National Treasury Cabinet Secretary Henry Rotich

National Treasury Cabinet Secretary Henry Rotich

The 2014 Public Expenditure Review (PER) released Wednesday outlines five underlying fiscal challenges which require urgent attention in the country. It notes that although the budget outlay for infrastructure has increased, the execution has declined in the recent years, standing at 43 per cent in 2013/14 down from over 70 per cent in 2011/12.

?The rising share of infrastructure spending is consistent with medium-term growth objectives but it is undermined by low execution and declining operations and maintenance budget,? the report, Decision Time: Spend More or Spend Smart.

It notes that while the government?s expansionary fiscal policy has increased opportunities for growth, it has also constrained public expenditure management particularly in the allocation and utilization of resources. ?The numerous challenges continue to impact on the economy. The effects of increasing public debt and mounting public expenditure are beginning to be felt,? Ms Diarietou Gaye, World Bank Country Director for Kenya said Wednesday.

?The pressure to spend more that started building before the roll out of devolution is likely to prevail for a few more years. The government needs to make choices to spend more or to spend smarter,? Ms Gaye said.

The reasons according to the report are varied and weighty: rising costs of rolling out devolution; costs of financing national security; huge infrastructure investments; funding of flagship projects to fulfill pre-election pledges; and a hefty public wage bill, among others.

It also warns that the reason why the current expansionary stance is yet to significantly create inflationary pressures is because the economy is still performing below its potential.

However, the prevailing conditions may not last for long and there is a risk that should inflationary pressures build up and rising international interest rates lead to a reversal of capital flows, Kenya?s fiscal position could deteriorate.

It however says that Kenya?s capacity to service debt, remains the same, even though the economy is much larger after the gross domestic product ( GDP) was revised in September 2014.

The revision reduced the share of revenue and exports to GDP to 20 per cent and 10 per cent, respectively.

CURATIVE HEALTH

The report is optimistic that the growth rate will likely remain around 6 to 7 per cent in the medium term, particularly if the government effectively manages its big spending decisions to contain growth of administrative recurrent costs, improve selection, prioritisation and execution of infrastructure projects, and to sufficiently provide for recurrent operating costs.

Inefficiencies within sectors adversely affect the poor. Apurva Sanghi, the bank?s lead economist for Kenya, cites the example of spending on primary health, which is highly pro-poor but receives 29 per cent of the total health budget, while 40 per cent of the health budget is spent on curative health, which disproportionately benefits the rich.

Ms Jane Kiringai, one of the authors of the report and World Bank?s senior economist for Kenya, cautions that spending on critical areas will continue to put pressure on the budgets at both national and county government levels.

Ms Kiringai warns that the prevailing situation increases the risk of inflation if economic growth accelerates beyond the prevailing levels.

DONOR FUNDS

Another concern raised by the report is that the budget provision for recurrent operations and maintenance has declined from 8.5 per cent of GDP in 2010 to 6.1 per cent in 2013/14. ?In this scenario completed facilities remain un/underutilised. Project implementation slows down because of insufficient exchequer releases of the approved budget allocations thus projects end up with long gestation periods with cost overruns and accumulated arrears,? the report explains.

The high recurrent administrative expenditure and weak revenue mobilisation could undermine the devolution objective of improving service delivery, the report adds.

In addition, the high share of ?off budget? donor funds undermines strategic prioritisation. According to the report, development partners finance about 40 per cent of Kenya?s development through country systems; additionally, there is a significant share that is ?off budget?.

By Paul Wafula, The Standard

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