COST-CUTTING

State commits to parastatals reforms amid IMF, World Bank pressure

Restructuring of state agencies is part of condition for Sh262.2 billion loan.

In Summary

•The government is also keen to reduce the fiscal deficit from the current financial year's 8.2 per cent of DGP to 6 per cent next financial year, and 4.4 per cent in 2023/24.

•In 2015, a Presidential Task Force on Parastatals Reforms recommended the trimming of the number of state agencies from 262 to187.

Treasury building
Treasury building
Image: FILE

World Bank and the IMF pressure could soon force Kenya to sale off loss making state agencies and merge those with duplicate roles to plug budgetary deficits.

The two global lenders say this will cut revenue wastage and reduce borrowing, in what would see thousands of public servants sent home.

The National Treasury estimates that parastatals have a maximum fiscal exposure of Sh1.3 trillion, which equates to 13.6 percent of GDP, putting some of them on permanent bail-out that eats into the public coffers.

In it's  Draft 2022 Budget Policy Statement, the National  Treasury says state corporations can be a major source of fiscal risk to public finances if they under perform financially.

A fiscal risk analysis performed this year, on a sample of 18 state corporations, indicated liquidity challenges resulting from unfavourable revenue and economic performance, Treasury says.

Restructuring of state agencies is part of IMF's conditions for access to credit facilities announced this year, with the latest being a $264 million (Sh29.5 billion) loan which IMF reached a staff-level agreement with Kenya last week.

This will be subjected to executive board approval in coming weeks.

“The government will continue implementation of cost–cutting measures including parastatals reforms," CS Ukur Yatani says in the BPS.

This signals a possible merger and freeze on new employment going into the next financial year, starting July 1, 2022, as part of plans to cut fiscal deficit to the projected 6 per cent of GDP from the current financial year's 8.2 per cent.

It is expected to further drop to 4.4 per cent in 2023/24.

In July, Kenya earmarked 18 state agencies for restructuring as part of the IMF conditions for access to credit.

The move, the National Treasury said, was after a thorough financial assessment that revealed that the enterprises had an outstanding Sh170 billion in government-guaranteed debt as of December 31 last year.

Listed for restructuring were Kenya Airways, Kenya Airports Authority, Kenya Railways Corporation, Kenya Power, Kengen, Kenya Ports Authority, and a number of public universities.

Also targeted are Kenya Broadcasting Corporation, Postal Corporation of Kenya, Athi Water Works Development Agency and Kenya National Examinations Council.

Others are Kenya Wildlife Service, Kenya Post Office Savings Bank, Kenyatta National Hospital and E.A. Portland Cement.

A possible merger could be seen in agencies with duplicating roles, mainly in the ministries of agriculture, transport, tourism, energy, industrialization, trade and enterprise development, and sports, culture and heritage.

According to Treasury, a number of agencies have reflected a high liquidity risk amid inability to service short term obligations when they fall due.

About 14 state corporations have been found to have accumulated sizeable arrears.

This creates a high degree of fiscal risk for government through potentially stepping in for the repayment of on lent loans of Sh664 billion, Treasury says, and potential bailouts for guaranteed and non-guaranteed commercial loans totalling Sh343 billion.

There are also other contingent liabilities such as pending court cases (Sh109 billion) and potential liquidity injections for the clearance of arrears (Sh211 billion).

The evaluation further assessed agencies projected cash flows for the period financial year 2021/2022 – 2024/2025 and contingent liabilities which may crystallise to the national budget.

“It was deduced that the estimated liquidity gap over the next five year period is Sh382 billion taking cognisant of the effects of Covid- 19 pandemic and that no further budgetary support nor borrowing to be availed,” Yatani says in the draft statement.

The BPS is expected to be tabled in Parliament by the end of this month as Treasury pushes for a speedy budget making process ahead of next year's general elections.

He notes that the government is cautious in issuance of guarantees and other support measures to debt stricken and loss-making state corporations upon requests.

However, as the principal owner of all state corporations, the government is the natural underwriter of risk that they face.

Parastatal reforms, albeit on a slow-motion mainly on political interference, begun in 2015 when Presidential Task Force on Parastatals Reforms presented its report to President Uhuru Kenyatta, highlighting major reforms on state corporations, including rationalization to remove overlaps, duplication and redundancies.

The task force which was led by the President's former constitutional affairs adviser Abdikadir Mohammed had recommended the trimming of the number of state agencies from 262 to 187.