Deputy President Rigathi Gachagua has stated in different addresses that the new administration has found the public coffers empty. Different explanations have been given, but the bottom line is that government is cash-strapped because of its seductive spending.
Reforms need to be instituted at the Treasury to make it robust and fit for purpose to meet its obligations.
First is the issue of late disbursement of funds to counties. It is reported that August was when counties received money for the last three months of the 2021/2022 financial year, which ended in June.
That means they are yet to receive funds for the first two months (July and August) yet the national government spent Sh.55 billion in the last months of President Uhuru Kenyatta, with State House alone spending Sh4 million a day.
To cure this problem, the law should be amended to ensure that disbursements to counties don’t go to the Treasury accounts so as to protect devolution. The Treasury is part of the Executive and therefore not best placed to protect the disbursement interests of counties.
Second, it is time to delink the Treasury from budget-making. To start with, we have empowered the bureaucrats at the Treasury with undue powers and responsibilities on budget-making.
They are on the budget side and on the other end of revenue-raising, giving them a perfect perch to budget for corruption.
Treasury handling of budget-making is a Westminster hang-over that we need to shed because our structure of government changed.
In the US where we heavily borrowed the current structure of government, the White House Office of Management and Budget handles all the budget requests of the Executive and develops the budget proposal, which is then submitted to Congress.
This structure hands ownership of the budget proposals directly to the President as his agenda and he can be held accountable for it. In fact, the budget proposal is submitted to Congress as the President’s proposal.
This is exactly how it should be. For our case, the budget-making should be placed under the Office of the President, with the budget proposals the President’s and not the Treasury Cabinet Secretary's submissions to National Assembly.
Third, the Treasury should take full control of the Treasury auction market. Currently, issuance of Treasury securities is done by the Central Bank of Kenya and earn a commission. Now, the idea of using the CBK isn't wrong because it has the issuance infrastructure.
But it finds itself conflicted between chasing more revenue from the commission fees earned from issuing Treasury securities and monitoring the unsustainable accumulation of domestic debt, which is now a big concern. Treasury securities market is critical to monetary policy but the CBK finds itself acting as a broker and setting monetary policy.
Lastly is the issue about government crowding out private sector in the credit market. At the heart of monetary policy is money creation where banks use deposits to make loans to risky borrowers. Simply, banks transform short-term liabilities into long term assets.
But this money creation aspect in Kenya has been facing a fissure. Banks have been avoiding lending to risky borrowers, instead they prefer lending to govt and also hold much of their capital.
To propose that government should slow down on domestic borrowing is a long shot. Government has to refinance the maturing local debts as well as the new government is an expansionary one and will seek all avenues to fund its obligations including local borrowing. So, the money creation fissure will be with us for a whilst.
In a free for all Treasury auction that we have where there are no primary dealers, Treasury should enforce accepting bids from banks to an acceptable limit. This will be a step in trying to correct the money creation fissure problem where banks will be forced to lend to private sector their idle capital.
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Note: The results are not exact but very close to the actual.
