Spending cuts loom as Treasury plots mini-budget

State corporations might have to tighten their belts after it emerged that the National Treasury is preparing a mini budget to buy more Covid-19 vaccines, mitigate drought and bail out ailing parastatals.

In a statement yesterday, the International Monetary Fund (IMF) revealed that the National Treasury was preparing a supplementary budget to expand the Covid-19 vaccination programme, support the State-owned enterprises (SOE) reform plan and execute emergency spending related to drought in the northern regions of the country, and security.

This came as the IMF’s executive board announced that it had approved the immediate release of $258 million (Sh29.2 billion) to Kenya, which is likely to give critical support to the weakening shilling.

The disbursement brings the cumulative disbursements since April last year when the country signed the programme with the IMF to $972.6 million (Sh109.9 billion).

Initially, the National Treasury would have had more latitude of borrowing when doing a mini budget. However, due to a Sh264 billion IMF credit facility that requires the government to be austere, there will be little, if any, additional borrowing.

The deal with the global lender restricts the government from untamed borrowing.

“Strengthening domestic revenue mobilisation, maintaining expenditure control while protecting priority social spending and improving spending efficiency will remain essential,” said IMF Deputy Managing Director and Acting Chair Antoinette Sayeh.

While expenditure has barely reduced, the Kenya Revenue Authority (KRA) has been surpassing its target for the first time in eight years.

In the last financial year, KRA collected Sh1.669 trillion against a target of Sh1.652 trillion, attributed to aggressive tax collection efforts at the height of the Covid-19 pandemic.

Ms Sayeh also said that bold political commitment by all levels of government is needed to ensure the 2022-23 financial year budget is aligned with the three-and-half-year programme aimed at helping the country to stabilise its finances.

On December 9, senior officials from the National Treasury including Cabinet Secretary Ukur Yatani told a Senate committee that they would not increase allocation to counties despite the increase in tax revenue,  citing the need to manage growth of debt.

Albert Mwenda, director general of Budget, Fiscal and Economic Affairs at the National Treasury, said the allocation for both levels of government, as a fraction of Gross Domestic Product (GDP), had been cut because of the need to stabilise debt.

“If we grow the allocations and the revenues do not grow, then what we are saying is that we are borrowing more, and we lose out on the opportunities to pursue our fiscal consolidation path,” he said.

Allocation of shareable revenue between the national and county governments has been retained at Sh370 billion for the 2022-23 financial year.

The chairperson of the Senate Committee on Finance and Budget Charles Kibiru had sought to know why counties were not sharing in the growth of revenues.

“Chair, you need to understand that as much as revenue is growing, our expenditure also on another level has seriously grown. We are also paying more in terms of debt, and the cost of living is increasing,” said Yatani during the meeting to discuss the Budget Policy Statement for next year.

In the current financial year ending June 2022, the government plans to spend Sh3.2 trillion. To this end, it plans to raise Sh1.8 trillion in taxes and borrow Sh1.09 trillion, excluding grants.

Treasury has promised to cut down on non-priority spending to release more resources to procure more Covid-19 vaccines, drought mitigation and bail out the ailing parastatals.

Recently, the government announced that it would be disbursing an unspecified amount of money to families afflicted by the ongoing drought in the northern parts of the country.

The disbursement is part of a three-year programme the Kenyan government has with the IMF aimed at addressing the country’s debt vulnerabilities by cutting wasteful spending and ramping up tax collection.

In July, Treasury announced that it had completed a financial health check on 18 parastatals that unearthed a cumulative five-year financial shortfall of Sh70 billion, which means that a good number of the SOEs are in the red, with liabilities exceeding their assets.

Yatani said the government would soon be undertaking a rigorous restructuring of the State corporations.

“This requires multi-faceted efforts by all stakeholders to address the financial challenges facing SOEs including, but not limited to, possible reforms and restructuring through expenditure rationalisation, revenue enhancing measures and sealing of revenue leakages to minimise financial support from the Exchequer,” he said in a statement in July.

Most of the SOEs will be expected to stand on their own by diversifying revenue sources, cleaning up payrolls, selling non-profitable assets and ventures, and leveraging on ICT.

Treasury said it would be working closely with the firms to stop the bleeding of public funds.

The parastatals will also be expected to get concessional loans from multilateral institutions to replace expensive commercial loans, and defer debt repayment to the National Treasury.

It is likely what will befall four of the SOEs which, besides being non-strategic, have forced the government to regularly bail them out.

Kenya Broadcasting Corporation, East African Portland Cement Company, Postal Corporation of Kenya and Kenya Post Office Savings Bank were found to be insolvent in the Treasury survey.

The inflow of the IMF dollars into the government’s account at the Central Bank of Kenya will go a long way in replenishing the country’s reserve of hard currencies, thus helping the shilling strengthen.

The shilling has been hitting new lows and was trading at 113 by end of trading Friday.

Besides supporting Kenya’s programme to address debt vulnerabilities, the Sh264.4 billion credit facility will also boost the country’s response to Covid-19 and enhance governance.

As part of the deal, the State is expected to reform some of its fledgling parastatals, including Kenya Power, major public universities and Kenya Railways, and reduce their fiscal risks to the government.

IMF noted that Kenya has made notable advances in its structural reform and anti-corruption agenda.

One of the conditions of the programme was for the State to implement the regulations that require any company supplying goods or services to a State corporation to reveal its beneficial owners.

To this end, the IMF had given Kenya until the end of June this year to publish the names of all beneficial owners of the companies - which could reveal the owners of firms that benefited from Sh7.9 billion tenders at the Kenya Medical Supplies Authority.

This is the only condition that the State has not met under the 38-month programme, citing legal difficulties. Treasury has said it is on course to complete the requirement.

“Fiscal governance and transparency will be bolstered by the authorities’ action plan to address legal impediments that prevented the publication of beneficial ownership information related to public procurement and by planned audits of Covid-19 vaccine spending,” Ms Sayeh said.