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How IMF left an indelible mark in this year’s Budget

FINANCIAL STANDARD
By Macharia Kamau | June 15th 2021

The National Treasury and Planning CS Ukur Yattani at Treasury building on his way to present the Financial Year 2021/2022 budget at Parliament Buildings, Nairobi. June 10, 2021.[Jonah Onyango, Standard]

Kenyans are set to start living with the harsh conditions imposed by the International Monetary Fund (IMF) over the next financial year starting July.

In the budget statement delivered last Thursday, Treasury Cabinet Secretary Ukur Yatani gave Kenyans a glimpse of the measures that the government is set to implement in the 2021/22 financial year. They range from reforms on ailing parastatals that could see many civil servants declared redundant to university students paying more as the government seeks to make loss-making universities more financially sound.

The country agreed to a number of conditions following approval of a credit facility by IMF that is expected to help Kenya fight the vagaries of Covid-19.

IMF in February approved a Sh261 billion credit facility for Kenya under a three-year programme.

Then the IMF noted that the 38-month programme under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) is also aimed at helping the country reduce its debt vulnerabilities.

The credit facility has far-reaching effects, some of which are evident in the budget for the next financial year. Some of the effects include increasing taxes and cutting spending to reduce debt levels. There are fears that the restructuring of the struggling State-owned enterprising will be reminiscent of the 1990s structural adjustment programme that left thousands of public servants jobLess.

In his Budget statement,  Yatani spelt out some of the measures that are expected to start taking effect in the coming months.

They include parastatal reforms, which could see some of the civil servants go home as part of efforts to reform State-owned entities (SOE), a process that will see some made leaner and others merged.

“Given the prevailing business environment due to the adverse impact of the Covid-19 pandemic, there is an urgent need to evaluate the financial position and governance of key state corporations and institutions. It is in this respect that the government is exploring targeted reforms to strengthen these institutions, including public universities,” said Yatani.

The IMF had in an advisory to the government cited Kenya Airways, Kenya Power and Kenya Railways Corporation as some of the entities that need to be reformed due to among other reasons poor financial performance.

IMF said the combined profit for all State-owned entities dropped by more than 30 per cent to Sh62.5 billion in the year to June last year, adding that a “handful” of them were deep in losses.

“While the deteriorating income position of the SOE sector reduces its contribution to the budget, additional fiscal pressures could arise from SOE debt on-lent or guaranteed by the government,” said IMF. Indeed, Yatani said the government had over the recent past had to provide financial support to KQ, Kenya Power and Postal Corporation of Kenya to enable them to meet their obligations.

Also set for an overhaul are three of the largest public universities – Nairobi, Kenyatta and Moi – on the recommendations of IMF, which it noted had registered persistent losses for an extended period of time.

Yatani also said there are plans to review fees for university students, noting that the current charges of about Sh120,000 per year introduced in 1991 are unsustainable.

IMF also wants the government to review its procurement process, with a view of eliminating loopholes that are exploited by corrupt individuals.

The CS noted that the government has already started a process to automate the entire procurement process.

He told Parliament that the manual procurement aspects currently in place would be retired by the end of this year. In their place will be a purely e-procurement process. Yatani said e-procurement would enable the government to run efficient procurement processes with the impact of reduced operational costs, enhanced transparency and accountability through increased bidder participation.

“Last year, we began the process of automating public procurement through an end-to-end electronic procurement system,” said Yatani.

“So far, we have developed an implementation strategy that re-engineers all public procurement processes... in order to actualise this initiative, December 31, 2021 will be the final date for rolling out the electronic government procurement system and discontinuation of the manual procurement processes.”

Treasury was, however, silent on some of the proposals by IMF, which could spring up later in the course of the financial year.

They include the IMF suggestion to raise VAT on fuel to 16 per cent from the current eight per cent so as to increase tax revenues.

Microeconomic imbalance

It was unlikely to feature in the Finance Bill, 2021 considering fuel prices are at a historical high.

The Parliamentary Budget Office noted that so far, Treasury has not been explicit in its plans to fulfil IMF’s conditions.

PBO, which advises Parliament on budget matters, noted that while it had expected to see reforms in areas like revenue administration, containment of the public wage bill, restructuring of State-owned enterprises and rationalisation of public investment projects.

“As is the case with IMF programmes, the country has to contend with fiscal and monetary measures in order to correct its macroeconomic imbalances,” said PBO.

 “Is the 2021/2022 budget alive to IMF performance benchmarks?” it poses, adding that “a review of the budget indicates that recurrent expenditure has been reduced by Sh20.86 billion from the BPS level; denoting some effort to limit the growth of this expenditure component. However, the link between the proposed budget and ‘high impact’ growth expenditures particularly under the Big Four agenda as well as the post-covid-19 ERS is not very clear.”

“The post-Covid-19 ERS has not received much prominence in the budget and is phrased in a manner that does not identify any key performance indicators and targets for the coming financial year.”

In the deal with IMF, Kenya also committed to heightening the fight against corruption, audit Covid-19 spending and strengthen the anti-money laundering and combating terrorism financing framework.

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