## _cr16221 ## Source details **Canonical URL:** [_cr16221](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16221.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16221.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16221.pdf.json) --- ### PREFACE — mission, scope, and context - Mission: Fiscal Affairs Department (FAD) Fiscal Transparency Evaluation at the request of the Cabinet Secretary responsible for Finance, Republic of Kenya; mission period: August 19 to September 1, 2014. - Team: Led by Duncan Last; members Jason Harris, Florence Kuteesa, Chadi Abdallah (FAD); Guy Anderson, Fazeer Rahim (AFRITAC East); Lesley Fisher assisted in preliminary presentation and data collection. - Scope and timing: Evaluation based on information available as completed in September 2014; part of fiscal surveillance action plan for East African Monetary Union preparations. - Context highlights: - 2010 Constitution: 47 county governments; enhanced parliamentary oversight. - 2012 PFM Act aligned legal framework with best practice; IFMIS rollout to counties; Public Sector Accounting Standards Board established. - Recent oil and gas discoveries and EAC currency union plans; first bond issue floated in June 2014. ### Executive Summary — major themes and cross-cutting findings - Fiscal reporting generally meets basic practice but needs significant upgrading; coverage focuses on budgetary central government and omits substantial public sector activity. - Fiscal forecasting and budgeting reflect MTBF experience and program budgeting introduction but show credibility concerns with persistent upward drift in deficits. - Fiscal risk analysis and management: mixed results — some robust contingency and environmental arrangements, but large unreported contingent liabilities and PPP exposures. - Key summarized fiscal indicators (Table 0.1, percent of GDP; "Source: staff estimates"): - Budgetary Central Govt revenue: 19.3; central govt revenue: 25.9; general govt* revenue: 26.8; public sector* revenue: 34.8. - Budgetary Central Govt expenditure: 24.6; central govt expenditure: 30.2; general govt* expenditure: 31.0; public sector* expenditure: 40.8. - Budgetary Central Govt balance: -5.3; central govt balance: -4.3; general govt* balance: -4.2; public sector* balance: -6.1. - Public Sector (consolidated) Total Assets: 92.0; Total Liabilities: 92.9; Net Worth (consolidated): -0.9. - Assessments mapped to Fiscal Transparency Code show a mix of Not Met, Basic, Good, Advanced across 36 principles; core recommendations mapped to Kenya’s 2013–18 PFM reform plan. ### Fiscal reporting — coverage, stocks, flows, and integrity - Coverage of institutions and flows: - Total public sector institutional units: 419. - Budgetary central government entities: 35; extra-budgetary funds: 48; non-commercial parastatals / SAGAs: 129; commercial parastatals: 39; sub-national governments: 47 counties. - Around 28 percent of both central and general government expenditure unreported in key fiscal reports; 44 percent of public sector expenditure unreported in fiscal reports. - Stocks and balance sheet reporting: - No government balance sheet published in fiscal reports. - Reported government debt liabilities at June 2013: 42.3 percent of GDP. - Pending bills: 0.7 percent of GDP; cash assets: 1.3 percent of GDP; on-lent loans: 3.7 percent of GDP. - Staff-estimated public sector (consolidated) assets: 92.0 percent of GDP; non-financial assets: 65.2; financial assets: 26.9; liabilities: 92.9; net financial worth: -66.1; net worth: -0.9. - Unreported public service pension liabilities: 22 percent of GDP. - Consolidated public sector liabilities estimated at 93 percent of GDP by staff (far larger than reported public debt). - Flows and cash-to-accrual impact: - Cash-to-accrual adjustments would increase the 2012-13 deficit from 5.2 to 8.0 percent of GDP. - Selected 2012/13 adjustments (KSh mn and percent of GDP): - FISCAL BALANCE - CASH: -232.4 ; -5.2 - Payments (total): 128.6 ; 2.9 - Net accrued pension liabilities: 84.4 ; 1.9 - Other voted expenditure: 39.1 ; 0.9 - FISCAL BALANCE - GFS Basis: -360.5 ; -8.0 - Classification, consistency, and historical revisions: - Standard chart of accounts introduced July 2013; PSASB established to prescribe IPSAS from 2013/14. - Large discrepancies exist: average absolute discrepancy of 1.7 percent of GDP between fiscal balance and net financing over past four years; unexplained stock-flow adjustments around 1.1–1.2 percent of GDP over the past decade. - Different vintages of historical data vary by as much as 2.2 percent of GDP; average revisions to fiscal deficit around 1.5 percent of GDP. - Integrity and audit: - KNBS produces GFS-based fiscal statistics; independence provided by Statistics Act 2006. - Auditor-General (KENAO) audits individual ministries; 2012/13 audits: 42 percent of national government expenditures subject to adverse or disclaimer opinions. - Timeliness: accounting officers submit annual financial statements by October 31 (four months after year-end); audits of ministries completed within twelve months of year-end (audits completed by the following May/June). ### Fiscal forecasting and budgeting — MTBF, forecasts, and credibility - Medium-Term Budget Framework (MTBF) and program budgeting: - MTBF introduced 2001; program-based budgeting introduced 2012 with rolling three-year gross expenditure estimates by program. - Example MTBF rows (KSh million) — ENERGY, INFRASTRUCTURE AND ICT SUB-TOTAL: Estimates 2013/14: 216,531.9; Revised 2013/14: 213,158.1; Baseline 2014/15: 241,908.1; BROP CEILING 2014/15: 250,047.6; BPS CEILING 2015/16: 280,085.5; Projections 2016/17: 312,439.2. - Forecast accuracy and revisions: - Year-ahead real GDP forecast errors relatively high; no strong systematic bias overall. - Outer-year expenditure forecasts revised upwards by 9 percent on average in past three years; actual expenditure on average 9 percent higher than projected over the medium term. - Expenditure outturns on average 12 percent lower than original estimates in some contexts (presentation vs realization differences). - Legal and procedural framework: - PFM Act 2012 sets timetable for budget and content; BPS adopted four months before fiscal year start; BROP in September; Estimates due April 30. - PFM Act Section 15 fiscal principles include minimum 30 percent allocation to development, borrowing to finance development only, wage bill-to-revenue cap to be defined by regulation, public debt caps to be defined by regulation. - Current deficit upward drift to 5.7 percent of GDP; EAMU convergence criteria: overall deficit not to exceed three percent of GDP; debt stock net present value below 50 percent of GDP (criteria for potential union entry). - Public investment management and execution: - External projects subject to cost-benefit analysis; domestically funded projects often lack systematic CBAs and complete disclosure of lifetime obligations. - PFM Act requirement: minimum 30 percent of national budget to development will increase absorption demands; development budget under-spending persists. - Recommendations (select): - 2.1 Include all central government entities and their expenditure in fiscal aggregates. - 2.2 Issue and enforce Cabinet guidelines on selection, appraisal, and funding for major investment projects; require cost-benefit analyses. - 2.3 Clarify fiscal policy principles with practical guidance and measurable reporting. - 2.4 Improve forecast reconciliation tables by decomposing variations into policy decisions, economic outlook changes, and accounting/technical changes. ### Fiscal risk analysis and management — disclosure, quantified exposures, and gaps - Fiscal risk disclosure: - Fiscal risk statement included in BPS but not comprehensive; significant contingent liabilities omitted (about 11 percent of GDP unreported in statement). - Quantified contingent liabilities (Table 3.1, KSh and percent of GDP): - Reported: State Guarantees KSh 43.5 billion, 0.9 percent of GDP; Deposit Protection scheme KSh 153.4 billion, 3.0 percent of GDP; Natural disasters (drought) KSh 6, 0.1 percent of GDP. - Unreported: PPPs KSh 289, 5.7 percent of GDP; Court cases KSh 151, 3.0 percent of GDP; NSSF liabilities KSh 110, 2.2 percent of GDP; Other guarantees KSh 3, 0.1 percent of GDP; Callable capital to AfDB KSh 113.5, 2.2 percent of GDP. - Total reported + unreported: KSh 869.4 billion, 17.2 percent of GDP. - Specific risk areas: - PPPs: Unreported PPP exposures estimated at 5.7 percent of GDP (World Bank estimates USD3.4 billion). High-risk examples: Kenya-Uganda Railways PPP concession (25-year), twelve power purchasing agreements totaling USD3.1 billion (5.2 percent of GDP). - Guarantees and implicit exposures: Government loan guarantees around KSh45 billion (0.9 percent of GDP); additional non-disclosed commitments ~KSh287 billion (6.4 percent of GDP) including NSSF (KSh113 billion, 2.2 percent of GDP) and Deposit Protection Fund uncovered portion (KSh153.4 billion, 3.0 percent of GDP). - Natural resources: Known minerals/subsoil/forests net present value ~4 percent of GDP; Tullow estimate of reserves "well over 600 millions of barrels of oil equivalent" if confirmed. - Sub-national governments: Subnational spending increased four-fold from old local authorities (1 percent of GDP) to counties (4.3 percent of GDP); inherited local authority liabilities unresolved; example Nairobi County liabilities over KSh 40 billion. - Public corporations: Liabilities less than 10 percent of GDP in summary but sector includes on-lent loans KSh 167 billion (3.7 percent of GDP), government-guaranteed loans of 0.9 percent of GDP, write-offs so far 0.2 percent of GDP and further arrears of 0.8 percent of GDP. - Risk management arrangements: - Budgetary Contingency: Advanced. Contingencies Fund cap KSh 10 billion (Constitution); government has allocated about half in last two budgets; Treasury reports utilization to Parliament within two months. - Asset and liability management: Basic. Regular debt management (MTDS) and periodic actuarial pension assessments exist; no consolidated central government assets/liabilities report; fixed asset management weak. - Financial sector exposure: Good. Banking assets ~54 percent of GDP in 2013; deposit protection currently covers ~20 percent of insured deposits; uncovered portion equals 3.0 percent of GDP. - Environmental risk management: Advanced. Average annual disaster cost ~0.1 percent of GDP; National Drought Management Authority and strategy in place. - Long-term sustainability: - Not Met: No published long-term fiscal projections for main aggregates or NSSF; pension actuarial study (May 2014) showed current liability KSh 991.9 billion for 2013 (22 percent of GDP) using 10 percent discount rate. - Recommendations (select, numbered as in source): - 3.1 Report and quantify all fiscal risks in the fiscal risk statement; cover PPPs, guarantees (NSSF, Deposit Protection, court cases), callable capital. - 3.2 Disclose rights, obligations, and exposures under all existing and planned PPPs and PPP-type contracts annually; report expected receipts and payments over their life; maintain assessment framework at PPP unit. - 3.3 Ensure regular (at least annual) reporting on potential oil and gas resources, including volume/value, and build a macro-fiscal framework for resource revenues. - 3.4 Develop enhanced county fiscal reporting system generating debt, fiscal performance, and liquidity indicators per county. - 3.5 Prepare an annual consolidated financial report on the public corporation sector with aggregate sectoral fiscal information and summary financial indicators for each corporation. ### Kenya National Audit Office (KENAO) — mandate, findings, and implications - Mandate and capacity: - Auditor-General appointed by President with Parliament approval for non-extendable eight-year term; KENAO complement 974 staff (714 auditors/examiners); may outsource audits for public corporations/projects. - A Public Audit Bill is with Parliament to replace Public Audit Act 2003 to strengthen independence/professionalism. - Audit standards and 2012/13 outcomes: - KENAO applies international standards and a risk-based approach; opinions: unqualified, qualified, adverse, disclaimer. - 2012/13 national government expenditure audit (KSh mn): - Recurrent: 65 statements, Amount Ksh 611,695 — Unqualified 14 (Ksh 20,129); Qualified 34 (Ksh 328,970); Adverse 6 (Ksh 35,300); Disclaimer 10 (Ksh 225,599); Other 1 (Ksh 1,698). - Development: 47 statements, Amount Ksh 190,584 — Unqualified 3 (Ksh 369); Qualified 33 (Ksh 113,211); Adverse 2 (Ksh 3,403); Disclaimer 9 (Ksh 73,600). - Overall: 42 percent of national government expenditures subject to adverse or disclaimer opinions in 2012/13; 13 of 23 revenue statements attracted adverse or disclaimer opinions. - Timeliness and reconciliation: - Constitution Article 229: audit reports to Parliament within six months after end of financial year; to meet deadline, early drafts have significant queries. - Absence of consolidated annual financial statements prevents Auditor-General from expressing opinion on overall government financial performance and position. - Common audit issues: ledger-reported discrepancies, opening/closing balance inconsistencies, excluded transactions, unsupported balances, noncompliance with treasury instructions, bookkeeping errors. ### Summary assessment highlights (selected metrics and ratings) - Coverage of Institutions: Not met; High importance. 28% of general govt. and 44 percent of public sector expenditure goes unreported. Recommendation: 1.1 - Coverage of Stocks: Basic; Medium importance. Public liabilities of 43 percent of GDP outside fiscal reports. Recommendation: 1.2 - Internal Consistency: Basic; High importance. Average discrepancies of 1.7 percent of GDP between fiscal balance and financing; unexplained stock-flow adjustments of 1.2 percent of GDP. Recommendation: 1.4 - Historical Consistency: Not Met; High importance. Average revisions to fiscal deficit of 1.5 percent of GDP. Recommendation: 1.4 - External Audit: Basic; High importance. 42 percent of BCG expenditures subject to adverse/disclaimer opinions. Recommendation: 1.3 - Public-Private Partnerships: Not Met; Medium importance. Unreported PPPs amount to 5.7 percent of GDP. Recommendation: 3.2 - Contingent liabilities (aggregate): Reported + unreported total KSh 869.4 billion, 17.2 percent of GDP. ### Key recommended priorities (condensed) - Reporting coverage and accounting standards: - 1.1 Expand institutional coverage of key fiscal reports to full general government including parastatals, EBFs, and counties. - 1.2 Begin preparing and publishing a central government balance sheet; progress to consolidated public sector balance sheet. - Implement PSASB decisions: IPSAS for general government, IFRS for commercial state corporations (3–5 years for standards implementation). - Roll out re-engineered IFMIS and revised classification structure (1–4 years as indicated). - Financial statements and audits: - 1.3 Produce consolidated annual financial statements and audit within 6 months of year-end; publish audited statements as required by PFM Act 2012. - 1.4 Move reporting basis to internally consistent final audited figures; prepare audited reconciliation tables between net financing and debt stock changes; develop methodology for historical revisions. - Forecasting, budgeting, and investment: - 2.1 Include all central government entities in fiscal aggregates. - 2.2 Strengthen public investment management: clear institutional roles, enforce cost-benefit analysis, disclose lifetime project obligations. - 2.3 Clarify fiscal policy principles with operational guidance and measurable targets. - 2.4 Improve forecast reconciliation decomposition (policy vs macro vs accounting). - Fiscal risk management and transparency: - 3.1 Quantify and report all fiscal risks including PPPs, guarantees, callable capital, court cases, NSSF exposures. - 3.2 Disclose PPP contract obligations and fiscal implications annually; maintain PPP assessment framework in National Treasury PPP unit. - 3.3 Publish regular reporting on potential oil and gas resources and build macro-fiscal framework for resource revenues. - 3.4 Develop enhanced county fiscal reporting system with debt, performance, and liquidity indicators. - 3.5 Publish annual consolidated financial report on the public corporation sector. *Source: IMF mission — Fiscal Transparency Evaluation, Nairobi mission completed September 2014 (content unit _cr16221).* ### PREFACE _________________________________________________________________________________________ 5 ### PREFACE ### Mission and participants - At the request of the Cabinet Secretary responsible for Finance of the Republic of Kenya, Honorable Henry Rotich, a mission from the Fiscal Affairs Department (FAD) visited Nairobi during August 19 to September 1, 2014 to conduct a Fiscal Transparency Evaluation. - Team led by Duncan Last and comprised Jason Harris, Florence Kuteesa, and Chadi Abdallah (all FAD staff), and Guy Anderson and Fazeer Rahim (both AFRITAC East). Lesley Fisher (FAD) assisted in making a preliminary presentation and data collection. - Administrative and research support acknowledged: John Njera, Elizabeth Bukhala, Everlyne Olum; IMF office staff; Ragnar Gudmundsson (former IMF Resident Representative); Rachel Wang and Kaitlyn Douglas (FAD Research Assistants). ### Meetings and consultations - The mission met with: the Cabinet Secretary responsible for Finance; the Principal Secretary to the National Treasury; the Economic Secretary; The Investment Secretary; key Directors and staff of the National Treasury; the Head of the Parliamentary Budget Office; senior officials from the Central Bank of Kenya, the Kenya National Bureau of Statistics, the Office of the Controller of Budget, the National Audit Office and the Kenya Revenue Authority. - Additional meetings with representatives from: Kenya Institute for Public Policy, Research and Analysis; Ministry of Devolution and Planning; Local Authorities Pension Fund; National Social Security Fund; Kenya Railways Corporation; Ministry of Roads and Infrastructure and its road funds; Ministry of Environment, Water and Natural Resources; Kenya Investment Authority; National Drought Management Authority; Kenya Electricity Generating Company; Kenya Electricity Transmission Company; Kenya Power and Lighting Company. - Consultations included development partners supporting the government’s PFM Reform Program. ### Scope, timing, and purpose - This Fiscal Transparency Evaluation is part of the fiscal surveillance action plan agreed with the East African Secretariat in the lead up to a monetary union; other East African Community partner countries are expected to undergo similar evaluations over the next two years. - Evaluation based on information available at the time it was completed in September 2014. - Findings and recommendations represent the views and advice of the IMF mission team and do not necessarily reflect those of the government of the Republic of Kenya. - Unless otherwise specified, data in the text, figures, and tables are estimates made by the IMF mission team and not official estimates of the government of the Republic of Kenya. ### Acknowledgements - The mission expressed gratitude for the National Treasury’s logistical support during its visit to Nairobi and to specific staff who arranged meetings and facilitated the mission. ### Context and major themes from the Executive Summary - Kenya is undergoing significant public sector restructuring following the 2010 Constitution (47 county governments) and a shift to a presidential style of government; parliamentary oversight powers have been enhanced. - A 2012 PFM law aligned Kenya’s legal framework with best practice; IFMIS rolled out to counties; a public sector accounting standards board established. - Recent discoveries of oil and gas raise prospects of increased government revenues; East African Community partners agreed to move toward a currency union by 2024; Kenya floated its first bond issue in June 2014. ### Main findings — Fiscal reporting - Most aspects of Kenya’s fiscal reporting are in line with basic practice under the Fiscal Transparency Code and need significant upgrading. - Coverage of fiscal reports is primarily budgetary central government, with some reporting of counties, leaving around 28 percent of direct government expenditure unreported. - Discrepancies and unexplained adjustments: - Discrepancies between fiscal balance and financing average around 1.7 percent of GDP over the past four years. - Unexplained stock flow adjustments of around 1.1 percent of GDP over the past decade. - Different vintages of historical data vary by as much as 2.2 percent of GDP. - Financial statements are produced and audited but are not published; audit reports deliver adverse or disclaimer opinion for 42 percent of central government spending. - Liabilities equivalent to 43 percent of GDP are outside of fiscal reports. - GFS-based fiscal statistics produced by an independent statistics bureau, but usefulness is undermined by the reliability of underlying data. - Improvements possible through implementation of new accounting standards, financial statement formats, and publication as required by the PFM Act of 2012. ### Main findings — Fiscal forecasting and budgeting - Practices generally in line with good practice under the Fiscal Transparency Code, reflecting experience with medium-term budgeting and macro frameworks. - Key dates in the budget calendar are regulated in the PFM Act of 2012 and generally respected. - Budget Policy Statement (BPS) adopted in Parliament four months before fiscal year start; main instrument for fiscal policy making and resource allocation. - Program budgeting being introduced with performance information; significant public participation occurs during budget preparation; a people's guide to the budget is produced. - Parliamentary Budget Office provides analysis and alternative estimates. - Credibility concerns: - Between the first forecast in the Medium-Term Budget Framework (MTBF) and the outcome three years later, total expenditure in an average year has been revised up by more than 9 percent on average over the last decade. - Upward drift in fiscal deficit suggests fiscal principles are not binding constraints. - Investment project management, including donor-funded projects, requires significant improvements; further work needed to align programs to medium-term priorities and resources. ### Main findings — Fiscal risk analysis and management - Mixed results against the Fiscal Transparency Code. - Disclosure and quantification: a range of macroeconomic and fiscal risks are disclosed and discussed in the annual Budget Policy Statement, with some quantified. - Contingency framework: robust framework for budgetary contingencies in place; use restricted to urgent and unavoidable events and reported to Parliament. - Environmental risk management: environmental risks adequately addressed; specialized agency for rapid drought response established. - Significant unreported risks: - More than three quarters of the government’s contingent liabilities go unreported, worth some 12 percent of GDP. - Existing PPPs of around 5.7 percent of GDP are not reported or covered under the PPP Act. - Government guarantees to the National Social Security Fund currently estimated at 6.2 percent of GDP and likely to grow. - Subnational and natural resource risks: - Some new counties experiencing fiscal stress from revenue-sharing formula and unrealistic revenue expectations. - Inherited county liabilities not formally established; past audit data suggest around 1.4 percent of GDP (compared to aggregate revenues of 1 percent of GDP for old local authorities). - Main fiscal risk from future oil and gas production; should be monitored closely by the Treasury. - Absence of adequate accounting standards has hindered monitoring of general government assets and liabilities, estimated to be around 75 and 79 percent of GDP respectively. ### Key tables and summarized public sector financial overview (Table 0.1: percent of GDP) - Note: "Source: staff estimates." - Columns: Budgetary Central Govt | Central Govt | Local Govt | General Govt* | Public Corps | Central Bank | Public Sector* - Total Net Transactions† - Revenue: 19.3 | 25.9 | 1.3 | 26.8 | 8.2 | 0.3 | 34.8 - Expenditure: 24.6 | 30.2 | 1.3 | 31.0 | 10.0 | 0.3 | 40.8 - Balance: -5.3 | -4.3 | 0.1 | -4.2 | -1.8 | 0.0 | -6.1 - Total Assets: - Total Assets: 68.8 | 80.5 | 3.2 | 74.5 | 17.9 | 13.1 | 92.0 - Non-financial Assets: 43.8 | 50.6 | 2.3 | 52.9 | 11.9 | 0.4 | 65.2 - Financial Assets: 25.0 | 29.9 | 0.9 | 21.6 | 6.0 | 12.8 | 26.9 - Total Liabilities: - Total Liabilities: 71.4 | 74.2 | 1.6 | 75.5 | 17.9 | 12.0 | 92.9 - Debt: 42.3 | 40.7 | 0.1 | 40.6 | 3.6 | 3.6 | 44.1 - Public Service Pension: 22.1 | 22.1 | 0.0 | 22.1 | 0.0 | 0.0 | 22.1 - Other: 7.1 | 11.4 | 1.5 | 12.8 | 14.4 | 8.4 | 26.8 - Net Worth: - Net Financial Worth: -46.4 | -44.3 | -0.7 | -53.9 | -12.0 | 0.8 | -66.1 - Net Worth: -2.6 | 6.3 | 1.6 | -1.0 | -0.1 | 1.2 | -0.9 - * Consolidated - † Excluding transfers to and from other public sector units ### Assessments and recommendations overview - Table 0.2 summarizes assessment against the 36 fiscal transparency principles of the Fiscal Transparency Code, arranged by importance to Kenya (high, medium, low) and indicating levels of practice (Not Met, Basic, Good, Advanced) across three pillars: I. Fiscal Reporting; II. Fiscal Forecasting and Budgeting; III. Fiscal Risk Analysis & Management. - Table 0.3 summarizes key recommendations offered by the mission, with mapping of fiscal transparency indicators to Kenya’s 2013–18 PFM reform plan actions presented in the annex. *Source: IMF mission — Fiscal Transparency Evaluation, Nairobi mission completed September 2014.* ### 1.1 Expand the institutional coverage of the key fiscal reports to cover the general ### 1.1 Expand the institutional coverage of the key fiscal reports to cover the general government ### Key action points (from the source) - 1.1 Expand the institutional coverage of the key fiscal reports to cover the general government. - 1.2 Begin preparing a balance sheet for the central government. - 1.3 Improve the quality and timeliness of the audited financial statements, by preparing a consolidated financial statement and audit it within 6 months of year-end. - 1.4 Move the basis of reporting for all fiscal documents to internally consistent final audited figures. - Fiscal Forecasting and Budgeting: - 2.1 Include all central government entities and their expenditure in the fiscal aggregates of the budget documents. - 2.2 Issue and enforce Cabinet guidelines on the selection, appraisals, and funding for major investments projects. - 2.3 Clarify the fiscal policy principles to give practical guidance to policy makers as to what the major fiscal aggregates should be over the medium term. - 2.4 Improve the current forecast reconciliation table by including decomposition by source of forecast variations. - Fiscal Risk Analysis and Management: - 3.1 Report and quantify all fiscal risks in the fiscal risk statement and discuss their implications for fiscal forecasts. - 3.2 Disclose all the rights and obligations and other exposures under all existing and planned PPPs and PPP-type contracts at least annually. - 3.3 Ensure a regular reporting (at least annually) on potential oil and gas resources going forward. - 3.4 Develop an enhanced county fiscal reporting system. - 3.5 Prepare an annual financial report on the public corporation sector. ### Introduction — reporting principles and current gaps - Fiscal reports should: - Cover all institutional units engaged in fiscal activity; - Capture all assets, liabilities, revenue, expenditure, financing, and other flows; - Be published in a frequent and timely manner; - Be classified according to an internationally recognized classification system; - Reconcile any unexplained discrepancies within or between fiscal reports; - Be prepared by an independent agency (statistics) or scrutinized by an independent national audit institution (accounts). - Identified deficiencies in Kenya’s reporting practices: - Coverage is almost exclusively budgetary central government on a cash basis, excluding significant fiscal operations by off-budget units, and no balance sheet reporting. - Timeliness varies: frequent and timely reports on basic exchequer flows, but considerable delays in comprehensive budget outturns and audited annual statements. - Quality is diminished by existence of different estimates of actual fiscal outcomes that are not internally consistent with verifiable information (e.g., stock of debt). - Classification is good, but large fiscal operations remain outside international standards. - Integrity is weak: no consolidated financial statement and almost half of expenditure subject to adverse or disclaimer audit opinions. ### Institutional changes planned and indicative timelines - Accounting standards: implementation of the decisions of the newly established Public Sector Accounting Standards Board – IPSAS for general government and IFRS for commercial state corporations. (3–5 years). - Financial statements: improved annual financial statements based on new reporting formats through training, functionality included in the re-engineered IFMIS. (2–3 years). - Consolidated statements: preparation of consolidated central government annual financial statements, including a financial position statement by Accountant General’s Department and submission to the Auditor General in a timely manner. (2–4 years). - Classification structure: full implementation of the revised classification structure built into the re-engineered IFMIS for general government. (1–3 years). - IFMIS: completing the rollout of the re-engineered IFMIS to all budget entities. (2–4 years). ### Coverage of fiscal reports — findings and statistics - Kenya's public sector composition and scale: - Total public sector institutional units: 419. - Budgetary central government entities: 35 (of which budgetary central government funded through "the Exchequer" comprises the 19 government ministries and 16 other institutions). - Extra-budgetary funds: 48. - Non-Commercial Parastatals / SAGAs: 129. - Sub-national governments: replaced 175 local authorities with 47 counties in 2013–14. - Commercial parastatals: 39. - Central Bank of Kenya: 1. - Coverage gaps and implications: - No comprehensive register of public sector institutional units; the budget annex is incomplete. - Key fiscal reports focus primarily on budgetary central government; very little information on other sectors. - Financial Statements report solely on receipts into and issues from the exchequer, and use of those releases and own-source revenue by BCG entities, on a cash basis — do not provide details on parastatals' expenditure or own-source revenue. - KNBS' Annual Economic Survey includes county/local authority expenditures to a greater degree. - Controller of the Budget provides quarterly reporting for counties and budgetary central government. - Magnitude of unreported expenditure: - Around 28 percent of both central and general government expenditure is unreported in key fiscal reports. - 44 percent of public sector expenditure is unreported in fiscal reports. - EAMU commitments: - Kenya is required to move to full general government reporting under East African Monetary Union (EAMU) commitments, needed to report on EAMU general government fiscal deficit and public debt convergence criteria for three years from 2021. ### Coverage of stocks — balance sheet reporting and estimates - Current status: - No reporting of the government’s balance sheet in any fiscal reports. - Basic information on public debt and cash deposits is provided in Treasury’s debt report and QEBR. - CBK provides information on public debt and government and other public depositors’ cash balances at the Central Bank; deposit balances at commercial banks are not available. - Reported public debt and related figures at June 2013: - Government debt liabilities reported at June 2013: 42.3 percent of GDP. - Pending bills: 0.7 percent of GDP. - Cash assets: 1.3 percent of GDP. - On-lent loans: 3.7 percent of GDP. - Staff-estimated public sector balance sheet (2012–13) — selected aggregated figures (Percent of GDP): - Public Sector (consolidated) Assets: 92.0 - Non-financial Assets (consolidated): 65.2 - Financial Assets (consolidated): 26.9 - Public Sector Liabilities (consolidated): 92.9 - Net Financial Worth (consolidated): -66.1 - Net Worth (consolidated): -0.9 - Key components and adjustments explaining broader liabilities: - Unreported public service pension liabilities: 22 percent of GDP. - Extension of coverage to public sector increases liabilities by including: - Sub-national governments liabilities: 1.6 percent of GDP. - Non-commercial parastatals liabilities: 4.2 percent of GDP. - Commercial public corporations liabilities: 21.6 percent of GDP. - Liabilities of publicly owned banking sector: 10.9 percent of GDP. - Consolidation adjustments reduce liabilities by eliminating cross-holdings and intra-public sector claims. - Estimated public sector liabilities and assets context: - Staff estimate: public sector liabilities at 93 percent of GDP (far more extensive than reported public debt). - Public sector assets estimated at 92 percent of GDP, offsetting most liabilities and far greater than reported assets of 5 percent of GDP. - Unreported assets include: - Nonfinancial general government assets estimated at 53 percent of GDP (derived from perpetual inventory method; excludes public lands and sub-soil assets). - Central Bank assets: 12.5 percent of GDP. - Loans issued by publicly controlled banks: 1.3 percent of GDP. - Consolidated asset cross holdings, particularly the value of publicly owned parastatals. ### Implications for policy and reporting priorities - Expand institutional coverage of fiscal reports from budgetary central government to full general government coverage, including parastatals, extra-budgetary funds, and sub-national governments. - Prepare and publish a central government balance sheet and, ultimately, a consolidated public sector balance sheet. - Adopt and implement public sector accounting standards (IPSAS for general government; IFRS for commercial state corporations) within the indicated timelines. - Produce consolidated financial statements and ensure audits are completed within 6 months of year-end. - Move reporting basis to internally consistent final audited figures across fiscal documents. - Improve transparency and regular reporting on fiscal risks, PPPs, and potential oil and gas resources, and develop enhanced county fiscal reporting and annual public corporation sector financial reports. *Source: _cr16221 - 1.1 Expand the institutional coverage of the key fiscal reports to cover the general* ### 15. Kenya’s net worth is estimated to be roughly balanced at minus 0.9 percent of GDP, ### _cr16221 - 15. Kenya’s net worth is estimated to be roughly balanced at minus 0.9 percent of GDP, ### Net worth estimate - Kenya’s net worth is estimated at minus 0.9 percent of GDP. - The estimate falls in the mid-range of available international comparators, but significant caution is warranted due to very large uncertainties in the value of non-financial assets and a high likelihood of overvaluation because of poor quality past investments and insufficient maintenance of existing infrastructure. - The true net liability figure could be significantly higher, though the estimate is relatively low compared to existing estimates mainly from advanced economies and is in line with other developing economies. ### Coverage of flows (Basic) - Fiscal reports are predominantly prepared on a cash basis and do not recognize accrual flows; accounting and budget reports apply a modified cash basis (invoices for goods and services received prior to year-end may be paid during the first two weeks of July but expensed in the previous year). - Annual financial statements disclose pending bills outstanding at year-end, but these are expensed against the following year’s budget. - The in-year QEBR includes committed expenditures. - Public finance statistics reports are based on transactional cash flows and, excepting changes in the value of external borrowing stocks, take little account of other economic flows. - Significant accrual-based flows that would impact net worth remain unreported (for example, increases in pension obligations for public servants and military employees are neither expensed nor recognized as liabilities in the accounts). - Planned introduction of IPSAS accrual-compliant standards and formats will progressively capture and report other economic flows and balances. ### Cash to accrual adjustments and fiscal impact - Cash to accrual adjustments would increase the 2012-13 deficit from 5.2 to 8.0 percent of GDP. - The computation excludes value and volume changes to liabilities and assets (e.g., exchange rate variation on external debt, stocks, inventories, investments and depreciation). - Significant adjustments include: - Pensions: May 2014 actuarial review estimated pension liabilities would continue to accrue at an estimated 22.1 percent of the current payroll costs per annum; for 2012/13 this equated to 1.9 percent of GDP. - Pending Bills: change between the 2012–13 opening and closing balances of pending bills was 0.9 percent of GDP. - On-lending arrangements (state corporations arrears to central government at June 30, 2013): KSh12.3 billion overdue in respect of principal repayments and KSh24.2 billion interest (including KSh507 million which had accrued during 2012/13). Portfolio adjustments agreed during the year included: - Conversion to equity of KSh2,058 million principal and KSh12,989 million interest. - Write-off of KSh347 million principal and KSh2,912 million interest. - Conversion of KSh1,862 million principal to a grant. - Annual investments in PPPs: imputed construction costs not recorded in 2012/13 would, where available, further increase the GFS fiscal deficit. - Table extracts (2012/13 cash to accrual adjustment): - FISCAL BALANCE - CASH: -232.4 ; -5.2 - Receipts: 0.5 ; 0.0 - Accrued interest: 0.5 ; 0.0 - Payments: 128.6 ; 2.9 - Other voted expenditure: 39.1 ; 0.9 - Net accrued pension liabilities: 84.4 ; 1.9 - Grants: 1.9 ; 0.0 - Write-offs: 3.2 ; 0.1 - FISCAL BALANCE - GFS Basis: -360.5 ; -8.0 ### Tax expenditures (Not Met) - There is no public reporting of tax expenditures despite constitutional and PFM Act requirements; an internal record of tax exemptions approved by the Cabinet Secretary Finance is maintained but not published. - Methodology for identifying and measuring tax expenditures is not yet formally established. - Exemptions provided in various tax laws include investment deduction allowances (which can reach 150 percent if investment is done in remote areas), export promotion incentives through Export Processing Zones, zero-rated VAT products, and tax reliefs on interest earnings, on capital gains, and on mortgage interest payments. - Studies by the Kenya Revenue Authority and the World Bank estimate tax expenditures of around 2½ percent of GDP. - Major tax expenditures identified include accelerated depreciation, investment deduction allowances, and exemptions to Export Processing Zones. - Reforms: VAT Act of 2013 significantly reduced some incentives (repealing VAT remissions and reducing preferential rate items); proposed Excise Duty Bill under review also streamlines exemptions. ### Frequency and timeliness of fiscal reports - Kenya produces regular in-year fiscal reports submitted to Parliament and publicly accessible, including: - Quarterly Economic and Budgetary Reviews (QEBR) by the Treasury. - Quarterly budget implementation review reports covering national government (BIRR) and county governments (CBIRR) by the Controller of Budget (CoB). - Monthly Statement of Actual Receipts into and Issues from the Exchequer Account by the Treasury. - Coverage varies: QEBR provides the most comprehensive synopsis of national budget implementation, includes economic/fiscal developments, updates on public debt and guarantees, and summary expenditure/commitment tables. BIRR and CBIRR report on flows to/from the Exchequer account with expenditure analysis by sector, implementing agency and major economic category. The monthly Statement reports only flows into and out of the Exchequer Account with no analysis of application. - Timeliness: - QEBR is published quarterly within 45 days of the end of the quarter (calendar prescribed in the PFM Act). - Controller of Budget submits BIRR and CBIRR within two months of the quarter end. - Accounting officers submit annual financial statements by October 31 (four months after year-end); audits of ministries completed within twelve months of the year-end (audits completed by the following May/June, i.e., 11–12 months after year-end). - Treasury’s Statement of Receipts into and Issues from the Exchequer Account audit is completed by 31st December (within six months of the year-end); audited statement and Auditor-General's opinion included in annual report to Parliament. - Unaudited Financial Statements summaries are not audited and are not updated to reflect corrections from audits. ### Quality: classification, consistency, and historical revisions - Classification: - Kenya produces fiscal reports analyzing revenues and expenditures by administrative, economic and functional classifications. QEBR and annual financial statements provide administrative and economic breakdowns. KNBS annual reports provide GFS and COFOG compliant reports. - Standard chart of accounts introduced in July 2013 provides multiple reporting segments, harmonized across national and county levels, consistent with international standards; benefits not yet fully realized in annual financial statements. - Public Sector Accounting Standards Board (PSASB) established and prescribing IPSAS-compliant standards/formats to be progressively introduced from 2013/14. - Some practices reduce credibility of GFS-compliant reports: high proportion of national budget designated for general government purposes but classified under Grants with no detailed breakdown (e.g., transfer to Defense). Economic Survey Table 6.9 shows Grants to General Government Units as a proportion of Total Recurrent Expenditure varying between 23 percent and 33 percent over 2009/10–2012/13. - Internal consistency: - Kenya reliably publishes only one of the three internal consistency checks required under the Code. - Large average absolute discrepancy of 1.7 percent of GDP over the past four years between the above-the-line budget balance and below-the-line net financing (KNBS Economic Survey). - No reconciliations between net financing and change in net debt estimates; available data suggest large discrepancies for most years. - Unexplained large stock-flow adjustments exist (e.g., four percent of GDP increase in net debt in 2011 above financing needs for the budget; similarly large discrepancies in 2002 and 2003). - Potential causes (changes in government cash deposits, on-lending and equity holdings, exchange rate variations) are published to varying extents but do not resolve the discrepancy; possible underlying cause: revisions to budget balance data not recorded in budget outturn or central bank reports and not reflected in revised net financing estimates. - Historical consistency (Not met): - No systematic reporting or explanation of revisions to fiscal aggregates in fiscal reports despite large upward revisions to budget deficits. - Fiscal statistics are updated as estimates move from provisional to final following audits, but revisions appear as new figures in the following year’s report without comparison, explanation or bridging tables reconciling vintages. - Treasury’s QEBR and Central Bank’s Statistical Bulletin continue to publish provisional fiscal outcome data even after external audit results—over the past five years, revisions between provisional and audited figures have resulted in an average increase of 1.3 percent of GDP to the budget deficit. - Historical data are not revisited once audited; move to IPSAS and GFS reporting will change coverage and basis of accounting and should be applied retrospectively with clear explanations. Adoption of System of National Accounts 2010 is anticipated to result in a larger GDP estimate that will reduce key fiscal ratios; when applied, figures should be provided in nominal terms with old and new ratios to GDP. ### Integrity of fiscal reports - Statistical integrity: - Annual fiscal statistics are produced and disseminated by KNBS in line with GDDS practices. - Independence of KNBS is provided by the Statistics Act of 2006; KNBS head appointed for a three-year term, renewable once, appointed by the Cabinet Secretary of Planning from a board short-list; removal only by Cabinet Secretary Planning on board recommendation. - KNBS appears independent and professional despite some issues with fiscal statistics. - External audit: - Auditor-General audits annual financial statements of individual ministries and submits reports to Parliament; the Auditor-General's annual report is published on the Kenya National Audit Office (KENAO) website. *Source: Staff estimates, national financial statements, QEBR, Debt Management Report, 2012-13 Auditor Report, Report on Actuarial Valuation and Projected Benefit Expenditure, Kenya Revenue Authority, World Bank, KNBS Economic Survey, Central Bank of Kenya Statistical Bulletin, and WEO database as cited in the chapter.* ### 39. The Kenya National Audit Office (KENAO) provides independent oversight of public ### The Kenya National Audit Office (KENAO) provides independent oversight of public finances. ### KENAO mandate, structure, and appointment - The Office of the Auditor General is an independent body established under the Constitution to audit public entities and report on their management of public funds. - Complement of 974 staff, of which 714 are auditors or examiners. - Can outsource audits for public corporations, projects and specialist investigations. - The Auditor General is nominated and, subject to the approval of the Parliament, appointed by the President for a non-extendable period of eight years. - The Auditor General may only be removed from office in cases of misconduct or incapacity in accordance with the provisions of the Constitution. - Note: A new Public Audit Bill is currently with Parliament. It will replace the Public Audit Act 2003 and aims to further strengthen the independence and professionalism of the Office of the Auditor-General. ### Audit standards, scope, and approach - KENAO applies international standards and a risk-based approach to its audits. - Required audits include: the national and county governments; public funds; statutory bodies, commissions and independent offices; public corporations; and projects. - Plans and performs audits to obtain reasonable assurance about whether the statements are free from material misstatement. - Issues opinions classified as unqualified (“representing a true and fair view)”, qualified, adverse, or disclaimer, reflecting increasing degrees of deficiency. ### 2012/13 audit findings (national government) - Expenditure audit outcomes (2012/13): - Total national government recurrent: 65 statements, Amount Ksh 611,695 (Ksh mn). - Total national government development: 47 statements, Amount Ksh 190,584 (Ksh mn). - Breakdown by opinion for Recurrent (No.; Amount): - Unqualified: 14; 20,129 - Qualified: 34; 328,970 - Adverse: 6; 35,300 - Disclaimer: 10; 225,599 - Other: 1; 1,698 - Breakdown by opinion for Development (No.; Amount): - Unqualified: 3; 369 - Qualified: 33; 113,211 - Adverse: 2; 3,403 - Disclaimer: 9; 73,600 - Overall, the 2012/13 audit of national government entities resulted in 42 percent of expenditures being subject to adverse and disclaimer audit opinions. - Audits of 2012/13 revenue statements resulted in 13 of the 23 statements attracting an adverse or disclaimer opinion. - Common issues leading to adverse or disclaimer opinions: - Discrepancies between reported figures and ledger balances. - Inconsistencies between closing balances for one year and opening balances for the next. - Exclusion of transactions from the statements. - Unexplained, unsupported or unreconciled balances. - Failure to comply with treasury instructions. - Bookkeeping errors. - Many audit queries are cleared before the report is adopted by Parliament, though KENAO does not clear them. ### Timeliness and reconciliation practices - Article 229 of the constitution requires audit report submission to Parliament within six months after the end of each financial year. - To meet this deadline, the Auditor General must work with available information and first drafts have significant audit queries. - The National Treasury is working with KENAO to ensure that queries are addressed before the report is published, beginning this year, and will track all queries to expedite unresolved issues. - Absence of consolidated annual financial statements prevents the Auditor-General from expressing an opinion on the government’s overall financial performance and position. - Magnitude of errors detected in individual financial statements suggests aggregation would not produce reliable consolidated annual statements worthy of a “true and fair view” audit opinion. ### Comparability of fiscal data (basic) - Fiscal reporting comparability is assessed as Basic. - Budget outturn reports are presented on the same basis as the Budget; budget documentation reports key fiscal aggregates whose revised figures and actual outcomes are reported in the Treasury’s QEBR document. - Exchequer account flows are reported in budget documentation; actuals are reported by the Controller of Budget’s quarterly report. - Exchequer basis is not easily converted into fiscal aggregates due to inclusion of principal debt repayments as expenditure. - Published audited statements are limited to Exchequer account flows and do not include information on fiscal aggregates, complicating comparison with the budget. - A basic reconciliation from Exchequer flows (unaudited financial statements) to fiscal aggregate outturns (QEBR) is possible but requires multiple adjustments and leaves a residual difference of between 1 to 5 percent of expenditure over the last five years. - The Economic Survey and QEBR, both reporting provisional fiscal outturns on a cash basis with the same institutional coverage, have varied in their estimates of provisional expenditure by an average of 2.5 percent over the last 5 years. - Multiple reported outturns (Economic Survey, QEBR, audited outcomes) produce markedly different actual outturn estimates for key fiscal aggregates. ### Key recommendations for strengthening fiscal reporting (numbered as in source) - 1.1 Expand the institutional coverage of the key fiscal reports: - Include direct expenditure and revenues of extra-budgetary and parastatals sectors at a basic level. - Include an informational annex combining data from the Controller of Budget on county expenditures and revenues, and present aggregate fiscal data on a general government basis. - 1.2 Begin preparing a balance sheet for the central government in key fiscal documents: - Use data already available within existing systems and reports. - Initially present on a provisional (non-audited) basis. - As reporting moves to an IPSAS basis, improve estimate quality and expand coverage to general government and eventually entire public sector. - 1.3 Improve quality and timeliness of audited financial statements: - Accountant General’s Department to produce consolidated annual financial statements in accordance with PSASB standards and build capacity to lessen reporting deficiencies. - Auditor-General should complete the audit within 6 months of the year-end. - National Treasury should publish the audited statements. - 1.4 Move reporting basis for all fiscal documents to internally consistent final audited figures and begin reporting major fiscal aggregates in financial statements: - Investigate and report on remaining discrepancies between fiscal balance and net-financing and stock-flow adjustment. - Undertake an annual reconciliation between net financing and change in debt stock outturns during preparation of final accounts, preparing a reconciliation table to be audited by the Auditor General. - Develop and implement a methodology for preparing and explaining historical revisions. ### Summary assessment highlights (selected figures and ratings) - Coverage of Institutions: Not met. High importance. 28% of general govt. and 44 percent of public sector expenditure goes unreported. Recommendation: 1.1 - Coverage of Stocks: Basic. Medium importance. Public liabilities of 43 percent of GDP outside fiscal reports. Recommendation: 1.2 - Coverage of Flows: Basic. Low importance. - Tax Expenditures: Not met. Medium importance. Estimated foregone revenue around 2 percent of GDP in 2010/11. Recommendation: 1.2 - Frequency of In-year Fiscal Reports: Basic. Low importance. Publication time lags over past five years vary from 16 to 53 days, with average of 43 days. - Timeliness of Annual Financial Statements: Basic. Medium importance. Final Audit report published 11 months after year-end. Average differences between audited and unaudited total expenditure if 2 percent. - Internal Consistency: Basic. High importance. Average discrepancies of 1.7 percent of GDP between fiscal balance and financing, and unexplained stock flow adjustments of 1.2 percent of GDP. Recommendation: 1.4 - Historical Consistency: Not Met. High importance. Average revisions to fiscal deficit of 1.5% of GDP. Recommendation: 1.4 - Statistical Integrity: Advanced. Low importance. An independent agency prepares statistics according to GDDS. - External Audit: Basic. High importance. 42 percent of BCG expenditures subject to adverse or disclaimer audit opinions. Recommendation: 1.3 - Comparability of Fiscal Data: Basic. High importance. Multiple estimates of fiscal data outturns over history exist, varying by as much as 2.2 percent of GDP. Recommendation: 1.4 ### Fiscal forecasting and budgeting — overview and outstanding reforms - Budget and forecasting principles (from source): - Provide a comprehensive overview of fiscal prospects, presented on a gross basis. - Be presented, debated, and approved timely with clear responsibilities. - Be presented to facilitate policy analysis and accountability. - Be credible and subject to independent evaluation. - Key challenges noted: - Budgetary documentation does not provide comprehensive coverage of revenue, expenditure and financing of central government. - Selection and budgeting of public investment projects is fragmented with limited disclosure of financial obligations and lack of systematic cost-benefit analysis. - Current fiscal principles do not translate into clear, measurable and binding fiscal policy objectives. - Multi-year planning and budgeting process has yet to produce reliable expenditure priorities and credible forward estimates. - Planned actions outstanding: - Drafting legislation for reporting and inclusion of off-budget resources (government owned entities) in budget documents. - Extending coverage of E-ProMIS to include GoK-funded projects. - Preparing regulatory framework to implement fiscal responsibility principles in the PFM Act 2012. - Strengthening and rolling-out program-based budgeting to improve expenditure prioritization and costing. - Calendar of main fiscal documents (as described): - Budget Review and Outlook Paper (BROP): September. - Budget Policy Statement (BPS): February. - Estimates of Recurrent and Development Expenditure: April 30. - Estimates of Revenue, Grants and Loans: April 30. - Development Estimates (externally funded): June/July. - Estimates of Revenue and Expenditure of State Corporations: Mid-June. - Finance Bills: June. - Appropriation Bill: June. - Comprehensiveness observations: - Annual budget documentation provides a generally satisfactory picture of central government fiscal operations, including main social security funds. - Annex reporting 128 of 132 parastatals and 15 major EBFs out of 75; 4 unreported parastatals assumed relatively small but should be included. - Presentation issues that obscure transparency: - Fiscal aggregates in BPS and budget estimates understate size of central government because parastatals and EBFs revenue, expenditure or financing are excluded from aggregates. - Large inconsistencies between transfers to parastatals and EBFs from budget estimates and receipts in the summary annex: 1 percent of GDP for recurrent grants, and 9 percent of GDP for development grants. - Annex fails to distinguish commercial parastatals outside central government from non-market core central government entities. - Macroeconomic forecasts: - BROP and BPS provide detailed medium-term forecasts; BROP (September) and BPS (February) cover budget plus two outer years. - Forecasts include real GDP growth, inflation (CPI and GDP deflator), terms of trade, investment and savings, reserves and current account balance. - Budget Statement provides a final update in April. - Documentation lacks detailed explanations of key macroeconomic variables and component contributions (sectoral, expenditure/income components), and could extend to asset prices and indicators of long-run trends. *Source: Executive Summary of the Auditor-General’s Report 2012/13 and related sections in the provided IMF document.* ### 57. While Kenya's year-ahead forecasts errors for real GDP are relatively high, they do ### _cr16221 - 57. While Kenya's year-ahead forecasts errors for real GDP are relatively high, they do ### Forecast accuracy and bias - Kenya's year-ahead forecast errors for real GDP are relatively high among comparable countries, with one of the highest absolute average forecast errors (Figure 2.1). - Forecasts do not present a strong systematic bias overall when compared to a set of sub-Saharan and European countries (Figure 2.2). - Two distinct sub-periods within the decade 2000–13: - First half: forecasts were conservative, with growth outturns stronger than forecasts. - Latter half: outcomes were well below forecasts. ### Medium-term Budget Framework (MTBF) — design and practice - MTBF introduced for central government in 2001; integrates top-down and bottom-up expenditure forecasting, improving consistency and medium-term focus. - MTBF documentation (BROP and BPS) presents updates of macroeconomic fiscal performance, fiscal policy objectives, and expenditure projections over the medium term, summarizing revenue, expenditure and financing for two preceding years, the upcoming budget and two outer years broken down by sector, ministry and broad economic category. - Program-based budgeting introduced in 2012; Estimates of Expenditure for the National Government for 2013/14 and 2014/15 provide rolling three-year gross expenditure estimates by program with objectives and performance indicators. Key MTBF budget example (Table 2.2) — selected rows (KSh million): - AGRICULTURE, RURAL & URBAN DEVELOPMENT SUB-TOTAL: 53,343.4 (ESTIMATES 2013/14), 64,637.8 (REVISED 2013/14), 55,674.90 (BASELINE 2014/15), 55,559.1 (BROP CEILING 2014/15), 64,974.5 (BPS CEILING 2015/16), 66,966.1 (PROJECTIONS 2016/17) - Rec. Gross: 15,022.2; 17,216.5; 16,080.70; 15,964.9; 17,514.1; 18,417.3 - Dev. Gross: 38,321.2; 47,421.3; 39,594.20; 39,594.2; 47,460.4; 48,548.8 - ENERGY, INFRASTRUCTURE AND ICT SUB-TOTAL: 216,531.9; 213,158.1; 241,908.1; 250,047.6; 280,085.5; 312,439.2 - Rec. Gross: 27,533.6; 36,700.4; 41,606.70; 41,439.9; 44,212.1; 46,422.8 - Dev. Gross: 188,998.4; 176,457.7; 200,301.4; 208,607.7; 235,873.4; 266,016.5 - Real benefits of MTBF are yet to be fully realized: - Annual budget discipline improved, but medium-term expenditure discipline remains elusive. - Expenditure typically comes in under budgeted amounts in the budget year due primarily to underspends in the development budget. - Actual expenditure on average 9 percent higher than projected over the medium term (Figures 2.3 and 2.4). - Upward revisions over the medium term are at the lower range for the EAC region but considerably higher than even the worst performing countries in Europe (Figure 2.3). - Identified weaknesses undermining MTBF effectiveness: poor prioritization; unrealistic budgeting; poor policy and program implementation. - Recommendation: Treasury should design and implement a capacity building program as part of the rollout of program-based budgeting to address weaknesses and improve framework credibility. ### Public investment management and development budget execution - Public investment regulations and procedures exist, but domestically funded projects are not systematically subject to cost-benefit analysis; where done, results are not always public. - External funding projects are subject to rigorous cost-benefit analysis; approval and budgeting of projects within National Treasury is fragmented (External Resources Department coordinates externally-funded projects; Budget Supply Department coordinates domestically-funded projects). - Annual Estimates for Development Expenditure do not include total financial obligations of projects—only expenditures and funding sources for the budget year and two outer years. - Budget documentation provides insufficient information on scope and implementation progress of each project; capital projects and “softer” development activities are presented on an equal footing, obscuring infrastructure needs. - MTEF guidelines for 2013/14 requested detailed project information; sector responses were mixed. - PFM Act 2012 provision: both central and county governments to allocate a minimum of 30 percent of budgetary resources to development projects—this will impose additional strain on existing absorption capacities. - Persistent under-spending of the development budget in recent years indicates significant absorption capacity problems (Figure 2.5). - Increasing absorption will require streamlining institutional roles and coordination within the National Treasury. ### Orderliness — legal and procedural framework - The Constitution and the Public Financial Management Act of 2012 provide a comprehensive legal and regulatory framework governing public resources, including limits on the legislature’s power to amend the executive’s budget. - PFM Act elements include stronger fiscal rules and medium-term objectives, stronger macro-fiscal focus, and extended budget coverage to general government. - Sections 35-40 of the PFM Act set the timetable for budget preparation and approval; Section 38 specifies content requirements for budget documentation to facilitate informed debate. - Timeliness: - Budget presented to Parliament at end of April, two months prior to the budget year; estimates approved and published before the fiscal year—conforms to legal requirements and Fiscal Transparency Code. - BPS and medium-term Debt Management Strategy submitted to Parliament in February, two months before annual budget presentation. - Budget documentation published on National Treasury website for public scrutiny. ### Policy orientation — fiscal principles, performance information, and participation - Section 15 of the PFM Act requires National Treasury to enforce fiscal responsibility principles; implementing regulations are pending. Principles include: - a minimum of 30 percent of the national budget to be allocated to development spending; - government borrowing to only finance development spending; - the wage bill to revenue ratio not to exceed a percentage to be defined by regulation; - public debt and obligations to be capped at levels to be defined by regulation. - Limitations: - Principles do not provide operational guidance for main fiscal aggregates (overall balance, total expenditure, public debt). - No limits yet defined for the wage bill or public debt—key regulations pending. - Requirement that borrowing finance only development expenditure does not constrain the deficit meaningfully given development expenditure targeted at 30 percent of the budget (10 percent of GDP). - Lack of binding constraint visible in gradual upward drift of the deficit to current level of 5.7 percent of GDP (Figure 2.6). - Progress expected: Public Finance Regulations under preparation will provide numerical targets for the wage bill and debt-to-GDP ratio. - EAMU convergence criteria (for potential entry to monetary union planned for 2024): - annual overall deficit not to exceed three percent of GDP; - debt stock to stay below 50 percent of GDP in net present value. - These criteria are not yet embodied in legislation or government objectives. - Performance information: - Budget documentation sets targets and reports performance for outputs under major policy areas. - Estimates of Expenditure for 2014/15 provide policy objectives linked to the Second Medium-term Plan Kenya Vision 2030, summaries of past performance, and medium-term output targets. - Program budgeting (initiated 2012) is nascent; programs remain organized around restructured departments, outputs often not clearly defined or measurable, limiting reliable program cost estimates and influence on resource allocation. - Detailed performance reports (Fourth Annual Progress Report 2011–12; Annual Public Expenditure Review) exist but are published late and not synchronized with the budget process, reducing their influence. - Public participation: - Formal public participation integrated into the budget process since mid-2000s with influence in select sectors. - Public consultations via print media and website, NGO participation in sector discussions, National Treasury public hearings, and county-level legislative engagement. - Citizen’s Budget Guide produced for the last three years summarizing fiscal performance, budget implications for typical citizens and demographic groups, and information on equity/regional balance and Youth and Women Programs. ### Credibility — independent oversight, supplementary budgets, and forecast reconciliation - Independent evaluation: - Non-partisan Parliamentary Budget Office (PBO) provides independent medium-term macroeconomic and fiscal forecasts and publishes an annual Budget Options document, usually a week after the Treasury’s Budget Policy Statement. - Budget Options assesses past fiscal performance, proposes policy options based on PBO projections, and explains differences due to differing assumptions. - PBO has generally been more cautious in revenue projections historically, which has often proven more accurate (Figure 2.7). - Supplementary budgets: - Any material variation to the approved budget requires National Assembly authorization; “material variation” interpretation is relatively narrow (increases to aggregate expenditures, transfers between votes/programs/development vs recurrent, and economic groupings). - Typically limited to one supplementary appropriation bill per year following a mid-year review; a second only for exceptional demands. - Practice is more stringent than legal minimums (Constitution Article 223; PFM Act Article 44 permit retrospective authorization up to 10 percent of aggregate approved budget, requiring accompanying statement). - In practice, parliamentary approvals are sought prior to funds being made available; revised budget released in IFMIS used for control and accounting. - Budget outturns and credibility: - Expenditure outturns are on average 12 percent lower than original estimates, undermining the budget as an effective guide to expenditure (Figure 2.8). - No regular pattern exists of reallocating development savings to recurrent purposes or vice versa (Figure 2.9). - Forecast reconciliation: - BROP and BPS provide a reconciliation table showing current and last published medium-term forecasts for revenue, expenditure and financing and some explanations for changes. - Limited discussion on how changes to the economic outlook have led to forecast revisions; budget documentation provides limited information on size and causes of medium-term forecast revisions. *Source: IMF staff report content as provided in the supplied document excerpt.* ### 82. Forecasts variations have tended to be large and should be reconciled. In the past ### _cr16221 - 82. Forecasts variations have tended to be large and should be reconciled. In the past ### Forecast variations and reconciliation - In the past three years, outer-year expenditure forecasts have been revised upwards by nine percent on average, suggesting previous outer year forecasts were set at unrealistically low levels. - An illustrative reconciliation (Table 2.3) decomposes revisions for sample budgets: - 2014 Budget (Budget year, BY+1, BY+2) - Total Expenditure: 100, 110, 120 - Reconciliation in terms of: - Accounting or one-off factors: -5, -6, -8 - Macroeconomic factors: 3, 4, 6 - Policy measures: 0, 5, 3 - Total Variation: -2, 3, 1 - 2015 Budget (Estimated Actual, Budget year, BY+1, BY+2) - Total Expenditure: 98, 113, 121, 130 - Reconciliation in terms of: - Accounting or one-off factors: 2, 13, 15 - Macroeconomic factors: -2, -2, -3 - Policy measures: 0, -11, -12 - Total Variation: 0, 0, 0 - 2016 Budget (Estimated Actual, Budget year, BY+1, BY+2) - Total Expenditure: 113, 121, 130, 139 ### Recommendations to strengthen fiscal forecasting and budgeting (Section 2.5) - 2.1 Address discrepancies of information on grants across the various budget documents. - Ensure consistency between the transfers budgeted in the estimates document and the grants received shown in the annex on public corporations, and provide explanations of any residual differences in the annex document. - 2.2 Clarify institutional roles for public investment management. - Strengthen coordination, appraisal and monitoring of public investment projects to raise absorption capacity. - Require cost-benefit analysis for all major infrastructure projects. - Ensure budget documents reflect the full lifetime cost of projects, as well as the stock of related multi-year contract commitments being carried over into the new budget year. - 2.3 Clarify the fiscal policy principles to give practical guidance to policy makers as to what the major fiscal aggregates should be, and provide clear measurable reporting against them in the budget documents. - 2.4 Improve the current forecast reconciliation table by introducing a clear decomposition of the three sources of forecast variations: - (i) new policy decisions taken during the period; - (ii) changes to the economic outlook; and - (iii) accounting and technical changes. ### Summary assessment of fiscal forecasting and budgeting practices (selected findings from Table 2.4) - Budget Unity (2.1.1): Good presentation of revenue and spending; High importance due to discrepancy in documentation for grants of 516 bKSh in 2013/14 – 10 percent of GDP or 35 percent of budget. - Macroeconomic Forecasts (2.1.2): Good: BROP and BPS forecast key macro variables and provide underlying assumptions; Medium importance: High absolute forecast errors equivalent to 1.5 percent of GDP. - Medium-Term Budget Framework (2.1.3): Advanced presentation of fiscal aggregates; Medium importance: Actual expenditure around 9 percent higher on average than projected over the medium term. - Investment Projects (2.1.4): Basic: All major projects tendered, but no disclosure of total financial obligation and no systematic cost benefit analysis; High importance: Achieving 30 percent of budget for investments will require better coordination and oversight. - Fiscal Policy Objectives (2.3.1): Basic: Some fiscal objectives are not precise and time-bound and not reported; High importance: Upward drift in deficit - currently 5.7 percent of GDP - suggests that fiscal principles are not binding constraints. - Independent Evaluation (2.4.1): Good: PBO provides macro-fiscal forecasts without evaluating NT forecasts; Medium importance: Average overestimation of revenues of 1.5 percent of GDP undermines budget credibility. - Forecast Reconciliation (2.4.3): Basic: Forecast reconciliation does not separate effects of various adjustments; High importance: 9 percent upwards revisions in MT expenditure forecasts unexplained. ### Fiscal risk analysis — introduction (Section III) - A government’s ability to cope with fiscal risk depends on quality of information about risks, powers to mitigate such risks, and capacity to absorb fiscal implications if risks materialize. - Required arrangements include institutional/procedural capacities to collect, analyze and report fiscal risks from macroeconomic volatility, guarantees, state-owned enterprise losses, court judgments, disasters, PPPs, natural resource exploitation, financial sector difficulties, asset/liability management, and long-term liabilities such as pensions. - Kenya’s macroeconomic volatility has been relatively low recently, and debt is judged sustainable and below the EAMU convergence criteria, but emerging fiscal risks exist from devolution, oil and gas exploitation, and deteriorating security. ### Risk disclosure and analysis (Section 3.1) - The fiscal risk statement is included in the BPS but is not comprehensive; it omits significant contingent liabilities of about 11 percent of GDP (not fully quantified) including sizeable PPP activities and guarantee schemes such as one related to the NSSF. - No systematic monitoring or reporting of activities outside the perimeter of central government, including inherited assets and liabilities of newly formed counties. #### 3.1.1 Macroeconomic Risks (Basic) - The Statement of Specific Fiscal Risk in the BPS analyzes the impact of: - a one percent shock to GDP; - a one percent shock to inflation; - a one percent shock to import prices; - a ten percent shock to the exchange rate. - The sensitivity analysis reports impacts on the fiscal balance but lacks discussion of mechanisms, yielding counter-intuitive and inconsistent results across years. Examples: - In the last statement, a one percent positive shock to GDP leads to an increase of government expenditure by eight percent of GDP. - A ten percent depreciation increases government revenue by one percent in 2013 but reduces it by 5.5 percent in 2014. - Underlying modeling for this analysis is still work in progress. - Probabilistic analysis suggests the risk of exceeding the 50 percent EAMU debt target is low at around 5 percent probability (Figure 3.2 referenced). #### 3.1.2 Specific Fiscal Risks (Basic) - The Statement on Specific Fiscal Risks discusses various qualitative risks (environmental shocks, contingent liabilities, financial sector exposure) and makes policy recommendations, but omits discussion and quantification of several significant existing commitments including: - active PPP arrangements such as the Kenya-Uganda Railways and power purchasing arrangements associated with Independent Power Producers (IPPs); - indemnities and letters of support associated with IPPs; - pending court proceedings related to pension awards to teachers; - exposure under the Deposit Protection Fund; - exposure under the new government guarantee scheme of the National Social Security Fund; - existing callable capital to international financial institutions such as the African Development Bank. - Some omitted risks are quantified elsewhere (Annual Debt Report, Medium Term Debt Strategy, Financial Stability Report, Deposit Protection Fund Board annual report) but fragmentation reduces the value of the information. #### Quantified contingent liabilities (Table 3.1) - Reported - State Guarantees: KSh 43.5 billion, 0.9 percent of GDP — Annual Debt Report - Deposit Protection scheme: KSh 153.4 billion, 3.0 percent of GDP — Financial Stability Report, Deposit Protection Fund Board Annual Report - Natural disasters (drought): KSh 6, 0.1 percent of GDP — Budget Policy Statement - Unreported - Public Private Partnerships: KSh 289, 5.7 percent of GDP — IMF staff calculations based on World Bank and authorities' data - Court cases: KSh 151, 3.0 percent of GDP — Existing court awards - NSSF liabilities: KSh 110, 2.2 percent of GDP — NSSF 2013 balance sheet - Other guarantees: KSh 3, 0.1 percent of GDP — Financial statements of public corporations - guarantees issued by them - Callable capital to AfDB: KSh 113.5, 2.2 percent of GDP — Central Bank of Kenya and AfDB annual report - Total reported + unreported: KSh 869.4 billion, 17.2 percent of GDP #### 3.1.3 Long-term Fiscal Sustainability Analysis (Not Met) - The government does not produce or publish long-term projections of main fiscal aggregates or social security funds; projections are made only over three years. - Pension projections exist over more than 30 years but are not published; projections for potentially increasing liabilities of the National Social Security Fund are not produced. - Given relatively low debt and low demographic pressures, lack of comprehensive long-term sustainability analysis is not judged an immediate concern. The government is committed to a fiscal consolidation plan aiming to meet the EAMU ceiling in 2021. - The actuarial study completed for the Salaries and Remuneration Commission in May 2014 showed a current liability of KSh 991.9 billion for 2013 (22 percent of GDP), based on a discount rate of 10 percent. ### Risk management (Section 3.2) #### 3.2.1 Budgetary Contingency (Advanced) - Kenya’s budget includes an allocation for budgetary contingencies with transparent access criteria and reporting on utilization. - PFM Act of 2012 provides regulatory framework for the Contingencies Fund established in the 2010 Constitution; Fund capped by the Constitution at KSh 10 billion. - In practice the government has allocated only half that amount in the last two budgets. - The Treasury must report to Parliament on utilization of the Contingencies Fund within two months. - Utilization requires a case to be made and approval by the Cabinet Secretary Finance; records are kept for reporting and audit. - Based on these practices, Kenya achieves an advanced score on this indicator. #### 3.2.2 Assets and Liabilities (Basic) - No consolidated report shows central government’s consolidated assets and liabilities. - Major items and findings: - Public Debt: Government borrowing controlled by the National Treasury; MTDS submitted annually to Parliament and published; MTDS analyzes stock of debt and evaluates costs, risks and sustainability of borrowing scenarios. - Pension Liabilities: Most central government public servants entitled to defined-benefit pensions funded from the national budget. Actuarial study (May 2014) shows current liability of KSh 991.9 billion for 2013 (22 percent of GDP). Strategies under discussion include implementation of the Public Service Superannuation Act 2012. - Investments: Government majority holdings in 39 state owned enterprises and minority holdings in 29 companies; annual Consolidated National Government Investment Report contains details. Registers of shares are maintained for minority holdings but there is little active management. - On-lending: As at June 30, 2013, government had on-lent KSh 167 billion (3.7 percent of GDP) to state corporations. Debt service arrears as at June 30, 2013 were KSh 12.3 billion on principal repayments and KSh 24.2 billion on interest payments (together equivalent to 0.8 percent of GDP). Management actions included rescheduling, write-off, and conversion to equity or grants. - Cash balances: Exchequer account operations result in a substantial overdraft from the Central Bank of Kenya despite large unremunerated cash balances. Treasury is working with the Central Bank to establish a Treasury Single Account as required by the PFM Act of 2012. - Fixed assets: No comprehensive asset management framework exists to guide strategic planning, acquisition and disposal of assets, operations, security, maintenance, accounting and performance monitoring. *Source: National Treasury and IMF staff estimates as presented in the supplied chapter content.* ### 99. Schedules of liabilities and assets handed over to the county governments are not ### _cr16221 - 99. Schedules of liabilities and assets handed over to the county governments are not ### Liabilities and assets handed over to counties - The 47 counties inherited the liabilities of the 175 local authorities that they absorbed. - Schedules of liabilities and assets handed over to the county governments are not available, presenting a significant fiscal risk. - Available information (e.g., Nairobi and 2011/12 audit statements) suggests liabilities include outstanding loans, court compensations, and arrears in salaries, pension contributions, and payments to suppliers. - The Transition Authority is mandated to collate and verify this information but has not yet completed the task. - Some counties have taken on liabilities fully, others only partially; a recent court ruling confirmed county responsibility for these liabilities. - Some counties have transferred assets in settlement of their debts. - Example figure: Nairobi County has current liabilities of over KSh 40 billion. ### Guarantees (Basic) - Parliament imposes a ceiling on the stock of guarantees in line with the PFM Act of 2012; current ceiling is set at KSh200 billion (4 percent of GDP). - The PFM Act 2012 limits the power to issue new guarantees to the National Treasury. - Government reports on loan guarantees, but coverage is not exhaustive, especially for implicit guarantees. - May 2014 Annual Debt Report shows government loan guarantees amounting to around KSh45 billion (0.9 percent of GDP), consisting of loans contracted by seven public corporations and one sub-national government (Nairobi) with four lenders (Japan, Canada, U.S.A. and IDA). - Additional non-disclosed commitments, financially similar to guarantees, collectively represent around KSh287 billion (6.4 percent of GDP). These include: - National Social Security Fund: Estimated liability based on 2013 balance sheet is KSh113 billion or 2.2 percent of GDP; liability expected to rise due to increased contributions and coverage under the National Social Security Fund Act of 2013, including conversion of public servants to a defined contribution scheme under the National Social Security Fund. - Deposit Protection Fund: Maximum guarantee KSh100,000 (USD1,176) per depositor. Bank of Kenya values insured deposits at KSh198.9 billion in 2013; Deposit Protection Fund assets cover around 20 percent of insured deposits. Uncovered portion amounts to KSh153.4 billion or 3 percent of GDP. - Guarantees issued by public corporations: Analysis of financial statements of the ten largest public corporations shows public corporations have issued loan guarantees amounting to KSh3.4 billion as of June 2013. ### Public Private Partnerships (PPP) (Not Met) - Information on active PPP contracts has not been made publicly available; fiscal implications not fully assessed. - World Bank estimates total contract value of active PPP projects around USD3.4 billion (5.7 percent of GDP). - Two PPP arrangements posing highest risks: - Kenya-Uganda Railways PPP concession contract (25-year, signed in 2006) includes exclusivity provisions which may be affected once the Mombasa to Nairobi Standard Gauge Railway construction project becomes operational. - Twelve power purchasing agreements totaling USD3.1 billion or 5.2 percent of GDP signed between Kenya Power and Lighting Company and Independent Power Producers between 1996 and 2013; contracts involve minimum demand/revenue guarantee (“take” or “pay”), supported by letters of support and underwritten by Partial Risk Guarantee instruments provided by the World Bank. - New PPPs planned for 2014–17 will add risks if fiscal implications are not managed and disclosed; all new PPPs will be negotiated and signed within the PPP Act of 2013. - The PPP unit in the National Treasury is mandated to collect and disclose information on all PPP contracts (Section 25 of the PPP Act 2013). - A list of 47 national priority-PPP projects has been identified across transportation, tourism, housing, and energy. - Urgent need for a PPP assessment framework; technical support has been agreed with the World Bank. - Footnote on Partial Risk Guarantees: backstop obligations of KPLC over few months only under letters of credit for amounts drawn by IPPs for breach of payment obligations, effectively adding to government’s debt once called; political risks include war and civil disturbance, expropriation, changes in law, regulation, taxes and licensing arrangements. ### Financial Sector Exposure (Good) - Fiscal risks linked to the financial sector are relatively low; government has limited exposure. - Kenyan banking sector composition: 43 commercial banks, 1 mortgage finance company, and 9 deposit taking microfinance institutions. - Total bank assets amounted to around 54 percent of GDP in 2013; the three remaining public banks account for 4.6 percent of GDP. - Ratio of nonperforming loans to total loans has increased recently, but banks remain sound and profitable. - No government support to the banking sector since mid-2000s bailout. In 2008, government injected liquidity (0.7 percent of GDP) into the National Bank of Kenya by paying off debt owed to the bank by state corporations; no other instances of government support since. - Deposit insurance scheme: maximum coverage KSh100,000 (in place since 1985) and currently under review. - Deposit Protection Fund balance covers around 20 percent of insured deposits (insured deposits estimated to be around 4 percent of GDP); uncovered portion of deposits equals 3 percent of GDP and constitutes contingent liabilities for the government. - Reporting on explicit financial sector exposure is adequate: Budget Policy Statement analyzes potential exposure; Central Bank of Kenya publishes bi-annual Financial Stability Report and annual Bank Supervision Report with micro stress tests and plans to incorporate macro stress testing. ### Natural Resources (Not Met) - Exploitation of natural resources currently not very significant; net present value of known deposits of minerals, subsoil assets and forests (non-timber) around 4 percent of GDP (Wealth of Nations Database, World Bank). - Government discloses volume and sales in the Economic Survey by KNBS. - Recent discoveries of oil and gas require close monitoring once exploitable reserves size is known. Current exploration activity: - 23 investors undertaking explorations in 44 license blocks. - Crude oil found in 7 wells (Tullow Oil with Africa Oil as Joint Venture Partner). - Natural gas and oil found in both onshore and offshore blocks (Apache and British Gas Group). - Commercially viable quantities are yet to be proven. - Tullow estimates reserves to be well over 600 millions of barrels of oil equivalent (if confirmed, could generate substantial revenues and potentially bring Kenya's external current account to surplus soon after exploitation starts). - Government publishes basic information on exploration status via the Ministry of Energy; current medium-term budget envelope does not include potential revenues from these sources. ### Environmental Risks (Advanced) - Average annual cost of damages due to natural disasters over the last decade was around 0.1 percent of GDP. - The 2012 drought episode necessitated a larger policy response financed mainly through funds set aside for drought relief and the contingency fund (0.3 percent of GDP), and support under the IMF's Rapid Financing Instrument. - Government quantifies fiscal implications of potential drought episodes in its annual Budget Policy Statement. - Government strategy to manage drought risks published in Vision 2030; National Drought Management Authority issues monthly Drought Monitoring and Early Warning Bulletin reports for each county. - Authority preparing an investment plan on Ending Drought Emergencies with potential support from development partners. - Long-term mitigation policies include scaling up geothermal energy production and expansion of irrigation. - Kenya also faces terrorism-related challenges with important economic implications. ### Fiscal Coordination — Sub-National Governments (Not Met) - Establishment of counties in 2013 led to a four-fold increase in subnational spending: old Local Authorities budgets amounted to 1 percent of GDP; counties increase subnational spending to 4.3 percent of GDP. - Counties responsible for significant expenditure programs (health and agriculture) and allowed to borrow, though only with a central government guarantee. - Reporting framework from counties to central government not fully developed aside from constitutionally mandated reporting to the Controller of Budget and the Auditor General. - Weak financial reporting legacy: 2011–12 audit of Local Authorities found 169 out of 175 local authorities with disclaimer or adverse audit opinions. - Closing balances of local authorities at merger with counties yet to be fully verified and audited. - Some liabilities lack evidence; many counties dispute responsibility for past debts, some accruing penalty interest. - No significant county borrowing with central government guarantees yet; some counties resort to in-year liquidity borrowing from local banks. - Framework for long-term borrowing under discussion, including sharing of aggregate annually agreed national borrowing limit. - Overestimation of own revenues in 2013/14 county budgets: own revenue estimates over KSh 60 billion while collected revenues estimated at KSh 25 billion. - Counties with lower ratio of equitable share to cost of devolved functions systematically overestimated own revenues (Figure 3.7 illustrates overestimation and fiscal imbalances for FY2013/14). ### Public Corporations (Basic) - All transfers to public corporations included within budget estimates and published in a parastatal annex to the budget; annex provides revenue, expenditure and operating balance information on parastatals. - Every public corporation subject to annual performance agreement with parent ministry setting performance targets. - No other summary reports detailing financial performance of public corporations; financial statements available for majority of the 39 corporations per IFRS, though many not available on the internet or outdated. - No summaries of the size or health of sector balance sheets; sector includes 9 percent of GDP of liabilities (see Table 1.3). - Equity share unusually high, equivalent to 8 percent of GDP—almost equal to liabilities and almost half of assets. - Sector includes corporations in difficulties (examples: sugar companies and ferry services) with some in negative net equity positions. - Public corporation sector anticipated to expand: revenues more than doubling in the 2014–15 budget, driven by large donor loans, particularly to the railway and power generation sectors. - County-level pressures to create new corporations; counties inherited 120 water service providing corporations (activities reported and monitored by Ministry of Water) but have not begun setting up other corporations. - Need for closer monitoring and summary reporting to assess overall sector risks; current monitoring occurs at line ministry level but lack of summary reporting means overall risks are not being considered. *IMF staff report excerpt.* ### 122. Public corporations have been the beneficiary of indirect support in the form of ### Public corporations have been the beneficiary of indirect support in the form of ### Fiscal exposures and contingent liabilities - The government has borrowed 4.6 percent of GDP from international donors, and on-lent those loans to public corporations. - A number of these loans have not been repaid, or are in arrears. - So far the government has written off 0.2 percent of GDP of these loans—the largest of which were to Telkom and Kenya Railways, with further write-offs likely given there are another 0.8 percent of GDP of payment arrears. - The sector has been the recipient of government guaranteed loans of 0.9 percent of GDP, with the guarantees called for 15 percent of these loans. ### Quasi-fiscal activities by public corporations - The sector is required to perform a variety of quasi-fiscal activities; information on the size or value of these activities is not provided. - These activities are centered around the power, transport and agriculture sectors, and include: - price ceilings on power, - loss making sales of fertilizer, - free ferry transportation services. - These activities are usually covered through transfers from the budget, and in some cases have set up incentives for poor performance (with loss-making activities automatically covered) resulting in continued governance problems amongst some firms. ### Recommendations for strengthening fiscal risk analysis and management in Kenya - 3.1 Report and quantify all fiscal risks in the fiscal risk statement and discuss their implications for fiscal forecasts. Coverage should be exhaustive and comprehensive, including currently unreported contingent liabilities arising from public-private partnerships and all existing guarantees (NSSF, Deposit Protection, pending court cases, and callable capital to international financial institutions). - 3.2 Disclose all the rights and obligations and other exposures under all existing and planned PPPs and PPP-type contracts at least annually (including at the sub-national government level). It would also be important to report the expected annual receipts and payments over the life of these contracts. Assessing the fiscal implications of these contracts should also be undertaken within a framework maintained by the PPP unit at the National Treasury. - 3.3 Ensure a regular reporting (at least annually) on potential oil and gas resources going forward. This includes regular reporting on the volume and value of these assets. Additionally, it would be important to initiate the process of setting up a macro-fiscal framework for oil and gas resource revenues. - 3.4 Develop an enhanced county fiscal reporting system. For each county, the system should generate: (a) key debt indicators—e.g., debt service/debt stock, debt service/current revenue, debt stock/current revenue; (b) key fiscal performance indicators—e.g., operating expenditure/operating revenue, own revenue collection/revenue potential, personnel expenditure/operating expenditure, actual development expenditure/planned; and (c) key liquidity indicators—e.g., accounts payable/cash balance, cash balance/operating revenue. - 3.5 Prepare an annual financial report on the public corporation sector. The report should provide information both aggregate sectoral fiscal information, as well as summary financial performance indicators for each of the corporations. ### Evaluation highlights and key statistics (from Table 3.3) - Macroeconomic risks: Basic: Rudimentary macro-sensitivity analysis is presented, but no scenarios or explanation. Low: Low historical volatility of GDP and revenues. - Specific fiscal risks: Basic: Fiscal risks are discussed mainly qualitatively and leave out significant risks. No discussion of likelihood of risk materializing. High: Contingent liabilities amount to 17.2 percent of GDP, three-quarters of which go unreported. - Long-term fiscal sustainability analysis: Not Met: No long term projections for fiscal aggregates and NSSF. Long-term PS pension projections available but not published. Low: Low demographic pressures favorable. Debt is sustainable. - Budgetary contingencies: Advanced: budget includes adequate allocation for contingencies with transparent access and reporting on utilization. Low: Budget allocation is 0.4 percent of 2013/14 expenditure. - Asset and liability management: Basic: Regular assessment of debt management risks, and periodic actuarial assessments of pension liabilities. Low: GG has liabilities and assets estimated as 75 percent and 79 percent of GDP, respectively. - Guarantees: Basic: GoK guarantees are reported but SOE implicit guarantees are not, neither is the NSSF guarantee. High: Unreported implicit guarantees equal to 6.2 percent of GDP. - Public-Private Partnerships: Not Met: Exposure to active PPPs, including the IPPs in the energy sector, is not disclosed or managed. Medium: unreported PPPs amount to 5.7 percent of GDP. - Financial sector exposure: Good: Exposure to the financial sector is regularly managed and disclosed and financial sector stability is regularly assessed. Low: Banking assets equal 54 percent of GDP in 2013 - 5 percent public. Deposit protection covers 1/5th of deposit value, currently 4 percent of GDP. - Natural resources: Not Met: Mineral and forestry resources volumes and sales disclosed in statistics. Oil and gas still at exploration stage. High: While mineral resources are small, potential oil and gas reserves assets could amount to 600 mboe. - Environmental risks: Advanced: Environmental risks are discussed, quantified, and published. A published strategy guides disaster response. Medium: Average cost of natural disasters is low. - Sub-national governments: Not Met: Subnational reporting remains weak. High: 5-fold increase in sub-national spending since the new Constitution. - Public corporations: Basic: The budget includes all transfers to public corporations, and finances of public corporations are normally published in a budget annex, though not for 2014–15. Medium: Public corporation liabilities are less than 10 percent of GDP, with only 0.5 percent of GDP of government transfers. *Source: Excerpt from IMF country report content unit _cr16221 - 122.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16221.pdf_