This archive report was first published on 11 July 2020.
Kenya's Fiscal Consolidation Efforts ¶
Published on July 11, 2020, the World Bank's Kenya Public Expenditure Review proposes options for fiscal consolidation and support macroeconomic stability in the medium term to the Government of Kenya (GoK).
The World Bank recommends that the government resume its fiscal consolidation effort to maintain sustainability, crowd-in private sector-led growth, and rebuild fiscal buffers. This includes reducing 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.
The National Assembly approved the Taxation Laws (Amendment) Act 2020 providing income tax relief to low-income earners, reduction of corporate and individual income tax rates, reduction of turnover tax rate on all micro, small and medium enterprises (MSMEs), 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 drop 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.
Fiscal Consolidation Measures ¶
The World Bank recommends several fiscal consolidation measures to return Kenya's fiscal account to a prudent trajectory. These measures include improved 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. This includes 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.
Government Procurement ¶
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 savings.
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.
Public Investment Management ¶
The National Treasury should establish a public investment project baseline and undertake a rationalization exercise on dormant projects. The World Bank opines that cancellation of even a third of these dormant projects would deliver one-off expenditure savings of about Ksh.150bn or 1.5 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.
