The FINANCIAL — The International Monetary Fund (IMF) has on July 12 published a Fiscal Transparency Evaluation (FTE) report for Kenya. The evaluation was carried out at the request of the government of Kenya by a team from the Fund’s Fiscal Affairs Department in September 2014, using information for the fiscal year 2012/13.
It is important to note that, since the FTE was carried out, the government has undertaken steps in several areas to improve practices. The impact of these changes against the specific principles of the Code has not been assessed but could result in improved assessment ratings. The attached annex provides a summary of progress made.
Kenya is undergoing a substantial restructuring of its public sector which imposes new challenges and increases the importance of fiscal transparency. The 2010 Constitution introduced two levels of government – the national government and 47 county governments with significantly increased expenditure responsibilities. It created a presidential system of government, and significantly enhanced the powers of parliament. In addition, a new Public Financial Management (PFM) Law was enacted in 2012. In 2013, autonomous agencies and state enterprises were rationalized and improvements made to their oversight. A public sector accounting standards board has also been established. In the longer term, further improvements in fiscal transparency will be required as Kenya and its partner states in the East African Community move towards a currency union by 2024, according to IMF.
Kenya performs well against many of the standards set by the IMF’s Fiscal Transparency Code. Across its three pillars, 13 of the Code’s 36 principles are rated as either “good” or “advanced”, while 16 principles are rated as “basic”.
The report finds that the production and dissemination of annual fiscal statistics meets the Code’s advanced practice, while most other aspects of pillar I on fiscal reporting are in line with the Code’s basic practices. There is no reporting of the government’s balance sheet in fiscal reports, although basic information on public debt and cash deposits is provided. The 2012/13 audit of national government entities resulted in 42 percent of expenditures being subject to adverse and disclaimer audit opinions, though many of these were cleared before the report was adopted by the parliament.
Most aspects of pillar II on fiscal forecasting and budgeting are in line with good or advanced practices. The annual budget policy statement (BPS), which is adopted by parliament, is the main instrument for economic and fiscal policy making and resource allocation. Based on the BPS, the Parliamentary Budget Office produces a budget options report, with alternative macro-fiscal forecasts. Significant public participation takes place during budget preparation and a people’s guide to the budget is also produced. The Controller of the Budget publishes regular in-year reports on central government and counties. Areas that require improvement include the credibility of forward estimates of spending, the management and oversight of investment projects, publication of revised budgets, and the alignment of spending programs with medium-term sectoral priorities.
The evaluation of fiscal risk practices against pillar III of the Code shows mixed results. A range of macroeconomic and fiscal risks are disclosed, discussed and at times quantified in the annual budget policy statement. Budgetary contingencies and environmental risks are being adequately addressed and managed. However, more than three-quarters of the government’s contingent liabilities, estimated to be about 12 percent of GDP, go unreported. Risks arising from government guarantees to the National Social Security Fund, estimated at 6.2 percent of GDP, are also not adequately monitored.
This FTE report made a number of recommendations to strengthen fiscal transparency, including:
• Expanding the coverage of the key fiscal reports to include at a basic level the direct expenditure and revenues of extra-budgetary funds and parastatals;
• Beginning to prepare a balance sheet for the central government, using data that are available from existing systems and reports;
• Improving the quality and timeliness of audited financial statements in line with international standards;
• Clarifying institutional roles and responsibilities in managing public investment projects and programs;
• Improving the presentation and reconciliation of variations in macro-fiscal forecasts arising from new policy decisions, changes in the economic outlook, and accounting and technical changes; and
• Preparing a consolidated annual financial report on public corporations.
The attached annex indicates areas of the Code in which the government has made progress since September 2014 in implementing some of the report’s recommendations.