National Government Continues to Struggle to Execute its Budget

Why the National Government Continues to Struggle to Execute its Budget
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Case of Annual National Budget Implementation Report for FY 2022/23

According to a report by the National Democratic Institute (NDI) and The Institute of Social Accountability (TISA) dubbed ‘Financial Transparency and Accountability, implementation of the National government budget for FY 2022/23 was marked by a political transition.

The previous administration of Jubilee government oversaw the formulation of this budget which was consequently approved by the National Assembly of the 12th parliament of Kenya.

Nevertheless, the biggest part (three quarters) of implementation of this budget was undertaken by the current, Kenya Kwanza administration that came into power on the 13th of September 2022 after the general elections of August 2022.

The implementation of this national budget was on the back of a slowdown in economic activity particularly in quarter one (Q1) and quarter 2 (Q2) of FY 2022/23, with a significant rebound in quarter three (Q3) as the economy expanded by 5.3 percent in Q3 of 2022/23 compared to 6.2 percent in a similar quarter in FY 2021/22.

Why the National Government Continues to Struggle to Execute its Budget

Indications from Kenyan National Bureau of Statistics (KNBS) is that the economic rebound is attributed to the agriculture sector and continued resilience of the tertiary (services) sector.

The economy continued to experience persistent inflationary pressures during the FY 2022/23 driven by elevated food and fuel prices. This is despite overall year-on-year inflation declining from 5.2 percentage points in June 2022 to 4.3 percentage points in June 2023.

Fuel inflation increased to contribute 2.2 percentage points to year-on-year overall inflation in June 2023 from a contribution of 1.7 percentage points in June 2022.

This was mainly driven by the increase in electricity prices due to higher tariffs and increase in prices of kerosene/paraffin, diesel and petrol on account of relatively higher international oil prices.

The contribution of core (non-food and non-fuel) inflation to year-on-year overall inflation has been low and stable, consistent with the muted demand pressures in the economy, supported by prudent monetary policy.

Why the National Government Continues to Struggle to Execute its Budget

Emerging Issues on Revenue Performance

  • Declining tax revenue to GDP implies that modest economic growth is not translating to improved revenue yield. This is attributed to the structure of the economy (80% informal sectors) and large reliance of agriculture (contributes >25% to GDP-declining/stagnant manufacturing sector). Other factors including political transition are at play as well.
  • Revenue forecasting has commendably moderated but is still evident from the widening gap between quarterly revenue collection against target.
  • Untimely revenue inflows are a potential for liquidity risks which translates to delays and uneven disbursement to MDAs. Therefore, cash flow management is critical to ensure smooth budget implementation and in turn improved service deliver

Why the National Government Continues to Struggle to Execute its Budget

Expenditure performance

The biggest budget credibility challenge is with execution of development budget which is a recurring challenge when compared with expenditure performance for the past decade. About 19% of its approved development budget was not spent by the end of Q4 of FY 2022/23 compared to 7.2% for recurrent expenditure

For both recurrent and development expenditure, the capacity of MDAs to spent funds already at their disposal is not a challenge as the utilization rate is over 100% across all sectors.

It is only the development expenditure on the education sector whose utilization rate was substantially below 100%. This suggests some inherent capacity gaps in the delivery of education services amidst other planning and budgeting challenges.

On the recurrent expenditure side, the top three most struggling sectors in executing their budgets are General Economic and Commercial Affairs (15.3%); Public Administration and International Relations (12.5%) and Education (10.6%) in that order. The unspent recurrent expenditure portion is largely for non-wages, that is, for operations and maintenance component.

Similarly, Education (35.9%) and General Economic and Commercial Affairs (28.4%) and Environmental Protection, Water and Natural Resources (23.6%) as the odd one out, are the top three most struggling sectors on the development expenditure side. Emergence of stalled/incomplete projects in these foregoing service delivery areas are a manifestation of challenges in the absorption of their respective development budgets.

Health Sector Budget Performance

As provided for in the Constitution of Kenya, the national level health sector is responsible for providing and coordinating health policy formulation, ensuring quality service delivery and regulating health care.

The sector’s approved budget of Ksh 122.5 billion was cut by 5.3% through downwards revisions to Ksh 119.4 billion in Supplementary Budget I and again further down to Ksh 116.4 billion in Supplementary Budget II.

By the end of FY 2022/24, the health sector’s budget performance was 94.5%, substantially better than in FY 2021/22 whose absorption rate was 87.9%.

This improved budget performance was driven by significance uptake in the sector’s development budget. Besides the effect of downward revision of the budget is likely to have improved the sector’s budget performance.

Why the National Government Continues to Struggle to Execute its Budget

Consolidated Fund Services (CFS)

Constituting nearly 40% of the entire government budget in FY 2022/23, the CFS (mandatory expenditure) and largely driven by public debt servicing cost has continued to exert pressure on the implementation of budget.

Funds not released (under release) according to approved budget

Lack of release of funds as per the approved budget, for whatever reasons is one of the causes of low budget execution. Underutilization of gross budget is bigger than that of net budget.

Effects of Changes in National Government Allocations to Budget Credibility

Originally approved budgets for FY 2022/23 and FY 2021/22 were each revised twice. While budget revisions are permissible under Article 223 of the Constitution of Kenya, 2010 and section 44 of the Public Finance Management (PFM) Act, 2012, habitual revision of the budget reflects weaknesses in planning and budgeting.

Detailed report on this link.

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