State agencies asked to prioritise clearing pending bills

The government has asked ministries and state agencies to prioritise the clearing of pending bills carried forward from the last financial year.

This is a sigh of relief to suppliers who are struggling to stay afloat, with the majority forced to either close shop or downsize as the government holds onto over Sh500 billion.

According to the supplementary budget guideline by the National Treasury to Ministries, Departments, and Agencies (MDAs) dated November 7, bills carried over from last year will be prioritized. 

"Accounting officers must ensure that pending bills and carryovers from 2021/22 financial year are prioritised and paid within the budgetary provision of the current year,'' National Treasury cabinet secretary Njuguna Ndung'u says in the circular. 

He added that they should ensure that no contracts and tenders are awarded for goods and services without sufficient budgetary provisions. 

Pending bills have continued to rise despite various circulars by the past and current regimes directing ministries, parastatals, and counties to prioritise payment of verified arrears in their budgets.

The Central Bank links a percentage of total loans in default to pending bills.

The latest banking sector supervision report shows that bank loan defaults crossed the half-a-trillion shilling mark for the first time in June, setting up thousands of borrowers for property seizures in an economy hit with reduced cash flows and high inflation.

Economists have advised the government to act swiftly and resolve the pending bill's menace to free cash flow in the economy.

Last month, CBK governor Patrick Njoroge acknowledged the danger of high pending bills to the economy, saying that the government should stop accumulating more.

Last week, the Capital Markets Authority (CMA) advised the government to use a shell company to issue a bond to enable Kenya clear Sh500 billion in pending bills.

The regulator, in its quarterly report for the three months to September, said the state sets up Special Purpose Acquisition Vehicles (SPVs) to handle the pending bills headache that has seen several businesses collapse. 

SPVs are short-term firms mostly domiciled in low-tax jurisdictions for the purpose of issuing debt or shares, after which they are shut down.

“An SPV may be established to take up all pending bills, ring-fence a portion of tax revenues as the receivables to back the issue of a bond, whose proceeds may be used to settle the bills in a securitisation programme,” CMA said.

In the proposed supplementary budget aimed at cutting expenditure by Sh300 billion, the state has ordered 100 per cent cut on communication, advertising and travel budgets. 

It has also frozen new projects by ministries and state agencies in an effort to cut the budget by Sh300 billion.

"The government will control expenditure by initiating austerity measures on provisions for operation and maintenance," the circular by the National Treasury reads in part.

It has for instance fully cut on advertising budget for MDAs, a move that is likely to further hurt revenue for the struggling media industry.

Officials of state agencies have also been asked to fully slash foreign travel expenses for MDAs, purchase new equipment and refurbish buildings.

President William Ruto's administration has also cut two-thirds of communication, training and office niceties.

Furthermore, MDAs and stage corporations have been directed to scale down on externally funded projects with an absorption rate of 60 per cent.

According to the National Treasury, the state is on a fiscal consolidation path to ensure the country preserves its debt sustainability as it races to gradually reduce expenditures to about 22.7 per cent of GDP over the medium term.

Spending across the 2022/23 financial year has been estimated at Sh3.358 trillion against revenues projected at Sh2.462 trillion.

This leaves behind a financing hole estimated at Sh862.9 billion to be plugged through Sh280.7 billion in the next foreign financing and Sh582.2 billion in net domestic financing.

Of the Sh3.4 trillion budget, Sh2.271 trillion is estimated to be a recurrent expenditure that includes spending by ministries apart from capital allocations.