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State should pay overdue bills to boost economy - World Bank

In Summary

• The value of cash owed to companies runs up to Sh14.33 billion

•These delays in payments reduce firms profits

Development Economist Anzetse Were with Eduardo and Associates managing Consultant Patrick Obath during the launch of The World Bank Kenya Economic update in Nairobi on April 9,2019.
Development Economist Anzetse Were with Eduardo and Associates managing Consultant Patrick Obath during the launch of The World Bank Kenya Economic update in Nairobi on April 9,2019.
Image: Photo/Enos Teche

Government needs to pay monies owed to the private sector to spur economic growth.

The World Bank Economic Update released yesterday in Nairobi shows profitability among firms dealing with government is on the decline and as a result it has weakened economic growth.

"There is evidence of a buildup in pending bills in Kenya, especially at the county level of government," the report stated.

 

The total value of pending bills is estimated to have grown from 0.9 percentage points of the country's GDP in the 2015/16 financial year to 1.6 per cent of GDP over the 2017/18 fiscal year.

With Kenya's GDP value estimated at Sh8.59 trillion in 2018, the value of cash owed to companies runs up to Sh14.33 billion.

This is a significant growth given in 2016 when the country's GDP was valued at Sh7.19 trillion, pending government bills were valued at Sh6.38 billion.

The 2018 enterprise survey for Kenya finds that approximately 12 per cent of the 1,001 firms surveyed (or 120 firms) have had a contract with the government that was in arrears. 

According to the World Bank, these delays in payments reduce firms profits as they change the present discounted value of payments.

The affected firms, especially small businesses end up in bankruptcy or alternately stop servicing their debt resulting in increased non-performing loans. This, in turn, has a negative impact on the banking sector.

Data by the Central Bank show in the year to February, gross non-performing loans grew 12.8 per cent.

 

Delayed payments also ultimately lead to poor cash flow in the market, a delay in hiring and in some instances staff layoffs.

"Efforts to accelerate payments could help boost the economy, revamp tax revenue collection and create jobs," the report stated.

The global lender recommends that government put in place a decisive policy action to clear its arrears to restore market liquidity and enhance private sector activity. 

"Accelerating the implementation of structural reforms aimed at crowding in private sector participation in the Big 4 development agenda remains crucial," World Bank country director for Kenya Felipe Jaramillo said. 

The World Bank cut its 2019 economic growth forecast to 5.7 per cent growth down from the 5.8 per cent projection it had given in October. This is lower than the government’s forecast of 6.3 per cent.

The lender attributed the marginal drop to dry weather being experienced across the country that risk diminishing agricultural produce.

“The medium-term growth outlook is stable but recent threats of drought could drag down growth,” the report stated.