Ballooning pending bills and their effect on the Kenyan economy

01 Oct, 2020 0 comments
Haron Ngeno Haron Ngeno

The accumulation of pending bills has raised concerns in the recent past, with the President calling for a special audit to be done by the Office of Auditor General (OAG). Reports from the Office of Controller of Budget (OCoB) 2012/13 and 2013/14 show that pending bills, together with debt repayment, amounted to Kshs. 1.7 billion and Kshs. 3.7 billion respectively. 

A pending bill is an unsettled financial obligation at the end of a financial year. Pending bills arise when an entity fails to settle invoiced amounts for goods and services properly procured and delivered, or rendered as at the end of a financial year. In this case, the entities are the governments. 

Typically, the government procures services and goods from different entities. It is expected that it will honor payments according to the contract terms. However, time and again, government entities find themselves facing cash deficits as a result of myriad factors, and are unable to honor the requisite payments. Some of these factors include delayed transfers from the national government, own source revenue shortages, disputed payments and delayed legislations such as the recent senate stalemate on revenue sharing formula. Some of the pending bills are inherited from the previous local authorities and other administrations, many of which are under dispute.

In 2017/18, pending bills increased by 295 percent to Kshs. 108.4 billion from a previous average of Kshs. 36.7 billion from the last three years. This increase was driven by an accumulation in recurrent expenditure pending bills from Kshs. 9.2 billion in FY 2014/15 to Kshs. 80.4 billion in FY 2017/18 associated with increased government spending and delays in exchequer releases due to prolonged electioneering period which dampened the efforts of collecting the targeted amount of revenues thus unable to fully finance the budget.

Figure 1: A sharp increase in Recurrent Pending Bills in FY 2017/18

Source of Data: OCoB reports (2015-19)

For the purpose of settling genuine pending bills, the National Treasury requested the OAG to undertake a special audit in line with Section 96(3) of the Public Finance Management (PFM) Act. However the special audit failed to ascertain the number of pending bills accumulated by devolved units. Its report had figures almost 20% lower than those of the OCoB. It further indicated that only Kshs. 51.3 billion were eligible bills and the rest were either fictitious  or did not meet the threshold for payment. This special report was never shared with the public. The governors disowned the audit figures citing that they were never involved in the audit.

Regarding the ineligible pending bills, the Intergovernmental Budget and Economic Council (IBEC) through a resolution in June 2019, ordered all the county governments to establish an Ineligible Pending Bills Committee to verify the bills. Any verified bills identified by these committees would then be prioritised and paid within 2019/20.

According to the Kenya Enterprise Survey 2018, the total value of pending bills in Kenya has increased from 0.9 percent of GDP in 2015/16 to 1.6 percent in 2017/18. The survey further showed that approximately 12 percent of the 1,001 firms surveyed have had a contract with the government that was in arrears. 

Figure 2: Between June and December 2019, the government settled over 10 billion pending bills, transferring Kshs. 4.23 unsettled bills to 2020.

Source of Data: National Treasury circular No.10-2020.

The National Treasury through circular No.10-2020 released in 2020, showed that the Ministry/State Department and Agencies had accumulated validated pending bills amounting to Kshs. 14.99 billion as of June 2019. By December 2019, the government had settled 68 percent (Kshs. 10.23 billion) of the pending bills. About 3.5 percent (Kshs. 531 million) of the pending bills were pending awaiting clearances upon the release of money by the national treasury leaving Kshs. 4.23 billion (28 percent) unsettled in 2019. The breakdown of the unsettled national bills as the end of 2019 is shown in figure 3 below.

Figure 3: State Department of Interior contributed the largest sharing of pending bills accrued in 2019.

Source of Data: National Treasury circular No.10-2020.

The State Department of Interior topped the offending state agencies, holding huge unsettled expenditure bills amounting to Kshs. 798 million at the end of 2019. Other state departments including State Departments of Public Works, Broadcasting and Communications, Public Services and Sports had cumulative unsettled bills amounting to Kshs. 920 million. The National Land Commission had accumulated over Kshs. 556 million pending bills by the end of 2019 while the Judiciary, Parliamentary Service Commission and Independent Electoral and Boundaries Commission had accrued pending bills amounting to Kshs. 342 million, 385 million and 344 million respectively. 

The government has committed to accelerating the payment of pending bills and VAT refunds as part of Economic Stimulus measures aimed at cushioning businesses from the adverse effects of COVID-19. This will help increase their liquidity. 

Adverse effect of pending bills

According to the Central Bank of Kenya, failure by the national and county government to settle pending bills over time had weakened the economy just before COVID-19 set in, causing recession in the economy evident by the reduction in real GDP growth from 6.3 to 5.8 between 2018 and 2019 and is estimated to drop further to 1.5% in 2020 . As a result, it caused the collapse of retail trade for instance Nakumatt, Uchumi and Tuskeys who were the main players in the retail sector; constrained liquidity in the economy; and the collapse of the SME sub-sector. This has had a negative impact on the economy, including doubling the unemployment rate from 5.2% in 2019 to 10.4 % by August 2020 and escalation in the number of people living before the poverty line from 36.1% in 2018 to 38.9 percent of the total population in 2020.

Provision of essential services is adversely affected when county governments are overburdened with debt repayment. Late settlement of debts attracts more interest and penalties especially with fluctuation in exchange rates. Additionally, when bills remain unresolved for too long, investors’ confidence is eroded, and the counties may lose reliable suppliers and contractors.

Literature also shows that pending bills exacerbate liquidity constraints among the firms doing business with the government. This can lead them into bankruptcy or causes high probability of them defaulting on their loan repayments. More often, liquidity constrained firms shut down their operation or postpone their new investments, leading to reduction in the size of the private sector. This also affects the banking sector by increasing firm’s default rate which is associated with an increase in non- performing loans. This trend underscores the importance of curbing pending bills and arrears as a key measure of fiscal prudence. Without this, the Kenyan economy could descend into weaker growth as private sector activities and aggregate demand shrinks.

Punitive actions

First, accumulation of pending bills is a violation of law by the assigned public officers. The PFM Regulation, 2015, section 50 (2)(3) requires that procurement of goods and services be done once the budget has been set for the same. Therefore it becomes unlawful to hold pending bills associated with procurement of goods and services. The PFM act also stipulates that a public officer who authorizes unlawful expenditure can be removed from office on grounds of improper conduct. At the same time, failure to promptly pay approved bills in cases where funds have been provided for the bills attracts a similar penalty.

The National Treasury has yearly been sending circulars to National Government cabinet secretaries, accounting officers and County Governments highlighting the need to take disciplinary actions against those who are yet to settle their obligations despite receiving budgetary allocations from the Exchequer. According to them, state corporations are equally required to pay all unremitted Sacco deductions as well as loan deductions when due. This is on top of all statutory deductions including Pay As You Earn (PAYE), National Social Security Fund (NSSF), National Hospital Insurance Fund (NHIF) and pension arrears. Failure by the government to make payments as and when due, or default on financial obligations indicates material breach of section 94(1) of the Public Finance Management Act. 

Treasury has previously invoked the PFM Act Section 96 which empowers them to temporarily freeze transfer of not more than half of funds to affected counties as part of corrective measures for violating financial guidelines. The freeze on disbursements to the counties has largely targeted counties that had defaulted on bills amounting to more than a billion shillings for more than 90 days after verification.

Treasury has further instructed government accounting officers to make pending bills the first item of expenditure on their budgets for the 2020/21 financial year, putting in limbo spending plans for many public offices. 

Given this context, and with a view to enhancing government effort in addressing the pending bills menace, the following considerations can help guide a way forward:

  1. There is a need to review the accounting standards for the 47 counties to include disclosures on assets and liabilities on a monthly basis. This is helpful in establishing an acceptable level of opening balances for both asset and liability categories in the books inherited by county governments and as a result reducing the huge pending bills being transferred to the next government. It will also ensure cases of pending bills accumulating to over Ksh1 billion in 90 days are minimized. Treasury had initiated the review process in 2018 with the Public Sector Accounting Standards Board (PSASB), a State agency that sets financial accounting and internal audit guidelines for the public sector, on tightening rules on managing assets and liabilities. This should be implemented as soon as possible.
  2. The Ineligible Pending Bills Resolution Committee should act as auditors to further enhance closer monitoring of county governments’ pending bills in support of the reforms introduced by PSASB as suggested above to monitor and audit pending bills in the face of financial statements. PSASB reforms will provide adequate documentation of pending bills and assets which will facilitate the smooth handover between county government regimes.
  3. The Treasury should strengthen its focus on enforcing compliance with the Fiscal Responsibility Principles such as the Principle of Openness, Transparency and Accountability among others, especially legal thresholds for wage bill and development spending. As indicated in our previous blog counties have struggled to generate their own source revenue failing to attain their OSR targets, and also (sometimes as a result) breaching the 35 per cent limit on wage bill expenditure as a share of total revenue. For example, Nairobi, Machakos, Embu, Laikipia and Wajir blew more than half of their total income on wages in FY 2018/19. Improvements in the delivery of devolved services can only be sustained if county governments adhere to existing fiscal rules. 
  4. Both levels of government should ensure the procurement plans align with the disbursement of funds to avoid accumulation of pending bills. This can be done by ensuring there is a strict adherence by the accounting officers of a government entity to only make an expenditure commitment against the procurement plan approved based on the allocations and allotments from approved budget for that entity in accordance with the Public Procurement and Disposal Act and Regulations made thereunder (PFM regulation, 2015, Sec. 50 (2 &3).
  5. Treasury should curb the rising pending bills and arrears in payments at both county and national government. A phased approach could be adopted in settling the outstanding arrears, whereby the government can settle the bills in installments in certain circumstances such as the current tight fiscal space the country is experiencing. This could restore liquidity, stimulate private sector activity and create jobs.

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