This archive report was first published on 12 December 2019.
Published on December 12, 2019, a recent update by the National Treasury revealed that both levels of government in Kenya owed suppliers Sh227 billion, equivalent to 2.5 percent of the country's GDP.
According to the update, county governments owed Sh89 billion, out of which a special audit by the Office of the Auditor General (OAG) in 2018 verified and approved payments of an amount of Sh51.2 billion.
As for the national government, pending bills as at the end of the fiscal year 2018/19 amounted to Sh96.1 billion. Additionally, certain ministries, departments, and agencies (MDAs) reported historical pending bills relating to prior years amounting to Sh42.7 billion.
These elevated figures are bound to negatively impact the economy. Research by the International Monetary Fund (IMF) in 2015 found that arrears have an economically significant impact on growth, with an increase in arrears by one percent of GDP reducing growth by 0.6 to 0.9 percentage points.
Experts argue that increased delays in public payments can affect private sector liquidity and profits, ultimately impacting economic growth. Moreover, arrears not only affect the primary supplier but also a chain of secondary suppliers, exacerbating the impact.
Consequently, the issue of pending bills calls for urgent fiscal attention and two policy moves. Firstly, government budgeting at both levels should be conducted on an accrual basis, with trade debt and arrears taking priority in subsequent budgets.
Secondly, county governments need to enhance the collection of own-source revenues (OSRs). Data from the Controller of Budget shows that in fiscal year 2018/19, counties only raised 75 percent of the targeted OSRs.
To address this, the Public Finance Management (PFM) Act of 2012 needs to be amended in section 160 to mandate only the Kenya Revenue Authority (KRA) to collect revenues at both levels of government.
