Pressure mounts on State to pay suppliers Sh400b

President Uhuru Kenyatta. [Standard]

Former president Mwai Kibaki is said to have had a pocket notebook which he would start by inquiring from each minister whether they had paid suppliers and wrote down notes, according to those familiar with his cabinet meetings.

“He would mark it on the small book so that the next time you arrived for a cabinet meeting, he would follow up on the progress of the pending bills,” the source said.

President Uhuru Kenyatta’s strategy is different. This was exhibited when he stood at the podium in Narok during the 56th Madaraka Day celebrations on June 1, where he read the riot act to his ministers.

“I hereby direct that all accounting officers pay and settle all pending payments that do not have audit queries, on or before the end of the current Financial Year – 30th June 2019.

Further, I direct the National Treasury to secure full compliance of this directive. I also call upon county governments to follow suit,” the head of State said.

The contrast is not only bare in delivery as in practicality as critics say. What the president said simply cannot be done borders on a PR exercise meant to ease disquiet among the private sector.

A report by analysts Genghis Capital puts pending bills at a whooping Sh400 billion accumulated by counties and the central government over the years.

Officials estimates are unavailable with the Controller of Budget as of June 2018 put, counties and the national government owe suppliers more than Sh200 billion in unpaid money for goods and services already delivered.

A Treasury report to the National Assembly showed that the State owes local traders about Sh29.3 billion, though suppliers insist total pending bills run into hundreds of billions.

“The latest Quarterly Economic and Budgetary Report cites Sh29.3 billion as the pending bill in FY2017/18. However, this amount does not consider cumulative pending bills of the previous years and the on-going bills in the current fiscal year,” said Churchill Ogutu, Senior Research Analyst Genghis Capital said.

A report by the Kenya Association of Manufacturers (KAM) found that one out of ten large firms is owed by the Government, constraining cash flow in the economy and raising inflationary pressures.

Nairobi County ranks top in the list of counties owing suppliers with Sh64 billion unpaid despite the goods and services already being delivered.

Mombasa County is a distant second at Sh3.7 billion with Kisumu, Wajir and Nakuru counties rounding up the top five with more than Sh2 billion owed.

This is detrimental to the economy given the fact the government is the largest purchaser of goods and services.

According to the World Bank, failure of the government to honour its obligations is directly linked to the precipitating economic recession.

“Payment delays affect the economy mostly through the liquidity channel,” explains the Bank in part.

“Increased delays in public payments reduce vendors’ liquidity and profitability, which in turn weakens aggregate demand and economic growth.”

Pending bills also contribute to an increase in non-performing loans especially among small and medium enterprises (SMEs).

Data from the Central Bank of Kenya (CBK) indicates commercial banks’ non-performing loans portfolio increased 54 percent between 2016 and 2017 and now stand at Sh234 billion.

According to the Stanbic Purchasing Managers Index that polls purchasing managers in a panel of around 400 private sector companies, businesses have been struggling with lack of working capital especially the failure of the national and county government to pay suppliers.

CBK boss Patrick Njoroge indicated that 12.9 per cent of all loans granted by commercial banks were in default by April, especially those lent as personal loans and to the housing industry.

Just two months earlier, the default rate was 12.8 per cent.

The 0.1 per cent rise may seem marginal but it’s an increase of a cool Sh230 million in absolute terms.

“Activity in the private sector recovered in May after the agriculture sector slowdown witnessed over the past couple of months. In any case, should the government clear arrears owed to the private sector as promised on Madaraka Day, private sector activity could benefit from a huge boost,” Jibran Qureishi, Regional Economist East Africa at Stanbic Bank said.

At the same time, lack of liquidity impedes firms’ working capital, reducing the ability to invest in expansion and job creation.

This, in turn, hurts the government’s own revenue collection measures through reducing the tax bracket amongst both individual and corporate taxpayers.

Both parliament and the executive have in recent years raised concern on the growing stock of pending bills but there has been little action to follow through with the rhetoric.

“Pending bills should be dealt with continuously and not in a rush, the government did not just wake up and found out that it has pending bills, this is basically a symptom of poor economic planning,” explained Ugunja MP Opiyo Wandayi, who is chairman of the parliamentary Public Accounts Committee (PAC).

PAC blames Treasury and the taxman for making rosy projections on new avenues for revenue collection that do not add up.

“The reason why we have these pending bills, is because of lack of exchequer releases which is a result of poor tax collection because we are too ambitious in our budgeting,” he said.

“I think we need to start being more realistic, if we have no adequate source of revenue, let us cut our clothes according to our sizes.”

The State’s untamed appetite for borrowing has also made it difficult to bridge the budget deficit running past Sh630 billion, which means suppliers fall lower on the priority list of obligations to be met.

Despite the high default rate by counties and state departments in meeting financial obligations, suppliers remain hopeful that the billions owed to them will be settled.

Optimism among business leaders was at the highest last month in nearly five years, with firms indicating a rise in new orders and new prospects for growth in the coming year.

“Some panelists noted hopes of greater economic stability and less cash flow problems, while others looked to plans of new branch openings,” said Qureishi.

This, however, should be tempered with by expected hiccups, including the recent attack on the State’s online portal used to pay suppliers and disburse funds to county governments - the Integrated Financial Management Information System (Ifmis).

At the same time, KRA missed revenue targets with Sh1.1 trillion collected by the end of April this year against a target of Sh1.6 trillion with just two months to the end of the financial year.

“Unless some miracle happens, the presidents directive cannot be implemented, first the single biggest cause of pending bills is inadequate exchequer releases,” PAC committee Chair said.

“Therefore, unless the president is telling us that there is some money sitting somewhere that KRA has collected which was just sitting somewhere waiting to be released upon his announcement then he is just basically playing into the gallery.”

The PAC also warned that rushing payments may fuel corruption if the pending bills are not verified. “The process of verifying these pending bills is a long and arduous process and it is not possible to do it in such a short time,” said the PAC chair.

“Remember pending bills are one of the avenues for corruption so if you rush it you may end up paying ghost pending bills it needs to be done methodologically.” Manufacturers and suppliers are banking on proposed prompt payment regulations to secure a lifeline.

However, the regulations cannot be implemented at the moment due to lack of legal backing. “The prompt payment regulations cannot be implemented since they are not anchored on any law,” said KAM Chief Executive Phylis Wakiaga.