Kenya: Fiscal Transparency Evaluation

July 12, 2016

The International Monetary Fund (IMF) has today published a Fiscal Transparency Evaluation (FTE) report for Kenya. The evaluation was carried out at the request of the government of Kenya by a team from the Fund’s Fiscal Affairs Department in September 2014, using information for the fiscal year 2012/13.

It is important to note that, since the FTE was carried out, the government has undertaken steps in several areas to improve practices. The impact of these changes against the specific principles of the Code has not been assessed but could result in improved assessment ratings. The attached annex provides a summary of progress made.

Kenya is undergoing a substantial restructuring of its public sector which imposes new challenges and increases the importance of fiscal transparency. The 2010 Constitution introduced two levels of government – the national government and 47 county governments with significantly increased expenditure responsibilities. It created a presidential system of government, and significantly enhanced the powers of parliament. In addition, a new Public Financial Management (PFM) Law was enacted in 2012. In 2013, autonomous agencies and state enterprises were rationalized and improvements made to their oversight. A public sector accounting standards board has also been established. In the longer term, further improvements in fiscal transparency will be required as Kenya and its partner states in the East African Community move towards a currency union by 2024.

Kenya performs well against many of the standards set by the IMF’s Fiscal Transparency Code. Across its three pillars, 13 of the Code’s 36 principles are rated as either “good” or “advanced”, while 16 principles are rated as “basic”.

The report finds that the production and dissemination of annual fiscal statistics meets the Code’s advanced practice, while most other aspects of pillar I on fiscal reporting are in line with the Code’s basic practices. There is no reporting of the government’s balance sheet in fiscal reports, although basic information on public debt and cash deposits is provided. The 2012/13 audit of national government entities resulted in 42 percent of expenditures being subject to adverse and disclaimer audit opinions, though many of these were cleared before the report was adopted by the parliament.

Most aspects of pillar II on fiscal forecasting and budgeting are in line with good or advanced practices. The annual budget policy statement (BPS), which is adopted by parliament, is the main instrument for economic and fiscal policy making and resource allocation. Based on the BPS, the Parliamentary Budget Office produces a budget options report, with alternative macro-fiscal forecasts. Significant public participation takes place during budget preparation and a people’s guide to the budget is also produced. The Controller of the Budget publishes regular in-year reports on central government and counties. Areas that require improvement include the credibility of forward estimates of spending, the management and oversight of investment projects, publication of revised budgets, and the alignment of spending programs with medium-term sectoral priorities.

The evaluation of fiscal risk practices against pillar III of the Code shows mixed results. A range of macroeconomic and fiscal risks are disclosed, discussed and at times quantified in the annual budget policy statement. Budgetary contingencies and environmental risks are being adequately addressed and managed. However, more than three-quarters of the government’s contingent liabilities, estimated to be about 12 percent of GDP, go unreported. Risks arising from government guarantees to the National Social Security Fund, estimated at 6.2 percent of GDP, are also not adequately monitored.

This FTE report made a number of recommendations to strengthen fiscal transparency, including:

• Expanding the coverage of the key fiscal reports to include at a basic level the direct expenditure and revenues of extra-budgetary funds and parastatals;

• Beginning to prepare a balance sheet for the central government, using data that are available from existing systems and reports;

• Improving the quality and timeliness of audited financial statements in line with international standards;

• Clarifying institutional roles and responsibilities in managing public investment projects and programs;

• Improving the presentation and reconciliation of variations in macro-fiscal forecasts arising from new policy decisions, changes in the economic outlook, and accounting and technical changes; and

• Preparing a consolidated annual financial report on public corporations.

The attached annex indicates areas of the Code in which the government has made progress since September 2014 in implementing some of the report’s recommendations.

Further information about the IMF’s Fiscal Transparency Code and the Kenyan FTE report can be found here.

Annex: Progress against the Fiscal Transparency Evaluation since September 2014

Principle Assessment Recommendation Progress since September 2014

Pillar I. Fiscal Reporting

1.1.1

Coverage of Institutions

Not met: Fiscal reports cover only budgetary central government and some sub-national governments.

1.1 Expand coverage of the key fiscal reports

The coverage of the Annual Financial Statements has improved. The accounts for FY2013/14 and FY2014/15 cover the following: Consolidated Fund Accounts; Ministries, Departments, Agencies; Development Projects; State Corporations; Semi-Autonomous Government Agencies; and Counties. A table of public institutions is now incorporated in the Annual Economic Survey. Formats have been developed for collecting data from all public entities.

1.1.2

Coverage of Stocks

Basic: Fiscal reports cover public debt and cash balances

1.2 Begin preparing a balance sheet for the central government

Basic information is provided on public debt, pension liabilities, and liabilities of counties and public corporations. National Treasury has tabulated debt stock data for National Government and Counties for FY2013/14 and FY2014/15 but this is yet to be published.

1.3.1

Classification

Basic: KNBS economic survey and abstract includes economic and functional analysis consistent with GFS

1.3 Improve the quality (and timing) of annual financial statements

The Public Sector Accounting Standards Board (PSASB) has adopted international standards for all public sector entities: cash-based IPSAS for MDAs and Counties; IFRS for commercial entities; and accrual-based IPSAS for regulatory and constitutional bodies. Templates and formats for annual reporting have been issued, commencing FY2013/14. Extensive training has been delivered on preparation of financial statements for public entities; and external consultants engaged by National Treasury.

A public institutional table has been prepared and published, which identifies more clearly commercial and non-commercial parastatals.

The Chart of Accounts has not yet been linked to GFSM2014/ COFOG, although this is expected to be achieved in 2016, under the GFSM2014 implementation plan.

1.4.1

Statistical Integrity

Advanced: An independent agency prepares statistics according to GDDS

KNBS has improved GFS reporting. Plans to publish general government fiscal statistics for FY2014/15 by mid-2016.

Principle Assessment Recommendation Progress since September 2014

Pillar II. Fiscal Forecasting and Budgeting

2.1.4

Investment Projects

Basic: Public investment projects are not systematically subjected to cost benefit analysis; and annual development expenditure estimates do not include the total financial obligation of projects.

2.2 Issue and enforce Cabinet guidelines on the selection, appraisal, and funding of major investment projects.

The government is in the process of extending the E-ProMIS system, bringing domestically-funded investment projects into the system, and providing better information on the implementation of projects.

2.3.1

Fiscal Policy Objectives

Basic: PFM Act alone does not provide operational guidance for policy makers’ decisions on fiscal aggregates, such as the overall balance, total expenditure, public debt, or limits on the overall wage bill.

2.3 Clarify the fiscal policy principles to give practical guidance to policy makers as to what the fiscal aggregates should be over the medium term

Numerical, time-bound targets for key fiscal responsibility principles were set out in Finance Regulations issued in March 2015.

Principle Assessment Recommendation Progress since September 2014

Pillar III. Fiscal Risk Analysis and Management

3.1.1

Macroeconomic Risk

Basic: Analyses of shocks project inconsistent impact outcomes; scenario analyses do not reflect adequately all the more likely shocks; and the underlying model is still a work in progress.

3.1 Report and quantify all fiscal risks in the Fiscal Risk Statement and discuss their implications for fiscal forecast.

The Statement of Specific Fiscal Risks (Annex 1 to the 2016 Budget Policy Statement) provides stronger, quantitative analysis of macroeconomic risk, including: a sensitivity analysis of the key macroeconomic variables; and deviation analysis of previous macroeconomic assumptions and fiscal aggregates.

3.1.2

Specific Fiscal Risks

Basic: There is some quantification of fiscal risks but it is not exhaustive and omits significant items with potentially large fiscal implications.

Information on Independent Power Producer (IPP) projects and Public-Private Partnerships (PPPs) is now disclosed (see 3.2.4 below).

3.1.3

Long-term Fiscal Sustainability Analysis

Not Met: Government does not produce or publish projections of the main fiscal aggregates over the long-term

A sensitivity analysis of key indicators on Public Debt 2015-34 is now presented in the Statement of Specific Fiscal Risks.

3.2.4

Public-Private Partnerships

Not Met: PPP contract values not made publically available and fiscal implications yet to be fully assessed.

3.2 Disclose all the rights and obligations and other exposures under all existing and planned PPPs and PPP-type contracts at least Annually

The Statement of Specific Fiscal Risks discloses the contract values of the main Independent Power Producer (IPP) projects and PPP projects (ongoing and planned). It also includes a table showing the contingent liabilities, with probability/impact assessments, for some major PPPs. Government is in the process of establishing and operationalizing a PPP Project Facilitation Fund (a multi-purpose revolving fund) to help mitigate the risks.


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