Kenya has drafted new financial management regulations to stem wastage in government and manage spiralling borrowing under the new devolved structure.

The proposed Public Finance (Administration and Management) Regulations 2013 have, among other things, set borrowing limits for both national and county governments, put caps on recurrent expenditure and harmonised government cash management systems.

The proposed rules, meant to back up the Public Finance Management Act 2012, will see civil servants with key responsibility for managing public funds held solely responsible for any omission or commission that will result in the country losing money.

Kenya is facing pressure to finance its huge Ksh1.6 trillion ($18.6 billion) budget in the current financial year, with a deficit of Ksh329 billion ($3.8 billion), which has set the government up for heavy borrowing.

The government aims to collect Ksh986.2 billion ($11.4 billion) in taxes and Ksh491 billion ($5.7 billion) in grants in the current financial year.

The slow pace of revenue growth calls for keener public finance scrutiny, especially in recurrent expenses with an eye to keeping the economy growing. The government projects economic growth of six per cent in 2013, up from 4.6 per cent last year.

Under the regulations, the National Treasury and each County Treasury will establish a Treasury Single Account through which sub-accounts of government entities will be managed, effectively giving the government a clear picture of its consolidated cash position.

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In order to minimise borrowing costs and take advantage of interest-bearing deposits, the National and/or relevant County Treasury will be required to invest any idle cash balances in government securities and the balances will be kept to a minimum through consolidation into the Treasury Single Account.

By setting up the single account, the government hopes to have a clearer oversight of public cash flows in and out of these bank accounts and ensure that no public entity operates bank accounts outside the oversight of the respective Treasury. Currently, government entities run multiple bank accounts.

Business executives said the new provisions on public finance management would bolster Kenya’s faltering governance credentials by sealing loopholes that allowed siphoning out of taxpayers’ money.

“The rules could help save a lot of resources that can be used in development of the counties, including infrastructure and agriculture. Challenging a single person is easier than confronting a line of officials,” said Vimal Shah, the chairman of the Kenya Private Sector Alliance (Kepsa), a business lobby.

County governments received Ksh210 billion ($2.4 billion) for spending, a fund the National Treasury is hoping to put under tight management.

In August, county governments were forced to revise their budgets after Controller of Budget Agnes Odhiambo said the plans had failed the public finance management test.

The governors had submitted budgets that included items such as grants for the purchase of motor vehicles, loans and mortgages for county officials at the expense of development spending.

Analysts argue that unchecked corruption and wastage of public finances remain a big challenge, despite a raft of reforms aimed at improving service delivery in the public service.

A report released last month by the Office of the Auditor-General found a third of the money spent by government ministries and departments in the 2011-2012 fiscal year could not be accounted for.

According to the report, Ksh300 billion ($3.5 billion) remained unaccounted for in that financial year, with Auditor General Edward Ouko saying that more than half of the statement errors were due to unsupported expenditure, failure by civil servants to surrender imprests, unauthorised spending, poor bookkeeping and uncleared balances.

A largely ineffective war against theft and mismanagement in government offices coupled with poor governance and service delivery have been blamed for Kenya’s relatively high political and economic risk profile.

It is estimated that Kenyans have lost at least Ksh200 billion ($2.3 billion) in corrupt deals over the past 20 years, mainly through the Goldenberg scandal, Kenya’s biggest financial scam which gobbled up Ksh160 billion ($1,8 billion) and the Anglo Leasing scandal.

“These regulations are overdue because any public officer signing any document or record pertaining to a financial transaction must bear the greatest responsibility. It will avoid situations where public officers, for instance, blame the principal secretaries for the loss of money while it’s the junior officers who signed the documents. This will introduce a sense of accountability and responsibility into the management of public affairs,” said Stephen Mutoro, the secretary-general of the Consumers Federation of Kenya.

Treasury Cabinet Secretary Henry Rotich said the public and stakeholders have been given up to November 15, to comment on the draft regulations before they are considered for rollout.

The new regulations have also set borrowing limits for both county and national governments as Treasury seeks ways of stemming Kenya’s surging public debt.

The regulations say the outstanding portion of the national government’s consolidated debt at the end of any financial year as a ratio of the projected gross domestic product(GDP) of that year should not exceed 60 per cent.

The regulations further propose that the stock of government guaranteed debt at year-end to the GDP should not exceed 25 per cent.

Latest data by the Central Bank of Kenya shows that the country’s public debt increased by Ksh110 billion ($1.2 billion) to stand at Ksh2 trillion ($23.5 billion) at the end of August, up from Ksh1.8 trillion ($21.1 billion) in June.

Money owed to domestic lenders such as commercial banks increased to Ksh1.1 trillion ($12.9 billion), a six per cent jump from the level in June. Kenya’s debt-to-GDP ratio, usually seen as a measure of the health of a country’s economy, now stands as 54.1 per cent of GDP, compared with 51.7 per cent in June.

The International Monetary Fund and the World Bank have been pushing for a lower debt-GDP ratio.

The government’s strategy has been to keep the debt-to-GDP ratio below 45 per cent in the medium term, with a target of 43.9 per cent by June 2016. Higher ratios increase the risk of defaulting on debt obligations in the event of economic and financial distress and could erode the country’s credit rating.

The debt is projected to go even higher as the country prepares to issue its first sovereign bond by early next year to raise as much as $2 billion, partly to pay off a $600 million syndicated loan and to invest in infrastructure development, including railways and power generation.

More borrowing also means that the taxes collected from Kenyans are increasingly going towards servicing debts rather than paying for other services.

In the country’s current budget, $3.9 billion has been earmarked to pay public debts, accounting for nearly 20 per cent of the $18 billion budget. Kenya is every month paying at least Ksh14.2 billion ($167 million) in interest alone to local creditors, and Ksh700 million ($8.2 million) in interest to external agents.

In a bid to put the brakes on recurrent expenditure that has overtaken development spending over the years, Treasury has proposed that national and county governments’ expenditure on the compensation of employees (including benefits and allowances) should not exceed 35 per cent of the national or county government tax revenue.

In the current financial year, Kenya has set the gross recurrent expenditure for the national government at Ksh955.5 billion ($11.2 billion) or 60.2 per cent of the total budget of Ksh1.6 trillion ($18.6 billion). This leaves only Ksh645.9 billion ($7.7 billion) for development projects.

The regulations have put public officers on a tight leash in the management of public finances.

“It is the duty of any public officer signing any document or record pertaining to a financial transaction to read and satisfy himself or herself that it is proper to give his or her signature, and his or her signature shall be evidence of acceptance of responsibility for the document, whether the public officer read it or not,” says the draft document.

The proposed laws also bar an officer from signing a blank or incomplete cheque, record or other document, pertaining to a financial transaction.

“The regulations will put a lot of pressure on government representatives to reduce waste and increase efficiency, transferring responsibility to individuals who will do their best to protect their image,” said Eric Musau, an analyst with Standard Investment Bank.

The regulations come in the wake of a World Bank report that says Kenya’s economy is underperforming partly because of corruption in government.

Reported by Jeff Otieno, Christine Mungai, Scola Kamau and Steve Mbogo