Burden of public debt now hits counties

Counties will soon feel the pinch of the rising public debt, what with their equitable share of revenue from the national government targeted for loans repayment in the coming financial year.

The Commission on Revenue Allocation (CRA) has recommended that counties be allocated Sh370 billion for the financial year 2022/23, the same amount they received for the current financial year.

This is despite the devolved units’ rising needs amid falling own-source revenue collection due to containment measures put in place in response to the Covid-19 pandemic.

The CRA recommendation comes eight months early, as the National Treasury accelerates its preparation of the budget for the FY 2022/23 to be passed by Parliament in March, before the House is dissolved in June to accommodate preparations for the August 2022 General Election.

The Kenya Revenue Authority (KRA) expects to collect Sh2.142 trillion in the next financial year, a Sh366.4 billion increase from the Sh1.756 trillion that is projected to be collected in the current fiscal year.

But the commission says this additional revenue would be better used servicing Kenya’s rising annual public debt obligations to reduce the fiscal deficit and ease pressure on the exchequer, which has been borrowing to lighten the burden of below-target revenue collection over the past nine years. 

The CRA says this will also give the government wiggle room to restructure its spending to finance the elections, which are expected to be held in the second month of the financial year.

Kenya’s debt has grown exponentially in recent years, hitting Sh7.712 trillion in June while annual debt servicing obligations have risen to Sh1.17 trillion in the current financial year, nearly a third of the total budget.

The stock of public debt is expected to hit Sh8.645 trillion at the end of the current financial year and rise further to Sh9.42 trillion in FY 2022/23, pending raising of the Sh9 trillion statutory debt limit by Parliament.

“The commission recommends that based on a revenue projection of Sh2.142 trillion for financial year 2022/23, the national government be allocated Sh1.765 trillion, county governments Sh370 billion and equalisation fund Sh6.8 billion. The county governments’ allocation of Sh370 billion is equivalent to Sh27.3 per cent of the most recent audited and approved accounts for the FY 2016/17 amounting to Sh1.357 trillion,” CRA chairperson Jane Kiringai said.

“The commission further recommends that the projected revenue increase of Sh366.4 billion above the financial year 2021/22 estimate of Sh1.775 trillion, if realised, be used to reduce the national government’s fiscal deficit as a matter of national interest,” Dr Kiringai said.

This comes at a time counties are rapidly increasing their annual expenditures, which means a stagnation in their receipts from the national government is set to hit their spending plans hard, unless they look for other sources to supplement their coffers.

Data from the office of the Controller of Budget (CoB) shows counties have increased their annual spending by 135 per cent to Sh398 billion in the year to June, up from just Sh169.4 billion in the FY 2013/14 – the first year of the devolved units.

During the seven-year period, spending by counties on salaries, wages, travel and operations has more than doubled to Sh281.9 billion from Sh132.8 billion, while spending on development programmes has risen more than three times to Sh116.1 billion from Sh36.6 billion.

This comes as own-source revenue collected by counties through levies and taxes on property, entertainment, trade, mining and other sources continues to underperform, underlining the devolved units’ inability to plug any revenue gaps through their own means.

Revenue collected by counties fell for the second time in a row in the year to June, with only Sh34 billion collected against a target of Sh54 billion, down from Sh40 billion and Sh36 billion in 2018/19 and 2019/20 respectively due to reduced economic activities during the pandemic.

The CRA recommendation is likely to spark a vicious battle in the Senate, as was seen last year before the senators approved the Third Basis formula for revenue sharing that is in use  until the FY2024/25.

The formula provides for a baseline allocation to each county equivalent to 50 per cent of its actual allocation for the FY 2019/20.

The parameters for the formula are population index, whose weight is placed at 18 per cent, health (17 per cent), agriculture (10 per cent), urban services (5 per cent), roads (eight per cent), poverty (14 per cent), basic share (20 per cent) and land area (eight per cent).

The formula uses data from the 2019 population census and the 2015/16 Kenya Integrated Household Budget Survey poverty index by the Kenya National Bureau of Statistics (KNBS).

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