World Bank says Kenya needs to resume fiscal consolidation efforts and seek to rebuild its fiscal buffers to withstand shocks in the medium term. The World Bank in Kenya Public Expenditure Review proposes options for fiscal consolidation and support macroeconomic stability in the medium term to the Government of Kenya (GoK).
World Bank recommends that the government needs to resume its fiscal consolidation effort to maintain sustainability, crowd-in private sector-led growth, and rebuild fiscal buffers.
The GoK has put forward a fiscal consolidation plan aiming to reduce the budget deficit from 7.8% of GDP in FY2019/20 to about 4.5% in FY2023. However, as the COVID-19 crisis persists, the World Bank says Kenya’s government is expected to continue spending to strengthen healthcare systems and to address the economic fallout associated with the pandemic.
In the short term, the government is expected to increase spending to protect lives and safeguard livelihoods while keeping delivery of its BIG 4 agenda alive. There is increased spending estimated at Ksh40 billion to strengthen health care system’s capacity, support vulnerable households, and ease firms’ liquidity constraints. Other expenditures include Ksh13.8 billion to clear pending bills, Ksh10 billion for VAT refunds, and Ksh10 billion to scale up cash transfers.
The National Assembly approved the Taxation Laws (Amendment) Act 2020 providing income tax relief to low income earners (less than Ksh24,000/month), reduction of corporate and individual income tax rates from 30% to 25%, reduction of turnover tax rate on all micro, small and medium enterprises (MSMEs) from 3% to 1%, and a reduction of the VAT rate from 16% to 14%.
Therefore, the World Bank feels that the pandemic has led to a significant fiscal financing gap as revenue collections drops and expenditure pressures increase. Revenue collection is declining partly due to a slump in economic activity but also due to fiscal measures taken to provide tax relief for the most vulnerable households and to support liquidity among businesses.
The World Bank says that Kenya’s medium-term growth prospects are dampened by the COVID-19 pandemic as it forecasts a baseline growth of 1.5% in 2020.
Fiscal Consolidation Measures
The current module of the programmatic Public Expenditure Review (PER) provides a strategy for stronger fiscal reform to return Kenya’s fiscal account to a prudent trajectory. This report identifies such fiscal savings in the government’s wage bill management, procurement, and public investment management.
Wage Bill Management
Improved wage bill management and allowances could yield an estimated Ksh19.4 billion (or 0.2% of GDP) of expenditure savings. In this case, regular cleaning of the payroll-to eliminate ghost workers, a review and rationalization of the number of allowances, and improved functionality of government payroll management systems.
Payroll controls should be strengthened through combined automation of payrolls linked to IFMIS (Integrated Financial Management Information System) and implementation of a unique personnel number across the public sector. The government should also review and rationalize the number of allowances and benefits in order to regulate over-use of travel allowances.
In addition, the World Bank recommends consolidating and centralizing the procurement for homogeneous goods and services in government procurement. This strategy optimizes government’s purchasing power and could deliver massive expenditure. For instance, consolidated demand and centralized procurement for motor vehicles and ICT equipment in FY2018 yielded approximately Ksh85.2 billion (or 0.9% of GDP) in fiscal savings.
In this case, procuring entities should be required to make use of the market price indices to receive competitive pricing and avoid overpaying suppliers and centralize standardization of product specification. In addition, there should be full implementation of the e-procurement system linked to IFMIS which automates the procurement Act and regulations.
Public Investment Management
The National Treasury should establish a public investment project baseline and undertake a rationalization exercise on dormant projects which are approximately 522. In this case, the World Bank opines that cancellation of even a third of these dormant projects or 174 projects would deliver one-off expenditure savings of about Ksh.150bn or1.5 percent of GDP.
The government should re-program existing projects and postpone low priority ones, to help free resources for crisis response and recovery. In addition, there should be the establishment of a formal systematic mechanism for regular monitoring, flagging, and declaring the official status of projects across all ministries and departments either under appraisal, prerequisites met active, prerequisites met on hold, ongoing, completed, stalled, suspended, and abandoned.