Kenya facing Sh3.7b funding gap

March 23, 2011

, NAIROBI, Kenya, Mar 23 – As the reality of the negative effect of drought and high commodity prices on the economy continues to sink, the government has admitted that it will not be able to raise its target of Sh609.6billion in ordinary revenue for the 2010/2011 financial year.

Finance Minister Uhuru Kenyatta said the government expects to collect Sh605.9 billion during the period which represents a shortfall of Sh3.7 billion.

According to the Budget Policy Statement tabled in Parliament on Wednesday, cumulative revenue receipts as at February 2011 amounted to Sh394.5 billion against a target of Sh426.4 billion.

And true to expectations, the stiff competition in the mobile telephony sector in the last couple of months and the implementation of the new Alcoholic Drinks Control Act have resulted in a revenue drop and contributed to the deficit of Sh13 billion in ordinary revenue.

"The underperformance in ordinary revenue was associated with various factors including the VAT withholding challenges early in the financial year, oil supply constraints that weakened tax collection and changes in taxation of cigarettes in the Finance Act, 2010," said the statement.

A shortfall of Sh18.9 billion in Appropriations-in- Aid, which are the revenues collected by various government ministries and departments was blamed on the poor performance of the line ministries.

Interestingly, despite this deficit, the government has not been able to fully utilise funds allocated to it to finance various projects.

For instance, by February 2011 total expenditure for the year stood at Sh489.4 billion against a target of Sh611.9 billion, representing an under spending of Sh122.5 billion.

This points to the lack of absorption capacity of development funds that the country continues to grapple with largely due to procurement challenges and delays in the disbursement of donor money.

"Expenditures financed with domestic resources were below target by Sh38.8 billion and those financed with foreign resources were Sh47.1 billion," the budget outlook showed.

The poor utilisation of development funds however comes against the backdrop of increased revenue requirements to meet the ongoing implementation of the new constitution, intervention to mitigate drought and also beef up security along the porous Kenyan borders. This is in addition to the resettlement of Internally Displaced Persons.

"This is together with other additional requests from line ministries have amounted to over Sh120 billion. In the face of revenue shortfall, it is obvious that these requests cannot be met by additional borrowing without causing serious macroeconomic stability," the statement indicated.

This scenario therefore calls for expenditure rationalisation to ensure that money is used towards priority needs. The government has thus been forced to raise domestic borrowing by Sh20 billion to Sh125 billion, an amount that the Treasury considers too modest to have any significant effect on the macroeconomic stability.

At the same time, it is not lost on the government that it needs to do more to keep the country\’s debt at sustainable levels.

The overall public debt has risen from 39percent of Gross Domestic Product (GDP) ratio in 2007/2008 to about 48 percent currently which is considered very high given Kenya\’s economic development.

The aim is to reduce this figure to 45 percent by 2012/2013 which further calls for the slashing of the overall fiscal deficit from the current six percent of GDP to five percent over the same period.

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