Sh23 billion freeze in govt spending to hurt development projects
Faced with a gaping hole in its finances, the government has decided to revise its current budget by instituting massive cuts in the original spending plans and freezing expenditure on key infrastructural projects.
According to the new plan seen by the Sunday Nation, the budget for the current financial year will now be cut by a massive Sh23 billion implemented across all ministries.
Government services
The budget for the running and maintenance of government services — the recurrent budget — has been slashed by Sh6.6 billion while the development budget (money for capital expenditure) has been cut by a massive Sh16.7 billion.
It is the second such austerity measure to be implemented in recent months by the government, the first having been unveiled by the Treasury in February, as it attempts to adjust its spending plans in line with deteriorating economic conditions.
The scope of the spending freeze this time is of a scale likely to precipitate crippling cash flow problems across ministries with negative implications for the quality of government services in the remaining four months of the financial year.
The government is currently in the middle of a major cash crunch — a huge hole of Sh25 billion in its finances that has come in the context of revenue shortfalls and at a time when sources for external financing have dried up.
Although the Treasury announced a budgetary austerity programme in February that targeted cuts in expenses on training, foreign travel, and purchase of furniture, it was clear that the cuts were not enough to fill the huge hole in the government’s purse.
Kenya’s budget has very few opportunities for cuts because it devotes a disproportionate share of resources to salaries, pensions and debt service.
And although the government is negotiating to borrow some $100 million (about Sh8 billion) from the IMF, that money is being borrowed specifically to boost the country’s dwindling foreign exchange reserves and will, therefore, not be available for discretionary spending.
The World Bank has been reluctant to discuss budget support, citing governance concerns. Thus, the only practical option open to the government was either to engage in more domestic borrowing or cut development expenditure.
When the budget was read in June last year, it was assumed that the government would incur a net development expenditure of Sh143 billion out of which Sh33 billion was to come from donors.
Clearly, the 11 per cent cut in the budget for capital expenditure being implemented will disrupt capital expenditure in major ways. The details of the new austerity plan are contained in a new circular sent out to all permanent secretaries and accounting officers last week.
The plan is to be tabled before Parliament as a supplementary budget when the House resumes later this month. What is clear is that the Treasury will require to marshal political support for the spending freeze considering that the popular wisdom right now is that the country needs a fiscal stimulus.
Economic growth
Already, President Mwai Kibaki has himself come out to argue against a freeze on development expenditure. A day after the Treasury circular was put out, the President instructed the ministry of Finance to spare the development budget from the cuts to ensure continuity in projects that spur economic growth.
He was addressing the National Economic and Social Council (NESC) at the Kenyatta International Conference Centre (KICC) in Nairobi. Mr Kibaki advised the Treasury to target non-strategic areas that would not interfere with the country’s renewed economic growth momentum.
Under the revised budget, the cuts will target the development budgets of the ministries of Roads, Energy, Defence, Finance, Local Government and Nairobi Metropolitan Development.
The development budgets of the ministry of Roads and that of Energy have been cut by Sh3 billion, Internal Securiy by Sh2 billion, Finance by Sh1.1 billion, and Nairobi Metropolitan Development by Sh1.3 billion.
With regard to the recurrent budget, the biggest loser is the National Intelligence Service whose budget has been cut by Sh1 billion. The current budget was prepared on the assumption that the economy would grow by 4.5 per cent.
These assumptions have, however, been adversely affected by the effects of the post-election violence, high oil prices and the global financial crisis.
By the end of the second quarter, economic growth averaged between 2.2 per cent and 2.5 per cent. In the circumstances, the government has predicted major revenue shortfalls.
Compounding the situation for the government are the effects of the prevailing drought and the recent emergencies that have placed a heavy demand for additional funds over and above the funds set aside in the current budget for drought and contingency.
