How delayed State spending, pending bills could derail Big Four agenda

A pile-up of pending bills, poor absorption of development funds as well as rising salaries and allowances risks stalling the implementation of President Uhuru Kenyatta’s Big Four agenda, an analysis by the World Bank shows.

The Big Four agenda includes food and nutritional security for all, delivering at least 500 000 affordable housing units, increasing the share of manufacturing from nine percent of gross domestic product (GDP) to about 15 percent in 2022, and providing universal health coverage by 2022.

An analysis of the country’s public expenditure, however, exposed financial holes that may frustrate the President’s legacy projects.

“There are significant challenges stemming from a slowdown in revenue collection, a growing demand for transfers to county governments, and the need to fund the Big Four agenda.

“These issues raise the probability for fiscal slippages, requiring adequate mitigation to safeguard macroeconomic stability” the World Bank says.

The World Bank says efficient and impactful utilisation of public resources would be key to the implementation of President Kenyatta’s legacy programmes given the current tight fiscal space.

“Public sector resources devoted to the Big Four would need to be contained within a fiscally sustainable resource envelope and should seek to reduce inefficiencies in spending in order to maximise impact,” it says.

Statistics showed that budget execution remains low in Kenya, particularly for development spending. For instance, over the period 2013-18 underspending on the development budget has been substantial with an estimated 31 percent of the budget is not absorbed.

“Budget execution is also quite weak at the county level, making it difficult for the government to achieve its development objectives” the World Bank observed.

Data further showed that while the national government has shown some improvement in the execution of its development budget — with execution rates rising from 76 percent in 2014/15 to 87 percent in 2017/18 — county-level government’s execution has declined, from 74 percent in the financial year 2013/14 to 62 percent in the 2017/18 fiscal year.

“Delays in budget execution suggests absorption capacity constraints which call for capacity building in project appraisal, selection, planning, budgeting and execution across all levels of government.

A synchronised project implementation cycles to budgeting and faster exchequer releases could contribute to enhanced credibility of the multiyear budget (and the medium-term expenditure framework),” says the World Bank.

The lender also flagged a pile-up of pending bills as a potential threat to the Big Four agenda due to the risks it poses on the country’s overall economic performance.

The 2018 enterprise survey for Kenya showed that about 12 percent of the 1,001 firms surveyed (or 120 firms) have had a contract with the government that was in arrears with the total value of pending bills estimated to have increased from 0.9 percent of GDP in the financial year 2015/16 to 1.6 percent in 2017/18.

“This, if allowed to persist, could reduce firm liquidity and cause postponement of new investments. It could also increase firms’ default rate (in business to business transactions), which can be associated with a rise in non-performing loans for the banking sector,” the World Bank cautioned.

“This trend underscores the importance of curbing pending bills and arrears as key measure of fiscal prudence, without which an economy could descend into weaker growth prospects as private sector activity and aggregate demand are curtailed.”

The World Bank urged the government to clear any pending bills and arrears as well as reduce costs and time overruns for development projects, and enhance the efficiency of public spending.

Rigid spending by the national government has also been flagged as a threat to the realisation of the Big Four agenda.

The World Bank observed that with up to 68 percent of the central government budget being on items of high to medium rigidity, this could undermine the government’s ability to reallocate resources to priority sectors.

Spending on transfers to counties, State-owned enterprise (SoEs), Parliament, and the Judiciary, interest payments, and compensation of employees present a large portion of expenditures that is implicitly non-discretionary and undermines the ability of the government to reallocate resources to say the Big Four priority sectors.

“A medium to long term strategy may be needed to shift the rigidity of spending through either enhanced own source revenue of the counties, assessing the financial viability of some SoEs and improved debt management to reduce the interest rate obligations through a plan to retire short-term and expensive commercial debt” the World Bank advised.

Such a strategy would, however, come with pain because most targeted items such as salaries for permanent employees, interest payments, and county transfers would be tough to adjust without high costs (judicial, political, and social expenses).

“For permanent employees, to contain growth in this expenditure, evidence from other jurisdictions shows that restricting new hires to critical and technical services such as teaching, security and healthcare may be necessary.

“Even in these critical areas, additional hires should be remitted to replacing retired officers and those transitioning out of the profession” the World Bank said.

The share of compensation of employees in total national government expenditure has nearly doubled from 14.3 per cent in 2013/2014 financial year to 25 per cent in 2017/18 thanks to wage agitations and implementation of resulting collective bargaining agreements (with labour unions).

The poor performance in revenue collection by counties also stays in the radar as a threat to the financing of the Big Four agenda.

“Transfers to counties remains a constitutional obligation and given its dependency for services delivery at the counties, the only chance to stabilise transfers is to step up counties’ own-source revenue (OSR) mobilisation” it added.

Previous estimates of OSR potential shows scope for additional income mobilisation within counties that could reduce pressure on the exchequer if realised.

“Finally, improved debt management to reduce the interest rate obligations through a plan to retire short-term and expensive commercial debt could help.

“A known alternative is to raise the share of concessional borrowing relative to non-concessional debt in future financing of the deficit, even as the government stays the course in its announced fiscal consolidation pathway” the World Bank further said.

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