Kenya is inching closer to a financial crunch as it seeks funds to finance next month’s elections, with revelations the UN is holding back Ksh18 billion ($209.3 million) in reimbursements over Somalia incursion — money Nairobi had budgeted for the polls.
Well-informed sources have told The EastAfrican that the African Union Mission in Somalia (Amisom) has demanded a forensic audit on Kenya’s reimbursable claims on costs it incurred in the war in Somalia since the incursion in October 2011.
It is a major setback for Kenya because a protracted disagreement with Amisom over the claims is something the country is hardly prepared for right now.
Kenya is going into a General Election on March 4, with a huge hole in its budget. Indeed, the budget for the current financial year was planned on the assumption that the government would receive the Ksh18 billion ($209.3 million) from Amisom.
This development is bound to put even more pressure on the government’s shaky finances.
Under an arrangement approved by the UN Security Council, Amisom was supposed to reimburse Kenya expenses it incurred on personnel and equipment when the country deployed forces in the war in Somalia last year.
The gap in government’s finances has ballooned to unprecedented levels, now estimated at slightly over Ksh130 billion ($1.5 billion) — equivalent to more than 10 per cent of the Ksh1.2 trillion ($13.9 billion) budget approved by parliament in June.
Even with the gap having reached worrisome levels, new fears have emerged that the negative fiscal position may further worsen with reports that Treasury has been slapped with an even bigger additional spending requests by security agencies.
In addition, the country must grapple with having to fund a completely new system of devolved government with 47 counties, governors and county assemblies.
Kenya is the only country in East Africa with a modestly developed domestic credit market to borrow from. But local borrowing is not much of an option right now because the government has almost surpassed its borrowing target for this financial year.
The Kenya Revenue Authority (KRA) said mid-January it had collected Ksh380 billion ($4.45 billion) in taxes in the first half of the current fiscal year which ends in June — a figure which is Ksh34 billion ($12 million) short for the period’s target and less than half of Ksh881.2 billion ($10.3 billion) KRA aims to collect by June.
The shortfall was a result of a decline in revenues in all the major tax divisions, including value added tax, domestic excise duty, trade taxes and petroleum taxes.
The increased pressure to meet tax collection target has pushed KRA to adopt such innovative strategies as setting up new units to catch tax evaders and slapping businesses with new taxes.
Speaking to The EastAfrican on condition of anonymity, Treasury insiders warned that were Finance Minister Njeru Githae to bow to the new pressures by security agencies for more money, the government will go into the elections with a fiscal gap whose negative consequences will start showing in macro economy almost immediately.
The timing of the new pressure for money on the Treasury by security agencies is also raising eyebrows.
In the past, it has been observed that out-going ministers and permanent secretaries tended to make last minute spending decisions — pushing through questionable payments to lock in gains — especially in the period when parliament is not sitting. Whichever way things go, Mr Githae will be a man under watch.
What is clear is that the government is right now in no position to accept new expenditure requests. Several indicators point to the parlous state of Kenya’s finances.
In the first place — according to the government’s own figures — revenues are below what the government had projected at the beginning of the financial year by a massive Ksh43 billion ($500 million).
Second, the government has had to incur additional expenditures within the financial year, including salary awards to teachers, lecturers, health workers and police, amounting to Ksh30 billion ($348.8 million).
Combined with expenditure on security operations in Somalia, implementation of the Constitution, the additional expenditures, which have arisen since the beginning of the financial year, come to Ksh100 billion ($1.16 billion).
Initially, the Independent Elections and Boundaries Commission (IEBC) had a budget of Ksh17 billion ($197.6 million) for the general election.
However, since parliament approved IEBC’s budget in June, its budget has had to be enhanced to cater for acquisition of biometric voter registration machines through a loan amounting to Ksh6.6 billion ($76.7 million). Clearly, the arithmetic is not adding up for Kenya.
Compounding the situation is that opportunities for borrowing are also narrowing by the day. According to the government’s own figures, cumulative domestic borrowing as at the first five months of the financial year had passed the target by Ksh31 billion ($360.4 million).
The dire state of government finances can also be seen in the overdraft facility at the Central Bank of Kenya.
Despite the fact that the government is only half way through the financial year, the overdraft limit is at a level of Ksh25 billion ($290.7 million) — the highest allowed under the law.
Under the law, the government must raise the money within this financial year to retire the total overdraft amount.
Whether Kenya’s worsening fiscal position will precipitate a negative spillover effect on the rest of the region remains to be seen.
Within the region, Kenya is the economic linchpin. Because of its strategic location, its relatively developed infrastructure, educated working class and large middle class, Kenya has the ability to serve either as the locomotive of development or an agent of destabilisation in the whole region.
This is why Kampala, Kigali, Dar es Salaam and Bujumbura will be keenly watching next month’s General Election, hoping that peace will prevail this time around.
In 2008, the violence which erupted after the disputed elections threatened to plunge the landlocked economies of Uganda, Rwanda and Burundi into a spiral of macro-economic instability spurred by shortages of essential consumer products.
Trucks loaded with petroleum products destined for Kampala and Kigali were stuck at various Kenya Pipeline Corporation depots in the western Kenya towns of Eldoret, Kisumu and Nakuru — which were the main flashpoints of the violence that had engulfed the country.
Uganda’s oil distribution and marketing channels faced unprecedented paralysis due to the fact that major oil depot supplying oil products were located in Kisumu, Eldoret and Nakuru.
Will the March elections precipitate violence this time around? Most observers are predicting peaceful elections. But the recent party primaries demonstrated how elections in Kenya are still prone to violence.
The fact that the elections have been reduced to a contest between two major parties built around elites of traditionally antagonistic ethnic communities remain ominous. Neither are the stakes on winning the coming elections any lower than last time.
The joke in Nairobi is that this time around the stakes are high because the discovery of oil and rents to be made from Chinese-funded infrastructure projects that have been lined up by the outgoing administration of President Mwai Kibaki.