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Economic managers at the National Treasury have termed the mountain of pending bills as a 'fiscal risk' that might derail the turnaround of the battered economy and scuttle efforts to improve the lives of Kenyans.
A fiscal risk is the possibility that an event at an industry level could severely hurt the economy.
The Ruto administration is alarmed by the potential massive damage that the pending bills - seen by the Treasury as a ticking time bomb - could do to the economy, and now is hatching radical plans to securitise outstanding bills into a long-term bond to clear the debts.
Economists consider fiscal risks as deviations from fiscal outcomes expected at the time of budget formulation. This deviation might create significant impact on government finances and impair the capacity of a government to use fiscal policy to stabilise economic activity and support long-term growth.
"To remove pressure of settling pending bills from the annual Budget allocations, a transaction adviser will be engaged to advise on securitisation of the outstanding bills subject to verification," the Treasury revealed in the recently released 2023 Budget Policy Statement.
The Treasury said potential disruption from the pending bills poses risks to Kenya's economic growth targets.
"In the context of these challenging times, Kenya's economy remains resilient with an impressive economic performance of 7.5 per cent in 2021, largely on rebound from negative growth the previous year on account of bold economic policies and structural reforms as well as sound economic management implemented over time," said the Treasury.
"However, the momentum has been slowed again by the Russia-Ukraine conflict that has disrupted global trade through increased fuel, fertiliser and food prices. For the first time in five years, inflation rate in Kenya is above the government target range mainly driven by supply side constraints occasioned by external shocks."
Fiscal threats
Treasury continued: "Aside from these shocks, the Kenyan economy is confronted by various bottlenecks including: recurrent drought affecting agricultural productivity; declining manufacturing productivity; skewed access to finance for business and development; rigidities in business regulatory framework; weak governance; and fiscal risks including pension liabilities, stalled public projects, pending bills; and high debt service that has hindered the economy from achieving its full potential."
Elevating the pending bills to a fiscal risk places their unending challenge among other potential threats to the economy that are watched keenly by policy wonks of the new Ruto administration, offering hope for speedy solutions.
The assessment by Treasury builds up on earlier warnings by the Central Bank of Kenya (CBK) which cautioned last year that regime changes at both national and county levels could delay payments of pending bills for supplies or works delivered, leading to an increase in bad loans for lenders with outstanding loans.
Pending bills have continued to rise despite a three-year-old circular by Treasury directing ministries, parastatals and counties to prioritise payment of verified arrears in their budgets.
The CBK last year feared payment of the bills could be complicated by the political transition, affecting the mountain of bad debt held by financiers and affecting their asset quality.
"Political risks associated with the 2022 General Election could impact the economy and in turn banks' asset quality. Regime changes at both national and county levels could delay payments of pending bills for supplies or works delivered, leading to an increase in NPLs (non performing loans) for those with outstanding loans," said the CBK in its latest Kenya Financial Stability Report published late last year.
True to the projection, many county governments have set up task forces to vet the pending bills by previous administrations, prompting fears that contractors and suppliers owed money might be forced to wait longer.
Earlier, government suppliers indicated that they plan to file a class action suit over arrears owed by parastatals, ministries, counties and other State agencies, which form the bulk of the country's more than Sh574 billion pending bills, according to some statistics.
The pending bills include unfulfilled statutory payments to agencies such as pension funds.
A special audit by Office of the Auditor General verified eligible pending bills by county governments as amounting to Sh48.1 billion as at June 30, 2020.
In addition, Sh108.1 billion was found to be ineligible for payment due to lack of documentation to support services rendered or work done, says Treasury.
A separate report by the Controller of Budget indicates that by last December 21, counties had settled Sh22.9 billion (47.6 per cent of the eligible pending bills) leaving an outstanding balance of Sh25.1 billion.
In order to control accumulation of pending bills, a number of mechanisms have been put in place.
In a Circular Number 2 of 2022 dated March 24, 2022, the Treasury required all governors and county executive committee members for Finance to urgently ensure outstanding bills were paid so as to comply with the Public Finance Management Act, and most importantly avoid disrupting the operations and other financial obligations of the county governments due to stoppage of monthly disbursements.
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