Pending bills – also known as domestic expenditure arrears - being non-remittances of statutory deductions and payment delays for goods and services rendered to the government mainly by citizen contractors and suppliers and special groups, continue to be both fiscal and expenditure risk.
The absence of timely settlement with no benchmark or market-linked interest rate consideration for unexpected delays is a key feature of pending bills in public-sector financial management. Similarly, court awards arising from litigation are not settled promptly due to the non-provision of allocation.
Moreover, the diversion of earmarked allocations towards payment of approved-to-be-paid pending bills tends to exacerbate the accumulation or persistence of pending bills.
Consequently, long-standing arrears have negative outcomes on firms’ balance sheets and working capital, which disproportionally affect MSMEs and also stifle competition.
Given the liquidity challenges, which in the past have been the major contributing factor to the growth of expenditure arrears, the settlement of outstanding obligations may require a mix of legal, policy and budgetary or fiscal measures.
To solve the debacle, MPs should allocate Sh150 billion each financial year to settle and clear the pending bills for the next five years. This should be on first in (incurred) and first out (settled) basis using a mix of ordinary revenue and concessional based instrument to manage liquidity pressures and smoothen cash flow needs. Priority settlement should be given to suppliers with verified pending bills and un-remitted-but-deducted statutory obligations - PAYE, pensions, SACCO contributions and staff loans.
Second, respective allocation to clear or settle pending is provided within the vote or sector budget and is set at not more than 25 per cent of vote allocation for the fiscal year. Details of the pending bills to be settled should be submitted as a schedule annexed to budgets before National Assembly or respective county assembly.
Three, introduce and codify rule-based legal regimes to identify, quantify, classify, limit, and report all types of pending bills and commitments and provide specific sanctions curtailing the accumulation of pending bills.
Further to this, amend the PFM, Act (2012) to introduce further disclosure measures relating to pending bills and other government arrears.
Excerpts from PBO 2024-25 budget options review