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 aboutPFM reforms in selected countries. Each article will be written by the IMF’smission chief or resident representative in the country concerned, thus castinga fresh light on the reforms and their relationship to the Fund’s surveillancework.

Kenya is going through a huge set of political reforms, including a newConstitution.  What issues in public finance and PFM has thiscreated? 

Kenya’s ambitious new Constitutionwas promulgated in August 2010, and one of its eighteen chapters is devoted to Public Finance. Key provisions in thischapter relate to devolution and the process of fiscal decentralization to the47 newly created counties. Devolution was considered by the drafters of theConstitution as a way to promote political stability by ensuring adequaterepresentation and the participation of all Kenyans in the running of thecountry. In this context, fiscal decentralization was perceived as a mechanismto enhance the delivery of social services on the ground and to promoteenhanced accountability from State Officers. Moreover, a central objective ofthe Constitution is to promote good governance in PFM through the establishmentof a sound institutional and regulatory environment at both national and countylevel.

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

Probably the most noteworthyreform has been the adoption of a new comprehensive PFM Act which covers thenational government and county governments, clearly specifying the new roles ofthe National Treasury and Parliament for the oversight of public finances. TheAct includes strict provisions on budget preparation, regular reporting toParliament, stakeholder consultations, sharing of information with the public,public debt management, and, in line with the Constitution, blocking thetransfer of funds and imposing penalties in instances of financialmismanagement. Crucially, the Act also provides for the establishment of a TreasurySingle Account at the national level and in each of the counties, a vitalmeasure to strengthen cash management, reduce borrowing costs, and increasetransparency in public finances. It is notable that adoption of the Act was theoutcome of an intensive, 18-month process of consultation between stakeholdersin government, parliament, and civil society representatives. Such a consensualoutcome bodes well for the effective implementation of the Act.

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

A third reform underway is theintroduction of program-based budgeting (PBB), with the presentation toparliament of budget estimates on a program basis for the first time in April2013. 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 ofexpected results and indicators, the combination of PBB and stronger PFMpractices will help Kenya’s government to attract direct budget support fromdevelopment partners whose support in recent years has focused primarily on projectfinancing, 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 thePFM Act was a very important step, which is currently being complemented with thepreparation of implementing regulations, now in its final stages. These regulationswill include provisions on fiscal responsibility principles, notably withregard to the size of the wage bill, and should help shape intergovernmentalfiscal relations, two immediate concerns in the context of devolution. As faras program-based budgeting is concerned, in addition to its introduction at thecounty level in 2014/15, a challenge will be to align the strategies andindicators of line ministries with the second medium-term plan of thegovernment’s development strategy, Vision 2030, to be published in the thirdquarter of 2013. Moreover, effective implementation of the Treasury Single Accountat the national level in 2013/14 and at the county level in 2014/15 will be ofthe essence to promote strong financial management.

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

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

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

This is another area where theIMF’s technical assistance is contributing to the government’s reform efforts.The National Treasury (NT) needs to adapt to the requirements on financialcontrol of the Constitution as well as those of the PFM Act, which assigns itwith a wide range of responsibilities. These include enforcing fiscalresponsibility principles, coordinating the preparation and execution of thebudget, managing government assets, liabilities and risks, ensuring adequatebanking arrangements are in place for government entities, and approving all governmentborrowing and guaranteeing proposals. Many of the functions of the formerMinistry of Planning will also be absorbed into the NT. At the request of theKenyan authorities, an FAD mission in November 2012 conducted an in-depth reviewof the structure of the NT to enable it to handle these responsibilities mosteffectively, and strengthen the organization of its senior management. Thereport’s recommendations have been taken on board by the authorities and shouldbe implemented in the immediate future.

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

The oversight role of Parliamentin the area of public finances has been significantly enhanced by the new Constitutionand the PFM Act. In particular, the PFM Act has clear guidelines on the timelysubmission of budget estimates for review by Parliament, of quarterly reportsby accounting officers, and of the government’s debt management strategy. With someof their previous responsibilities having been assigned to the County Governorsand Senators, Members of Parliament are set to increasingly focus their work onreviewing fiscal policy and the budget, and following up on the recommendationsof audit reports. Recognizing the enhanced PFM role of Parliament, IMF teams regularlyengage with Members of Parliament and its specialized committees, and we havealso provided macro-fiscal training to staff of the Parliamentary BudgetOffice.

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

The challenge is two-fold:building capacity for PFM at the county level and managing expectations linkedto devolution. The initial staffing needs of county treasuries are being met,including through staff seconded from the National Treasury, and trainingactivities are underway with support from development partners. A TransitionAuthority has also been established to facilitate the process of devolution,and the NT will be actively involved in managing intergovernmental fiscalrelations. These developments are encouraging but the task ahead is a momentousone, not least in the poorest counties which are set to receive a relativelylarger share of devolved revenue, but where capacity is presently the mostconstrained.

For marginalized populations,there are justifiably high expectations regarding the benefits of fiscaldecentralization. However, if fiscal decentralization is to succeed, it has tobe accompanied by enhanced accountability and stronger PFM practices at thecounty level. Even though PFM capacity is a component in the revenue sharing formuladevised by the Commission on Revenue Allocation to allocate to counties a shareof 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 adviceprovided to county governments, including by development partners, isconsistent and ensures adherence to shared budget preparation, execution, and reportingstandards.

[1]IMF Resident Representative in Kenya.

[2]The weights are as follows: Population 45%; basic equal share 25%; povertyindex 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.