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June 03, 2013

Kenya’s Bold Course in PFM Reform

Posted by Ragnar Gudmundsson[1]

Note: This is the first in a new series of articles on the blog about PFM reforms in selected countries. Each article will be written by the IMF’s mission chief or resident representative in the country concerned, thus casting a fresh light on the reforms and their relationship to the Fund’s surveillance work.

Gudmundsson
Kenya is going through a huge set of political reforms, including a new Constitution.  What issues in public finance and PFM has this created? 

Kenya’s ambitious new Constitution was promulgated in August 2010, and one of its eighteen chapters is devoted to Public Finance. Key provisions in this chapter relate to devolution and the process of fiscal decentralization to the 47 newly created counties. Devolution was considered by the drafters of the Constitution as a way to promote political stability by ensuring adequate representation and the participation of all Kenyans in the running of the country. In this context, fiscal decentralization was perceived as a mechanism to enhance the delivery of social services on the ground and to promote enhanced accountability from State Officers. Moreover, a central objective of the Constitution is to promote good governance in PFM through the establishment of a sound institutional and regulatory environment at both national and county level.

How is Kenya responding to these challenges? What major PFM reforms have been introduced or are in the process of implementation?

Probably the most noteworthy reform has been the adoption of a new comprehensive PFM Act which covers the national government and county governments, clearly specifying the new roles of the National Treasury and Parliament for the oversight of public finances. The Act includes strict provisions on budget preparation, regular reporting to Parliament, stakeholder consultations, sharing of information with the public, public debt management, and, in line with the Constitution, blocking the transfer of funds and imposing penalties in instances of financial mismanagement. Crucially, the Act also provides for the establishment of a Treasury Single Account at the national level and in each of the counties, a vital measure to strengthen cash management, reduce borrowing costs, and increase transparency in public finances. It is notable that adoption of the Act was the outcome of an intensive, 18-month process of consultation between stakeholders in government, parliament, and civil society representatives. Such a consensual outcome bodes well for the effective implementation of the Act.

A complementary initiative has been the implementation of an Integrated Financial Management Information System (IFMIS) in all line ministries. This system allows for the computerization of budget allocations and expenditures, procurement operations, reconciliation of revenue and payments, statements of the government’s financial position, and production of statutory reports in real time. The next step is for the system to be rolled at the county level, now that the issue of connectivity to county treasuries has been addressed.

A third reform underway is the introduction of program-based budgeting (PBB), with the presentation to parliament of budget estimates on a program basis for the first time in April 2013. This is an important first step and further improvements are required, notably with regard to program design and objectives, performance indicators, and annual targets. Once these programs are well designed, with a clear set of expected results and indicators, the combination of PBB and stronger PFM practices will help Kenya’s government to attract direct budget support from development partners whose support in recent years has focused primarily on project financing, often outside of the budget.

How much progress has been made in implementing these reforms?  What are the main challenges that lie ahead?

As mentioned, the adoption of the PFM Act was a very important step, which is currently being complemented with the preparation of implementing regulations, now in its final stages. These regulations will include provisions on fiscal responsibility principles, notably with regard to the size of the wage bill, and should help shape intergovernmental fiscal relations, two immediate concerns in the context of devolution. As far as program-based budgeting is concerned, in addition to its introduction at the county level in 2014/15, a challenge will be to align the strategies and indicators of line ministries with the second medium-term plan of the government’s development strategy, Vision 2030, to be published in the third quarter of 2013. Moreover, effective implementation of the Treasury Single Account at the national level in 2013/14 and at the county level in 2014/15 will be of the essence to promote strong financial management.

What has been the contribution of the IMF's Fiscal Affairs Department (FAD) in providing TA and other support to help in the design and implementation of the PFM reform strategy?

Over the last few years, FAD has played an essential role in supporting Kenya’s efforts to enhance PFM, strengthen the budget process, and move towards fiscal decentralization. Most notably, and in cooperation with AFRITAC East, FAD  has provided extensive technical assistance in all the areas I mentioned earlier: drafting of the PFM Act, review of PFM regulations and financial reporting templates, devising a new chart of accounts, preparing a manual on program-based budgeting, enhancing liquidity forecasting and banking arrangements. It is clear from discussions with the Kenyan authorities that the IMF’s policy advice and technical recommendations are very highly valued, and that the authorities look forward to continued support from the Fund. 

How is the National Treasury being strengthened to create the capacity needed to manage public finances effectively?

This is another area where the IMF’s technical assistance is contributing to the government’s reform efforts. The National Treasury (NT) needs to adapt to the requirements on financial control of the Constitution as well as those of the PFM Act, which assigns it with a wide range of responsibilities. These include enforcing fiscal responsibility principles, coordinating the preparation and execution of the budget, managing government assets, liabilities and risks, ensuring adequate banking arrangements are in place for government entities, and approving all government borrowing and guaranteeing proposals. Many of the functions of the former Ministry of Planning will also be absorbed into the NT. At the request of the Kenyan authorities, an FAD mission in November 2012 conducted an in-depth review of the structure of the NT to enable it to handle these responsibilities most effectively, and strengthen the organization of its senior management. The report’s recommendations have been taken on board by the authorities and should be implemented in the immediate future.

How is the parliament adapting to its enhanced role in managing public finances?

The oversight role of Parliament in the area of public finances has been significantly enhanced by the new Constitution and the PFM Act. In particular, the PFM Act has clear guidelines on the timely submission of budget estimates for review by Parliament, of quarterly reports by accounting officers, and of the government’s debt management strategy. With some of their previous responsibilities having been assigned to the County Governors and Senators, Members of Parliament are set to increasingly focus their work on reviewing fiscal policy and the budget, and following up on the recommendations of audit reports. Recognizing the enhanced PFM role of Parliament, IMF teams regularly engage with Members of Parliament and its specialized committees, and we have also provided macro-fiscal training to staff of the Parliamentary Budget Office.

What are the main challenges in the devolution of fiscal authority to the new local governments?

The challenge is two-fold: building capacity for PFM at the county level and managing expectations linked to devolution. The initial staffing needs of county treasuries are being met, including through staff seconded from the National Treasury, and training activities are underway with support from development partners. A Transition Authority has also been established to facilitate the process of devolution, and the NT will be actively involved in managing intergovernmental fiscal relations. These developments are encouraging but the task ahead is a momentous one, not least in the poorest counties which are set to receive a relatively larger share of devolved revenue, but where capacity is presently the most constrained.

For marginalized populations, there are justifiably high expectations regarding the benefits of fiscal decentralization. However, if fiscal decentralization is to succeed, it has to be accompanied by enhanced accountability and stronger PFM practices at the county level. Even though PFM capacity is a component in the revenue sharing formula devised by the Commission on Revenue Allocation to allocate to counties a share of nationally raised revenues, it only has a weight of two percent at present[2]. Last but not least, it will be important to ensure that the policy advice provided to county governments, including by development partners, is consistent and ensures adherence to shared budget preparation, execution, and reporting standards.



[1] IMF Resident Representative in Kenya.

[2] The weights are as follows: Population 45%; basic equal share 25%; poverty index 20%; land area 8%; fiscal responsibility 2%.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy. 

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Comments

Another important post on Kenya. I would raise a few concerns that are not voiced here. First, the process of passing the PFM Act was not quite as consensual as implied here. There was a long, drawn-out war between the former Task Force on Devolution and the Treasury. The CIC played a key moderating role. The final Act is improved, but still does not, for example, put a deadline on when the public must get access to the government's budget proposal during parliamentary debate.

The new PBB represents the beginning of something that could be a major step forward, but it falls short on detail (there was more in the old format) and there is no cross-walk available to the public (or to Parliament?) to compare this year to last year's budget. Nor is there an explanation, crucial in the first year, of what funding was devolved (last year's budget had a code for funds to be devolved).

The Transition Authority appears to have fallen short, and the process of functional assignment is not yet complete, but the Division of Revenue is happening as we speak. Moreover, the Division of Revenue Bill 2013 contains a policy statement indicating that the phased transition to be led by TA is no longer to happen, and everything is to be transferred by July 1 to counties. Yet, this is in plain violation of the Transition to Devolved Government Act and the process envisioned in the Constitution. Moreover, there is little evidence counties are ready for the challenge of taking over everything next month.

Finally, even as IFMIS and PBB are being rolled out, there is a completely compromised budget process happening at county level because counties lack budget baselines, which Treasury has refused to share, and they are just making up numbers for health and other core services. To say nothing of the fact that most of them are putting a ton of deficit financing in their budgets, which requires national government approval. It is highly unlikely this will be forthcoming, so by and large these budgets are novellas. This is perhaps the most serious challenge for the new PFM system at county level.

Many good things are happening, but there is a healthy dose of chaos on its way from July 1.

I have to agree with Jason. The boldness of Kenya's PFM reforms is an over-reaction and is not matched with quality in execution. The result therefore is more likely to be controversy without impact instead of the elusive goal of transformation.

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