrowed in the financial year ended June 2020 went to development spending. However, this was rattled by Covid-19 disruptions that saw the government direct Sh170.68 billion or 19.1 percent of the 2020-21 borrowings to recurrent spending.
The Treasury said then the recurrent spending in the year to June 2020 was occasioned by spending interventions to cushion the poor and the vulnerable as well as to contain the spread of the infectious virus, including recruitment of additional health staff, additional support to health workers and purchasing vaccines.
A special audit by Auditor-General Nancy Gathungu’s on the utilisation of commercial loans in 11 and half years to 2021 showed the Treasury cannot show the projects funded with 13 syndicated loans and sovereign bonds totalling Sh1.3 trillion it tapped in this period.
Ms Gathungu said in the audit made public in July that even though the money was received in the Consolidated Fund, there was no evidence that the funding had been applied exclusively to finance development expenditures.
“It was noted that once the loan proceeds have been received in the Consolidated Fund, the monies are utilised for normal government expenditures that are falling due at the time of receipt of the said funds. No schedule is maintained on the expending of the loan proceeds,” said Ms Gathungu in the report.
Ms Gathungu asked the Treasury to establish an accountability framework for borrowed funds that specifically identifies the projects or programmes to which the loans are applied to. She also asked the Treasury to adhere to the law restricting borrowed money to development expenditure.
