COMPREHENSIVE PUBLIC EXPENDITURE REVIEW

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ComprehensivePublic ExpenditureReview

Spending for ResultsEYE on BUDGET

2013

MINISTRY OF DEVOLUTION AND PLANNING

REPUBLIC OF KENYA

ComprehensivePublic ExpenditureReview


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REPUBLIC OF KENYA

COMPREHENSIVE

PUBLIC EXPENDITURE REVIEW

EYE on BUDGETSpending for Results

MONITORING AND EVALUATION DIRECTORATE

MINISTRY OF DEVOLUTION AND PLANNING

October 2013


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Published by the Government of Kenya in September, 2013

Government of the Republic of Kenya

Ministry of Devolution and Planning


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TABLE OF CONTENTS

ACRONYMS AND ABBREVIATIONS IFOREWORD IVACKNOWLEDGEMENTS VIEXECUTIVE SUMMARY VII

CHAPTER 1: MACRO-FISCAL PERFORMANCE AND FISCAL FRAMEWORK 11.1 INTRODUCTION 11.2 MACROECONOMIC PERFORMANCE 11.3 FISCAL PERFORMANCE 71.4 DEFICIT AND DEBT DYNAMICS 201.5 ECONOMIC OUTLOOK 241.6 CONCLUSION 32

CHAPTER 2: PUBLIC FINANCE MANAGEMENT 332.1 INTRODUCTION 332.2 BUDGET CREDIBILITY 342.3 OPENNESS AND COMPREHENSIVENESS 422.4 ACCOUNTING AND REPORTING 432.5 EXTERNAL AUDIT AND OVERSIGHT 452.6 NEW RULES OF THE GAME: PFM ARCHITECTURE IN THE 2010 CONSTITUTION 472.7 PRIORITIES, RISKS AND CHALLENGES 53

2.8 CONCLUSION 56

CHAPTER 3: EDUCATION 593.1 INTRODUCTION 593.2 POLICY, LEGAL AND INSTITUTIONAL FRAMEWORK 603.3 PERFORMANCE REVIEW 623.4 PUBLIC EXPENDITURE REVIEW (2009/10 TO 2011/12) 723.5 POLICY OUTLOOK: CONSTITUTION 2010 AND DEVOLUTION 783.6 OVERALL ASSESSMENT AND RECOMMENDATIONS 88

CHAPTER 4: HEALTH 914.1 INTRODUCTION 914.2 POLICY, LEGAL AND INSTITUTIONAL FRAMEWORK 944.3 PERFORMANCE REVIEW 964.4 PUBLIC EXPENDITURE REVIEW (2009/10 TO 2011/12) 1004.5 PROGRESS REVIEW FROM 2010 PER 1004.6 PUBLIC EXPENDITURE ANALYSIS AND KEY TRENDS 101

4.7 SUB-CENTRAL PER CAPITA SPENDING AND COUNTY-LEVEL PERFORMANCE 1084.8 SUB-NATIONAL EFFICIENCY IN HEALTH SECTOR SPENDING 1174.9 PUBLIC EXPENDITURE OUTLOOK (2012/13 TO 2014/15) 120

CHAPTER 5: THE AGRICULTURE AND RURAL DEVELOPMENT SECTOR 1255.1 POLICY AND PERFORMANCE OVERVIEW 1275.2 POLICY, LEGAL AND INSTITUTIONAL FRAMEWORK 1285.3 PERFORMANCE REVIEW 1335.4 PUBLIC EXPENDITURE REVIEW (2009/10 TO 2011/12) 1395.5 POLICY OUTLOOK, CONSTITUTION 2010 AND DEVOLUTION 1445.6 OVERALL ASSESSMENT AND RECOMMENDATIONS 147

CHAPTER 6: WATER, SANITATION AND IRRIGATION 1516.1 INTRODUCTION 1516.2 POLICY AND PERFORMANCE OVERVIEW 1516.3 PUBLIC EXPENDITURE REVIEW (2009/10 TO 2011/12) 1606.4 POLICY OUTLOOK: CONSTITUTION 2010 AND DEVOLUTION 1686.5 PUBLIC EXPENDITURE OUTLOOK (2013/14 TO 2015/16) 1736.6 OVERALL ASSESSMENT AND RECOMMENDATIONS 173

CHAPTER 7: INFRASTRUCTURE 1777.1 INTRODUCTION 1777.2 POLICY, LEGAL AND INSTITUTIONAL FRAMEWORK 1787.3 PERFORMANCE REVIEW 1807.4 EXPENDITURES IN PHYSICAL INFRASTRUCTURE 1887.5 SECTOR RECOMMENDATIONS AND CONCLUSION 193

CHAPTER 8: SOCIAL PROTECTION 1958.1 INTRODUCTION 1958.2 POLICY, LEGAL AND INSTITUTIONAL FRAMEWORK 1968.3 PERFORMANCE REVIEW 2018.4 PUBLIC EXPENDITURE REVIEW 2168.5 KENYA CONSTITUTION 2010 AND DEVOLUTION 2228.6 PUBLIC EXPENDITURE OUTLOOK (2012/13 TO 2014/15) 2248.7 OVERALL ASSESSMENT AND CHALLENGES 225

8.8 RECOMMENDATIONS AND LESSONS LEARNT 226

REFERENCES 228

ANNEXES 229

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LIST OF FIGURES

FIGURE 1.1: GDP GROWTH FOR KENYA, SUB-SAHARAN AFRICA AND THE WORLD 2FIGURE 1.2: SECTORAL CONTRIBUTION TO GROWTH 2007/11 (PERCENTAGE 3

POINTS COMPOUNDED)FIGURE 1.3: GDP GROWTH RATES, 2008-2012 3FIGURE 1.4: SECTORAL CONTRIBUTION TO GROWTH 4FIGURE 1.5: EXTERNAL SECTOR PERFORMANCE 6

FIGURE 1.6: GROSS INVESTMENT AND SAVINGS IN KENYA 6FIGURE 1.7: NARROWING GAP IN RECURRENT AND DEVELOPMENT SPENDING 8FIGURE 1.8: WIDENING GAP BETWEEN REVENUE AND EXPENDITURE 8FIGURE 1.9: TRENDS IN REVENUE PERFORMANCE 10FIGURE 1.10: PERFORMANCE OF VARIOUS REVENUE SOURCES 12FIGURE 1.11: DEVIATIONS BETWEEN ACTUAL AND TARGETED REVENUE COLLECTIONS 13FIGURE 1.12: RELATIONSHIP BETWEEN TAX REVENUE TYPES AND THEIR RESPECTIVE TAX BASES 14FIGURE 1.13: RELATIONSHIP BETWEEN VAT AND PRIVATE CONSUMPTION 14FIGURE 1.14: APPROXIMATION OF THE VAT POTENTIAL 16FIGURE 1.15: KENYAS SPENDING HAS INCREASED TO REACH 30 PERCENT OF GDP IN 2011 18FIGURE 1.16: ECONOMIC COMPOSITION OF EXPENDITURES, PERCENT OF GDP 18FIGURE 1.17: INFRASTRUCTURE, ENERGY AND ICT AND EDUCATION SECTORS RECEIVES 19 THE LIONS SHARE OF THE BUDGETFIGURE 1.18: SECTORS ACCOUNTING FOR THE LEAST SHARES OF THE BUDGET 19FIGURE 1.19: HUMAN DEVELOPMENT SECTOR ACCOUNTS FOR THE HIGHEST EXECUTION RATE 21FIGURE 1.20: BUDGET DEFICIT AVERAGED 4 PERCENT OF GDP DURING THE FISCAL 21

STIMULUS INCREASING DEBT BY 4 PERCENT POINTSFIGURE 1.21: PUBLIC DEBT HAS REACHED 1.4 TRILLION BUT IT STILL SUSTAINABLE 22 BELOW 45 PERCENT OF GDPFIGURE 1.22: COMPOSITION OF DOMESTIC DEBT 23FIGURE 1.23: NATIONAL AND COUNTIES SHARE OF BUDGET ALLOCATION IN THE MEDIUM TERM 29FIGURE 1.24: USING CRA FORMULA - HEATH SPENDING: ALLOCATION PER CAPITA (KSH.) 30FIGURE 1.25: SPENDING ON HEALTH AND INFRASTRUCTURE AT SUBNATIONAL LEVEL CAN 31 CATALYSE GROWTHFIGURE 2.1: SHARE OF DEVELOPMENT AND RECURRENT FUNDS ALLOCATION 35FIGURE 2.2: OUTER YEAR PROJECTIONS AND BUDGETS FOR 2009/10 35FIGURE 2.3: TREND OF DEVIATIONS WITHIN THE RECURRENT AND DEVELOPMENT 37 BUDGETS, 2002/03 TO 2011/12FIGURE 2.4: TREND OF PENDING BILLS, 2002/03 TO 2010/11 VS. EXECUTION RATES 38FIGURE 2.5: BUDGET EXECUTION 2002/10 39FIGURE 2.6: AVERAGE BUDGET EXECUTION, 2009/10 TO 2011/12 40FIGURE 2.7: DEVELOPMENT ALLOCATION COMPARED TO EXECUTION RATE 40

FIGURE 2.8: A COMPARISON OF PEFA RESULTS FOR KENYA, UGANDA AND TANZANIA 44FIGURE 2.9: COMPARISON OF 2006, 2008 AND 2012 ACCOUNTING, RECORDING 44 AND REPORTING PEFA RESULTS FOR KENYAFIGURE 2.10: COMPARISON OF 2006, 2008 AND 2012 EXTERNAL SCRUTINY AND 47 AUDIT PEFA RESULTS FOR KENYAFIGURE 2.11: BUDGET TIMELINE AT THE NATIONAL AND COUNTY LEVELS 50FIGURE 3.1: FLOW OF FUNDS IN THE EDUCATION SECTOR 62FIGURE 3.2: SECONDARY SCHOOL NER (AVERAGE PUBLIC AND PRIVATE) BY COUNTY, 2009 66FIGURE 3.3: GENDER PARITY INDEX IN PUBLIC SECONDARY SCHOOLS, BY COUNTY, 2011 67FIGURE 3.4: SOUTHERN AND SACMEQ COMBINED READING COMPETENCY LEVEL EIGHT 68FIGURE 3.5: PERCENTAGE OF PUPILS WHO CAN PERFORM UP TO STANDARD TWO IN NUMERACY TEST 68FIGURE 3.6: TRENDS IN KCSE EXAMINATION RESULTS 2006-2010 69FIGURE 3.7: MEAN GRADE OF STUDENTS IN SECONDARY EXAMS, 2001-2010 70FIGURE 3.8: UNIVERSITY ENROLMENT, ACADEMIC YEAR 2004/05 TO 2010/11 71FIGURE 3.9: PERCENTAGE SHARE OF SPENDING ON EDUCATION TO GDP 73FIGURE 3.10: FREE PRIMARY EDUCATION TRANSFERS TO PRIMARY SCHOOLS 75

FIGURE 3.11: FREE DAY SECONDARY EDUCATION TRANSFERS TO SECONDARY SCHOOLS 76FIGURE 3.12: COUNTY LITERACY RATES, 2005/06 80FIGURE 3.13: GENDER PARITY INDEX IN PUBLIC SCHOOLS BY COUNTY, 2011 81FIGURE 3.14: PRIMARY PUPIL-TEACHER RATIO BY COUNTY, 2011 82FIGURE 3.15: PER CAPITA SPENDING AND PERCENTAGE PASSING PRIMARY SCHOOL EXAMS, 2009/10 84FIGURE 3.16: PER CAPITA SPENDING AND NER-PRIMARY, 2009 85FIGURE 3.17: PER CAPITA SPENDING AND PERCENTAGE OF EXAM PASSES, PRIMARY, 2010 85FIGURE 3.18: SPENDING PER CAPITA AND NUMBER OF EXAM PASSES IN SECONDARY LEVEL, 2009/10 86FIGURE 3.19: SPENDING PER CAPITA AND NERSECONDARY, 2009 87FIGURE 3.20: SPENDING PER CAPITA AND PERCENTAGE OF PASSERS AT SECONDARY LEVEL, 2012 87FIGURE 3.21: PRIMARY SCHOOL SIZE, PUBLIC SCHOOLS ONLY 88FIGURE 3.22: SECONDARY SCHOOL SIZE, PUBLIC SCHOOLS ONLY 88FIGURE 4.1: FLOW OF FUNDING IN THE HEALTH SECTOR 95FIGURE 4.2: LIFE EXPECTANCY IN KENYA 97FIGURE 4.3: INFANT MORTALITY PER 1,000 BIRTHS, BY PROVINCE 97FIGURE 4.4: CHILD MORTALITY (UNDER FIVE YEARS) PER 1,000 BIRTHS, BY PROVINCE 98FIGURE 4.5: BEDS PER 10,000 POPULATION 98FIGURE 4.6: NURSES PER 10,000 POPULATION 99FIGURE 4.7: GDP PER CAPITA AND GOVERNMENT HEALTH SPENDING, KENYA AND 102 OTHER COUNTRIES, 2009



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FIGURE 4.8: GOVERNMENT HEALTH EXPENDITURE AS A PERCENTAGE OF TOTAL 103 GOVERNMENT BUDGETFIGURE 4.9: TOTAL PUBLIC HEALTH EXPENDITURES BY LEVEL OF GOVERNMENT, 103 CONSTANT 2003/04 PRICESFIGURE 4.10: DEVELOPMENT PARTNERS HEALTH FUNDING, 2009/10 104FIGURE 4.11: HEALTH SECTOR ABSORPTION RATE BY FUNCTION 106FIGURE 4.12: GOVERNMENT HEALTH SPENDING BY ECONOMIC CLASSIFICATION 106FIGURE 4.13: CHILDREN UNDER FIVE YEARS DELIVERED IN A MEDICAL FACILITY, BY COUNTY 109

FIGURE 4.14: DELIVERIES IN HEALTH FACILITY, ACCESS TO QUALIFIED PERSONNEL AT BIRTH, 109 AND POVERTY, BY COUNTYFIGURE 4.15: FULLY IMMUNISED CHILDREN (1223 MONTHS) BY COUNTY 110FIGURE 4.16: NUMBER OF HIV+ CASES RECEIVING ARV TREATMENT, 2012 110FIGURE 4.17: COUNTY ACCESS TO WATER 111FIGURE 4.18: ESTIMATES OF COUNTY GOVERNMENT HEALTH EXPENDITURES PER CAPITA, 2010/11 112FIGURE 4.19: HEALTH PERSONNEL PER 100,000 POPULATION, BY COUNTY 113FIGURE 4.20: COUNTY PER CAPITA SPENDING AND AVAILABILITY OF HEALTH SERVICES 114FIGURE 4.21: PER CAPITA EXPENDITURES AND IMMUNISATION COVERAGE 115FIGURE 4.22: PER CAPITA EXPENDITURE AND DELIVERIES IN A MEDICAL FACILITY 115FIGURE 4.23: BURDEN OF DISEASE AND HEALTH SECTOR PERFORMANCE BY COUNTY 116FIGURE 4.24: EFFICIENCY SCORES, BY COUNTY 117FIGURE 4.25: EFFICIENCY SCORES AND FULLY IMMUNISED CHILDREN BY COUNTY 118FIGURE 4.26: EFFICIENCY SCORES AND CHILDREN DELIVERED IN A HEALTH FACILITY, BY COUNTY 118FIGURE 4.27: EFFICIENCY SCORES AND PER CAPITA TOTAL EXPENDITURE, BY COUNTY 119FIGURE 4.28: EFFICIENCY SCORES AND POVERTY RATES, BY COUNTY 119

FIGURE 5.1: PERCENTAGE CHANGE IN GDP GROWTH FOR SUB-SECTORS IN AGRICULTURE 2006 TO 2010 136FIGURE 5.2: RELATIONSHIP BETWEEN INPUTS, OUTPUTS AND OUTCOMES IN AGRICULTURE 145FIGURE 6.1: AVERAGE COMPOSITION OF EXPENDITURE IN WATER AND SANITATION 165 SECTOR, 2009/10 TO 2011/12FIGURE 6.2: FUNDING TREND TO THE PRO-POOR BASKET 172FIGURE 7.1: KENYA RELIES MAINLY ON HYDRO-POWER 185FIGURE 7.2: ROADS AND ENERGY ACCOUNT FOR 80 PERCENT OF THE TOTAL INFRASTRUCTURE SPENDING 189FIGURE 7.3: INVESTMENT IN ROADS IS MAINLY TOWARDS DEVELOPMENT 190FIGURE 7.4: INVESTMENT IN ENERGY SUB-SECTOR IS MAINLY TOWARDS NATIONAL ELECTRIFICATION 190FIGURE 7.5: SHARE OF ENERGY SPENDING BY ECONOMIC CLASSIFICATION 191FIGURE 7.6: SUB-SECTOR SHARES AS PERCENT OF TOTAL INFRASTRUCTURE BUDGET 192FIGURE 7.7: PHYSICAL INFRASTRUCTURE BUDGET EXECUTION RATES 192FIGURE 8.1: OP-CTP BENEFICIARIES BY COUNTY AS AT JUNE 2012 203FIGURE 8.2: PWSD BENEFICIARIES BY COUNTY AS AT JUNE 2012 204FIGURE 8.3: WEF BENEFICIARIES BY COUNTY AS AT JUNE 2012 205FIGURE 8.4: GOVERNMENT ALLOCATIONS TO YEDF 210

FIGURE 8.5: SOCIAL PROTECTION EXPENDITURES AS PERCENT OF TOTAL GOVERNMENT 217 OUTLAYS; 2009/10 TO 2010/11FIGURE 8.6: TOTAL SOCIAL PROTECTION EXPENDITURES BY SUB-SECTOR 217FIGURE 8.7: ANALYSIS OF RECURRENT EXPENDITURES, 2011/12 219FIGURE 8.8: BUDGET EXECUTION BY SUB-SECTOR (RECURRENT AND DEVELOPMENT) 220FIGURE 8.9: DIVISION OF THE SECTOR EXPENDITURES, 2010/11 221FIGURE 8.10: RESOURCE DISTRIBUTION TO COUNTIES, NORTHERN KENYA AND ARID 222 LANDS SUB-SECTOR, 2011/12FIGURE 8.11: RESOURCE DISTRIBUTION TO COUNTIES, YOUTH AFFAIRS AND SPORTS SUB-SECTOR, 2011/12 222FIGURE 8.12: RESOURCE DISTRIBUTION TO COUNTIES, GENDER, CHILDREN AND SOCIAL 223 DEVELOPMENT SUB-SECTOR, 2011/12

LIST OF TABLES

TABLE 1.1: SELECTED ECONOMIC INDICATORS, 2008-2012 5

TABLE 1.2: BUDGET OUTTURN 2009/10 TO 2012/13 9TABLE 1.3: COMPARISON BETWEEN VAT ACT CAP 476 AND VAT BILL 2012 15TABLE 1.3: SECTORAL BUDGET ALLOCATION AND EXPENDITURE (KSH. MILLION) 20TABLE 1.4: COMPOSITION PUBLIC DEBT AND PUBLICLY GUARANTEED DEBT (KSH. BILLION) 23TABLE 1.5: DEBT SUSTAINABILITY INDICATORS 24TABLE 1.6: MACROECONOMIC PROJECTIONS FOR 2013-2015 26TABLE 1.7: MEDIUM TERM FISCAL OUTLOOK 2012/13 TO 2014/15 27TABLE 2.1: AGGREGATE BUDGET OUTTURN INDICATORS 2008/09 TO 2010/11 37TABLE 2.2: BUDGET EXECUTION PEFA SCORES COMPARISON 39TABLE 2.3: OPEN BUDGET INDEX FOR KENYA, 2010 42TABLE 2.4: NATIONAL AND COUNTY PFM INSTITUTIONS 49TABLE 2.5: TIMELINES FOR BUDGET SUBMISSION TO LEGISLATURES ACROSS THE WORLD 51TABLE 3.1: TRENDS IN KEY INDICATORS OF EDUCATION IN KENYA 64TABLE 3.2: KEY EDUCATION INDICATORS IN SELECTED COUNTRIES, 2009 66TABLE 3.3: ADMISSION TO PUBLIC UNIVERSITIES AND TVET INSTITUTIONS, 2004/05 TO 2010/11 71TABLE 3.4: EDUCATION EXPENDITURES, 2003/04 TO 2010/11 (KSH. BILLION) 72

TABLE 3.5: EXPENDITURE BY ECONOMIC CLASSIFICATION (KSH. BILLION) 75TABLE 3.6: EDUCATION EXPENDITURE BY FUNCTIONAL CLASSIFICATION AND 77 PER CAPITA SPENDINGTABLE 4.1: HEALTH OUTCOMES INDICATORS FOR KENYA AND OTHER COUNTRIES 96



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TABLE 4.2: BREAKDOWN OF KEY REGISTERED HEALTH PERSONNEL, KENYA 99TABLE 4.3: TRENDS IN HEALTH EXPENDITURE (KSH.) 2001/02 TO 2009/10 101TABLE 4.4: SECTOR ACTUAL EXPENDITURE (NET IN KSH. BILLION), 2009/10 TO 2011/12 105TABLE 4.5: SAGAS INTERNALLY GENERATED FUNDS, KSH. (000) 107TABLE 4.6: SECTOR REQUIREMENT FOR BOTH RECURRENT AND DEVELOPMENT 121 EXPENDITURE (KSH. MILLION) 2012/13 TO 2015/16TABLE 5.1: HUMAN RESOURCE DEPLOYMENT IN THE AGRICULTURE SECTOR MINISTRIES 133 IN KENYA, 2012

TABLE 5.2: TOTAL VALUE (KSH. BILLION) OF KEY COMMODITIES 138TABLE 6.3: TOP FIVE COUNTIES BY ANNUAL PRODUCTIVITY FOR SELECTED COMMODITIES 139TABLE 5.4: TOP FIVE COUNTIES BY LIVESTOCK TYPE 140TABLE 5.5: VOLUME OF FISH PRODUCTION (METRIC TONNES), 2007-2010 140TABLE 5.6: TRENDS IN TOTAL RECURRENT EXPENDITURE (KSH. MILLION) 141TABLE 5.7: TRENDS IN TOTAL DEVELOPMENT EXPENDITURE (KSH. MILLION) 142TABLE 5.8: TOTAL EXPENDITURE (RECURRENT AND DEVELOPMENT) (KSH. MILLION) 142TABLE 5.9: TRENDS IN EXPENDITURE BY PROGRAMMES (KSH. MILLION) 143TABLE 5.10: TRENDS IN EXTERNALLY FUNDED PROGRAMMES (KSH. MILLION) 144TABLE 5.11: SECTOR RESOURCE REQUIREMENTS VERSUS ALLOCATION (KSH. MILLION) 147TABLE 6.1: WATER SECTOR INSTITUTIONS AND THEIR FUNCTIONS 154TABLE 6.2: FIRST MTP OUTCOMES 155TABLE 6.3: MOWI INTENDED AND ACHIEVED OUTPUTS (2009/10 TO 2011/12) 156TABLE 6.4: FINDINGS ON WATER AVAILABILITY BASED ON THE DRAFT (NWMP) 157TABLE 6.5: BENCHMARKING KENYAS WATER AND SANITATION INDICATORS, 2009 159TABLE 6.6: PROGRESS ON PER 2010 RECOMMENDATIONS 160

TABLE 6.7: WATER SECTOR PUBLIC SPENDING RELATIVE TO GDP AND TOTAL PUBLIC EXPENDITURE 161TABLE 6.8: NET WATER SECTOR FINANCIAL FLOWS FROM PUBLIC SOURCES (KSH. MILLION) 161TABLE 6.9: TRENDS OF EXPENDITURE FOR MOWI, 2008/09 TO 2011/12 (KSH. MILLION) 162TABLE 6.10: ANALYSIS OF EXPENDITURES BY ECONOMIC CLASSIFICATION (KSH. MILLION) 163TABLE 6.11: EXPENDITURE ANALYSIS BY PROGRAMMES (KSH. MILLION) 163TABLE 6.12: TOTAL EXPENDITURE ON WATER AND SANITATION BY LOCAL AUTHORITIES 164TABLE 6.13: SOURCES OF FINANCES (KSH. MILLION) 165TABLE 6.14: ANALYSIS OF EXTERNALLY FUNDED PROGRAMMES 165TABLE 6.15: ANALYSIS OF PENDING BILLS 166TABLE 6.16: INVESTMENT COST PER CAPITA: WATER SUPPLY (2009/10 TO 2011/12) 166TABLE 6.17: WATER PURIFICATION POINTS (WPP) AND BOREHOLES (BHS) 167 DRILLED 2008/09 TO 2012/13TABLE 6.18: SUMMARY OF RESOURCE REQUIREMENT VERSUS ALLOCATION FOR COUNTY 169 DEVOLVED (KSH. MILLION)TABLE 6.19: COUNTIES KEY STRATEGIC INTERVENTIONS AND RESOURCE ALLOCATION 170 IN 2013/14 (KSH. MILLION)

TABLE 6.20: ALLOCATIONS TO COUNTIES IN 2011/12 171TABLE 6.21: SUMMARY OF RESOURCE ALLOCATION BETWEEN NATIONAL AND 172 COUNTY GOVERNMENT (KSH. MILLION)TABLE 7.1: ROADS SUB-SECTOR PERFORMANCE 2009/10 TO 2011/12 182TABLE 7 2: ROAD NETWORK IN KENYA BY TYPE AND CLASSIFICATION 2009-2012 183TABLE 7.3: TRANSMISSION AND DISTRIBUTION LINES, CIRCUIT LENGTH IN KM AS AT JUNE 2012 185TABLE 7.4: DEMAND AND CONSUMER STATISTICS 186TABLE 7.5: INFRASTRUCTURE SECTOR EXPENDITURE (KSH. MILLION) 189TABLE 7.6: ANALYSIS OF EXTERNALLY FUNDED PROGRAMMES (KSH. MILLION) 193TABLE 7.7: SUB-SECTOR DEVELOPMENT BUDGET EXECUTION RATE (PERCENT) 194TABLE 8.1: NUMBER OF HOUSEHOLDS FINANCED AND DISTRICTS COVERED (2008/09 TO 2011/12) 202TABLE 8.2: DISTRIBUTION OF CASH TRANSFER BENEFICIARIES BY PROGRAMME 204TABLE 8.3: BENEFICIARIES OF WEF 204TABLE 8.5: TOTAL YEDF LOAN DISBURSEMENTS FROM 2007-2012 211TABLE 8.7: NATIONAL SOCIAL SECURITY FUND (NSSF) PERFORMANCE OVER THE YEARS 215TABLE 8.8: CIVIL SERVANTS SCHEME SPENDING TRENDS 216

TABLE 8.9: ANALYSIS OF EXPENDITURE BY SUB-SECTOR (RECURRENT AND DEVELOPMENT) 216TABLE 8.10: CIVIL SERVICE PENSION EXPENDITURE AND NET-LENDING (2009/10 TO 2011/12*) 218TABLE 8.11: ANALYSIS OF EXPENDITURES BY ECONOMIC CLASSIFICATION (KSH. MILLION) 218TABLE 8.12: ANALYSIS OFEXPENDITURES ON TRANSFERS BY SUB-SECTOR (KSH. MILLION) 218TABLE 8.13: BUDGET PERFORMANCE FOR CASH TRANSFER PROGRAMMES 219TABLE 8.14: RECURRENT PENDING BILLS (KSH. MILLION) 220TABLE 8.15: RECURRENT PENDING BILLS (KSH. MILLION) 221TABLE 8.16: APPROVED ESTIMATES PROJECTIONS (2012/13 TO 2015/16) 225

LIST OF BOXES

BOX 2.1: BOTTLENECKS IN THE PROCUREMENT PROCESS 41BOX 2.2: BUDGET EXECUTION REFORMS 41BOX 2.3: THE CONSTITUTIONAL PRINCIPLES OF PUBLIC FINANCE 48BOX 3.1: EDUCATION SECTOR TARGETS 60BOX 3.2: INVESTING IN YOUNG CHILDREN: EVIDENCE OF EARLY CHILDHOOD DEVELOPMENT IMPACT 65

BOX 3.3: SOUTHERN AND SACMEQ READING AND MATHEMATICS COMPETENCY LEVELS 69BOX 4.1: OUTCOME TARGETS OF THE HEALTH SECTOR FOR THE YEAR 2012 UNDER THE 93

VISION 2030 STRATEGYBOX 7.1: GOVERNMENTS COMMITMENT TO ENERGY SECTOR REFORMS 180



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ACRONYMS AND ABBREVIATIONS

ACA Anti-Counterfeit Agency

ADB African Development Bank

AG Attorney General

AIDS Acquired Immune Deciency SyndromeAMS Agricultural Mechanization Stations

ASALs Arid and Semi Arid Lands

ASCU Agriculture Sector Coordination Unit

ATC Agricultural Training Centres

BPO Business Process Outsourcing

BSPS Business Sector Program Support

CDF Constituency Development Fund

CEDAW Convention on Elimination of all forms of Discrimination

Against Women

CIDC Constituency Industrial Development Centre

CMEC Constituency Monitoring and Evaluation CommitteesCOE Centre of Excellence

COMESA Common Market for East and Southern Africa

CPFM Comprehensive Public Financial Management

CPI Consumer Price Index

CRC Convention of the Rights of the Child

CSO Civil Society Organizations

DFZ Disease Free Zones

DIT Directorate of Industrial Training

DMECs District Monitoring and Evaluation Committees

DRSRS Department of Resource Survey and Remote Sensing

EAC East Africa CommunityECDE Early Childhood Development Education

EEZ Economic Exclusive Zones

EFA Education For All

EMCA Environmental Management and Coordination Act

EPC Export Promotion Council

EPZ Export Processing Zones

ERC Electricity Regulation Commission

ERS Economic Recovery Strategy

ESP Economic Stimulus Programme

EU European Union

FOSA Front Ofce Savings Account

FY Financial Year

GDP Gross Domestic Product

GER Gross Enrolment Rate

GIS Geographical Information System

GJLOS Governance, Justice, Law and Order Sector

GoK Government of Kenya

GPS Global Positioning System

GRB Gender Responsive Budgeting

HIV Human Immunodeciency Virus

HMIS Health Management Information Systems

HRD Human Resource Development

ICT Information Communication TechnologyIDP Internally Displaced Persons

IFMIS Integrated Financial Management Information Systems

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IIBRC Interim independent Boundary Review Commission

IIEC Interim independent Electoral Commission

ILO International Labour Organization

IMF International Monetary Fund

IMIS Integrated Meteorological Information System

IPPD Integrated Payroll Personnel Database

IPPs Independent Power ProductsKAA Kenya Airports Authority

KDHS Kenya Demographic and Health Survey

KEBS Kenya Bureau of Standards

KEMSA Kenya Medical Supplies Agency

KENAO Kenya National Audit Ofce

KeNHA Kenya National Highway Authority

KeRRA Kenya Rural Roads Authority

KESSP Kenya Education Sector Support Programme

KFA Kenya Farmers Association

KIBHT Kenya Institute of Highways and Building Technology

KIE Kenya Institute of EducationKIRDI Kenya Industrial Research and Development Institute

KISE Kenya Institute of Special Education

KKV Kazi Kwa Vijana

KLRC Kenya Law Reform Commission

KNBS Kenya National Bureau of Statistics

KNEC Kenya National Examination Council

KPA Kenya Ports Authority

KPCU Kenya Planters Cooperative Union

KRA Kenya Revenue Authority

KURA Kenya Urban Roads Authority

LSK Law Society of Kenya

M&E Monitoring and Evaluation

MAMER Ministerial Annual Monitoring and Evaluation Report

MAPSKID Master Plan for Kenya Industrial Development

MDA Ministries, Departments and other Government Agencies

MDG Millennium Development Goals

MED Monitoring and Evaluation Directorate

MMR Maternal Mortality Rate

MoE Ministry of Education

MoMS Ministry of Medical Services

MoPHS Ministry of Public Health and Sanitation

MoT Ministry of Trade

MSE Micro and Small EnterprisesMSMI Micro Small and Medium Industries

MTP Medium Term Plan

NAAIAP National Accelerated Agriculture Input Access Program

NACADAA National Campaign Against Drug Abuse Authority

NACOSH National Council for Occupational Safety and Health

NALEAP National Legal Aid Programme

NCAPD National Coordinating Agency for Population and

Development

NCCRS National Climate Change Responsive Strategy

NCPB National Cereals and Produce Board

NCPWD National Council for Persons with DisabilityNEMA National Environment Management Authority

NER Net Enrolment Rate

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NESC National Economic and Social Council

NFE Non Formal Education

NHIF National Hospital Insurance Fund

NIMES National Integrated Monitoring and Evaluation System

NSE Nairobi Stock Exchange

NSSF National Social Security Fund

OVC Orphans and Vulnerable ChildrenPER Public Expenditure Review

PFM Public Financial Management

PGH Provincial General Hospital

PLWHAs People Living With HIV and AIDS

PMIS Pensions Management Information Systems

PPOA Public Procurement Oversight Authority

PPP Public Private Partnership

PSC Parliamentary Service Commission

PWDs Persons With Disabilities

RBBA Risk Based Audit Approach

RSIP Road Sector Investment PlanSACCO Savings and Credit Cooperatives Organization

SAGA Semi Autonomous Government Agency

SDCP Small Holder Dairy Commercialization Program

SEZ Special Economic Zones

SP Strategic Plan

STI Science Technology and Innovations

TB Tuberculosis

TIVET Technical, Industrial, Vocational and Entrepreneurship

Training

TJRC Truth, Justice and Reconciliation Commission

TSC Teachers Service Commission

UMR Under Five Mortality Rate

UN United Nations

VDS Vision Delivery Secretariat

WEF Women Enterprise Fund

YEF Youth Enterprise Fund

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FOREWORD

T

his is the second comprehensive Public Expenditure Review Report to be

produced after the government and development partners agreed on a

three year well researched Report to replace the annual reviews. The Report

comes at a time when the country is embarking on major changes in the nancial

management system that includes the devolution process and other changes

that resulted from the enactment of the Constitution of Kenya 2010. It therefore

provides the basis to anchor the nancial transformation in the national and

devolved levels of government in the next three years.

Government expenditure during the past three years has seen remarkable

increase both in the development and recurrent vote. This Report thus looks atthe expenditures of the government organs to utilize the allocated funds. In some

cases, county level expenditures are analysed to indicate the per capita public

expenditure and efciency in different counties. More so, the Report highlights

the recent policies developed to improve public nancial management and

develop organizational structures that create efciency in nancial utilization.

The Report highlights the expenditures of selected MTEF sectors based on

contribution to economic development and the social wellbeing of communities.The Report lays emphasis on composition of expenditures in the selected sectors

and the effectiveness of the mix towards the contribution of the sector to

economic performance. Sector budget has been increasing overtime especially

the development vote. The Report links expenditure and achievements while

taking cognizance of cost of achieving the results.

The Report comes at a time when the country is embarking on the second

Medium Term Plan of the Kenya Vision 2030. Looking back on the expenditures

and achievements of the rst Medium Term Plan (MTP) will provide information

that can be used in the budget process to come up with nancial allocation that

will spur and maintain the targeted annual economic growth of 10 percent. The

Report will be handy in evaluating the achievements of the Vision 2030 at the

end of the rst MTP.

Preparation of the PER is always a consultative process that involves all

stakeholders in both the government and development partners including the

public. In the next three years, the government will embark on participatory

research review and analysis in various sectors as a way of preparing the next

iv COMPREHENSIVE PUBLIC EXPENDITURE REVIEW2013EYE on BUDGET: Spending for Results


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vCOMPREHENSIVE PUBLIC EXPENDITURE REVIEW2013EYE on BUDGET: Spending for Results

three year document. The government is aware that enormous support from

development partners does not pass through the annual budget. We will

therefore work with all partners to capture all the expenditure to the public and

ascertain costs of gains and the efciency of the allocated funds.

ANNE WAIGURU, OGW

Cabinet Secretary



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ACKNOWLEDGEMENTS

vi COMPREHENSIVE PUBLIC EXPENDITURE REVIEW2013EYE on BUDGET: Spending for Results

The 2013 Public Expenditure Review presents research done over the last threeyears on expenditures and achievements of different sectors of the economy.The Report was prepared through participation of line ministries, consultationwith development partners and comments from stakeholders who participate in

both the budget process and the implementation of programmes.

The team that prepared this Report worked with commitment to provide the

required information and analysis to ensure quality and accuracy of the

information contained in the document. I would like to express my personal and

institutional gratitude to all of the stakeholders, public and private, development

partners and all the experts who actively participated and contributed to the

preparation of the 2013 Comprehensive Public Expenditure Review (CPER). The

PER provides insights on how to get better value for taxpayers money and ensure

that all Kenyans benet from their taxes.

Special recognition goes to all the technical ofcers from line Ministries who

provided data and information that went into the Report through the Ministerial

Public Expenditure Reviews (MPER). I would also like to register my appreciation of

the effort and active participation of the Public Expenditure Review Committee

that was responsible for the overall overseeing of preparation of this Report. Let

me also appreciate both the World Bank and GIZ for their support.

Special recognition goes to the Economic Planning Secretary, Mr. Stephen

Wainaina, and the Director of the Monitoring and Evaluation Directorate, Mr.

Samson Machuka, under whose leadership and supervision this assignment was

undertaken. I would like also to recognize the efforts of Ms. Jane Kiringai and

Ms. Tracey Lane (World Bank), Mr. Kristin Rosbach (GIZ) who provided technical

advice to the team. Special thanks go to Mr. Francis Muteti and Mr. Kenneth

Mwirigi, who coordinated the compilation, editing and nalization of the Report.

I would also like to further extend my appreciation to all our development

partners, NGOs, CSOs for contributing and working with the Ministry I thank youall and I look forward to your continued collaboration and support.

ENG PETER MANGITI

Principal Secretary



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viii COMPREHENSIVE PUBLIC EXPENDITURE REVIEW2013EYE on BUDGET: Spending for Results

Executive Summary

Following the implementation of Free Primary and Day Secondary Education

Programmes, net enrolment rates increased from 80.4 percent in 2003 to 95.7

percent in 2011 for primary and from 24.2 percent in 2007 to 32.7 percent in 2011

for secondary levels. During the three year period, most learners met the basic

requirement for secondary school enrolment but faced challenge in nding a

place in the available secondary schools. However, the percentage of childrentransiting from primary to secondary rose from 59.9 percent to 73.3 percent

during the same period.

The Health Chapter presents an analysis of the health sector revenue and

spending; sector performance review and achievements for the period 2009/10

to 2011/12 nancial years. It is evident that despite the challenges, the health

sector achieved considerable progress on the outcomes that included reduction

in under ve mortality rate from 115 per 1,000 live births in 2003 to 74 per 1,000 in

2008/09, and infant mortality from 77 per 1000 live births to 52 per 1000 in the same

period. The sector has also seen increased immunization coverage for under

1 year olds from 71 percent in 2008 to 77 percent in 2011. However, Maternal

Mortality Ratio has deteriorated from 414 in 2003 to 488 deaths per 100,000 live

births in 2008/09. Public spending per capita currently stands at US$19.2 and in

general, health spending per capita still remains low at US$42 compared to the

WHO recommendation of US$54 per capita. Total Government spending on

health increased considerably over the years from KSh. 38 billion in 2009/10 to

KSh. 59 billion in 2011/12. Development budget increased signicantly from 13

billion in 2009/10 to 28 billion in 2011/12 indicating the governments commitment

to spending on investments.

Agriculture Sector is the key component of Kenyas economy and remains the

main source of livelihood for majority of Kenyans. Through various reforms, the

sector has continued to ensure food security and improved nutritional status.

However, expenditure growth in the sector has been slow and is estimated at 4.3

percent against the Maputo Declaration of 10 percent of national expenditure.

In spite of the low level of funding, the sector directly contributed 24.5 percent of

the GDP valued at KSh. 741 billion in 2011. It indirectly contributes approximately

27 percent to the GDP through linkages with manufacturing, distribution and

other service related sectors. The sector further accounts for about 65 percent

of Kenyas total exports. The sector targets to achieve an average growth rate

of 7 percent per year over the next 5 years. This is through focus on innovative,

commercially oriented and modern agricultural practices to achieve the Kenya

Vision 2030 target of 10 percent economic growth rate.

Under the Infrastructure Sector, there has been a general shift of expenditure

towards increased development related investments. Sector allocation

accounted for 10 percent of the GDP on average in the period 2009/10 to 2011/12.

Infrastructure spending is mainly directed towards roads and energy sub-sectorswhich account for 80 percent of the total sector allocation. Roads receives the

largest share of the infrastructure budget which is in line with the government


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ixCOMPREHENSIVE PUBLIC EXPENDITURE REVIEW2013EYE on BUDGET: Spending for Results

Executive Summary

initiative of rehabilitating and expanding the existing roads, opening new roads

especially along the northern corridor and sustaining the already developed

roads in good standards. Equally, the energy sub-sector has seen noticeable

increment in budget allocation in the last three years. This is as a result of heavy

investment in renewable and clean energy especially geothermal and wind

powered energy, construction of high voltage power lines and the on-going oilexploration programme.

Spending on water sub-sector is principally made up of capital expenditure,

which accounts for 75 percent of the total sector allocations. Central government

spending on water and sanitation is, however a small share of the national income

(3.1 percent). Funds are allocated to Semi Autonomous Government Agencies

(SAGAs), which are regional-based and not county-based. Access to safe water

supply was 60 percent in urban areas and 45 percent in rural areas with national

water access coverage of 51 percent. This is far below the target of 72 percent

-urban and 59 percent -rural as envisaged in the Vision 2030 goal for 2012.

National sanitation coverage stood at nearly 70 percent with urban sanitation

coverage being 73 percent and rural sanitation coverage approximately 67

percent. The cumulative productive land under irrigation and reclamation at

the end of the review period comprised a total of 156,851 ha of irrigated land

and 32,733 ha of drained land. This was achieved through development of new

schemes and rehabilitation and expansion of existing public schemes.

The Social Protection Sector provides an insight of expenditures on improvement

of livelihood of people in Kenya especially the vulnerable and marginalised. TheSector has a responsibility to coordinate disaster management, address social

and economic issues affecting vulnerable groups, empower women, persons with

disabilities and youth, and also address the unique challenges facing northern

Kenya and other semi-arid lands. Key among the Sectors achievements is the

nalisation and operationalization of several policies to strengthen the capacity

of various structures to conform to the Constitution of Kenya 2010. The Sector

realised signicant increase in budget over the last three years from KSh. 30 billion

in FY 2009/10 to KSh. 36 billion in 2011/12. This led to an increase in allocation

to the social protection programmes that included cash transfer programme

to persons with severe disabilities and urban poor, scaling up of cash transfer

programme to orphans and vulnerable children (OVCs) and elderly persons.

Generally, this Report accentuates the institutional reforms underpinned in the

Constitution of Kenya 2010 and explores the opportunities to catalyze Kenyas

growth as envisaged in the economic blue print, the Kenya Vision 2030. The

devolved governments will form the catalyst for economic growth as more than

15 percent of national revenue will be spent at county level. If well spent by

reducing the administrative share of the budget, it can spur growth through

improvements in human capital and infrastructure. Generally, implementation inthe sector programmes over the period under review has increasingly received

nancial support.


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Macro Fiscal Performance and Fiscal


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1.1 INTRODUCTION

Kenyas macroeconomic policy has been pursued along two fronts, the rstbeing the monetary policy of the Central Bank of Kenya (CBK) and thesecond, the scal policy of the Ministry of Finance (now the National Treasury).

The monetary policy has been premised on the need to contain inationary

pressures on the economy due to a number of factors emanating from high

fuel prices and the international nancial crisis. The Monetary Police Committee

(MPC) of CBK undertook various initiatives to rein in the rising cost of living and

the depreciating foreign exchange rate through tightening of monetary policy,raising the Central Bank Rate (CBR) from 8.75 percent in 2007 to 18 percent in

2011. On the other hand, the Treasury continued to tighten the scal policy in

order to contain the scal decit while ensuring that public debt was restrained

within acceptable levels. The government also undertook measures aimed at

strengthening revenue mobilisation, containing unproductive expenditures and

leakages during the period under review.

This chapter reviews the macroeconomic and scal context for the preparation

of the 2013/14 budget and medium term outlook.

1.2 MACROECONOMIC PERFORMANCE

1.2.1 Overall economic performance

Kenyas growth averaged 3.9 percent during the last administration (2008-2012) compared to 5.3 percent during the previous one (2003-2007). Afterslumping to 1.6 percent in 2008, growth rebound and increased to 5.6 percent

in 2010 but moderated to about 4.5 percent in 2011 and 2012. The robust

growth recorded during 2003-2007 can be attributed to the global boom which

increased the demand for Kenyan exports, as well as to the reforms implemented

MACRO-FISCAL PERFORMANCE

AND FISCAL FRAMEWORK

Chapter 1

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In 2010, growth rebounded across all sectors. Rainfall exceeded the average for

a normal year as the country enjoyed a bumper harvest and low food prices. The

drought in 2011 dampened the performance of the agriculture sector and the

supply of hydro power, with spillover effects to industry and other sectors of the

economy. Nevertheless the economy still recorded an average performance of

4.4 percent in 2011 and a similar performance in 2012. The sectoral contribution

to growth is presented in Figure 1.4.

0 0.2 0.4 0.6 0.8 1.0

Electricty and water

Hotels and restaurants

Agriculture and forestry

Real estate, renting, business services

Other services

Construction

Education

Financial intermediation

Manufacturing

Wholesale and retail trade

Transport and communication

0.16

0.18

0.19

0.25

0.26

0.27

0.37

0.73

0.84

Percent

0.08

0.12

Figure 1.2: Sectoral contribution to growth 2007/11 (percentage points compounded)

Source: KNBS Economic Survey, 2012

1.6

2.6

5.6

4.44.6

0

1

2

3

4

5

6

2008 2009 2010 2011 2012

Percent

GDP growth rates, 2008

Figure 1.3: GDP growth rates, 2008-2012

Source: KNBS Economic Survey, Various Issues


Macro Fiscal Performance and Fiscal Framework


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In terms of sectoral contribution to GDP, agriculture and forestry had the highest

contribution with a level of 24 percent in 2011. Within the agriculture sector, the

largest share of this contribution is from the growing of crops and horticulture

at 18.1 percent while farming of animals had a paltry 4.8 percent. Wholesale

and retail trade, and transport and communication had the second highest

contribution with an average of 10 percent in the review period. Manufacturing

has declined in recent years from 11 percent of GDP to an average of 9 percent

in the three years. Except for agriculture and nancial intermediation, the

contribution of all the sectors showed a slight decline in 2011 as compared to

2010.

1.2.2 Recent macroeconomic developments

Following the economic slowdown in 2008 the government implemented an

economic stimulus programme in an attempt to shore up growth. The stimulus

implemented in 2009/10 increased spending by almost 2.6 percent of GDP and

the primary decit increased from 2.1 percent of GDP in the previous year to

3.8 percent of GDP by 2010/11. Growth gained momentum in the second half

of the scal year 2009/10 as public spending accelerated and the real GDP

growth rate was 4.1 percent. The general government sector contributed 22

percent of the value added and cushioned the economy from recession.

The impact of scal response is reected in government contribution to GDP.Since 2008, growth in government consumption surpassed growth in private

consumption. In 2007, for instance, private consumption expanded by 7.3

1.6

2.6

5.6

4.4

4.6

1

0

2

3

4

5

6

2008 2009 2010 2011 2012

Sectoral contribution to growth

Percent

Services Industry Agr iculture

Figure 1.4: Sectoral contribution to growth

Source: KNBS Economic Survey, 2012

4 COMPREHENSIVE PUBLIC EXPENDITURE REVIEW2013EYE on BUDGET: Spending for Results



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percent and government consumption by 4.4 percent. However, from 2009 to

2011 the average growth in private consumption was 2 percent compared with

an average growth rate of 4.3 percent for government consumption, see Table

1.1 for details.

Expansionary scal policy was complemented by an accommodative monetary

policy which saw a reduction in interest rates, leading to a lending boom. Growth

rebounded in 2010, driven at rst by scal stimulus and an accommodative

monetary policy, and then by private sector response through a signicant

increase in credit to private sector and households. Credit supply revived

domestic demand which was met through additional imports, reected in the

widening current account decit which reached double digits in 2011. The current

account decit increased from US$ 2.2 billion in 2010 to US$ 3.3 billion in 2011

and further to US$ 4.5 billion in 2012. The decit emanates from the merchandise

accountfrom a decit of US$ 7.2 billion, to US$ 9.0 billion and further to US$

10.1 from 2010 through to 2012. The poor show in goods trade reects lack of

competitiveness in the global market.

Rising oil prices increased the pressure from the external account leading to

macroeconomic instability. In 2011 oil imports accounted for 27 percent of

the import bill. The shilling exchange depreciated from 85 to 107 and inationpeaked at 19 percent. The expansionary policies, both scal and monetary,

were reversed at the end of 2012 to restore macroeconomic stability. Figure

Table 1.1: Selected economic indicators, 2008-2012

2008 2009 2010 2011 2012**

Growth rates percent

Real GDP growth 1.5 2.7 5.8 4.4 4.3

Private consumption -1.3 5 7.2 2.8 3.9

Government consumption 2.5 3.8 9.2 10.6 4.3

Gross xed investment 9.5 2.8 7.7 12.5 9.5

Exports, GNFS 7.2 -9.3 17.7 6.7 6.7

Imports, GNFS 6.6 2.8 6.1 15.6 6.7

Other indicators

Annual ination rate* 16.2 10.5 4.1 14.0 9.6

Exchange rate KSh./US$ 69.8 77.3 79.5 88.7 84.7

Interest rate (T-bill) 7.7 7.4 3.6 8.7 12

Current account balance percent of GDP

Import cover (months) 3 3 4 3 3

Population (million) 38.3 39.4 40.4 41.4 42.4

Nominal GDP (billion) 2,107 2,366 2,549 3,024 3,566

Source: KNBS, and IMF projections: **Estimates




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1.5 shows the trends in balance of payments which triggered macroeconomic

instability in 2011.

Kenyas external imbalances reect a country that is living beyond its means, as

seen in the gap between investments and savings. Trends in gross savings and

investment ratios are shown in Figure 1.6. Investment has been in the range of20 percent of GDP while the savings rate has remained below 15 percent of

GDP. The gap is met through savings from abroad. Gross investment rose from

KSh. 590,434 million or 19.8 percent of GDP in 2010 to KSh. 632,519 million or 20.9

percent of GDP in 2011. Most of this expansion has been due to investments in

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

Dec-05 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

US$(Million)

Performance of the external account (2005-2012)

Current account Capital and financial account Overall balance

Figure 1.5: External sector performance

Source: Central Bank of Kenya

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012

19.0 19.2 19.9 19.8

20.9

19.4

13.9

15.9

12.9

11.3

13.214.8

PercentofGDP

Investment Savings

Figure 1.6: Gross investment and savings in Kenya

Source: KNBS Economic survey, 2012




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other machinery and equipment which grew by 25 percent, cultivated assets

(which grew by 22 percent), and gross xed capital formation (which grew by

15 percent). Gross savings increased by 40 percent from KSh. 287,758 in 2010 to

KSh. 400,660 in 2011. However, the rate of savings has stagnated and remains far

below the medium term targets. For all the years, investment has stayed abovesavings, generating a resource gap averaging 6.3 percent between 2007

and 2011.

Macroeconomic instability experienced in 2011 has now been contained.

The average overall ination for 2012 was 9.6 percent as compared to 14.0

percent recorded in 2011. This reects a drop in food ination, a dividend of

the favourable weather conditions with adequate rainfall, thereby raising food

supplies. The exchange rate has stabilised from an average of 88.9 percent in

2011 to 84.6 percent average in 2012. Central Banks stance to continue relaxing

the tight monetary policy initiated in 2011 has seen the CBR decline from a high

of 18 percent in 2011 to 9.5 percent in January 2013. Stability in international oil

prices and prudent scal and monetary policies are expected to yield single

digit ination levels of about 5 percent in the medium term. Improved food

production and favourable weather conditions are crucial for any future overall

price stability since food commodities account for a big share in the consumer

price index.

1.3 FISCAL PERFORMANCE

The governments expenditure and net lending quadrupled in the last tenyears from KSh. 303 billion in 2004/05 to KSh. 1,263 billion in 2012/13 nancialyears. Total revenue expanded from KSh. 290 billion to KSh. 955 billion in the same

period. The decit remained high over the period except for the nancial years

2004/05 and 2007/08 where there was a surplus. Both recurrent expenditure

and development and net lending increased signicantly with development

expenditure doubling in the period 2005-2011 (see Figure 1.7). Most of the

increase under the development budget is a result of the increase in infrastructure

budget, mainly nanced through domestic and external public borrowing. The

government has sustained recurrent expenditure at an average of 20 percent of

GDP in the last decade and it is projected at the same level in the medium term.

1.3.1 Fiscal aggregates

During the period 2009/10 to 2012/13, Kenyas total revenue averaged 24 percent

of GDP while government spending stood at 30 percent of GDP. In 2012/13,

the estimated total revenue collection is KSh. 955 billion while government

expenditure is estimated at KSh. 1,258 billion (Table 1.2). Decit including grants




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amounted to 5.6 percent of GDP in 2011/12. While revenue and expenditure

is projected to remain at the same level (24 percent and 30 percent of GDP

respectively) in the medium term, the country could face various budgetary

pressures which could constrain the existing scal space. Some of the various

sources of budgetary pressure include pressure from the implementation of

the Constitution of Kenya 2010; current devolved system of government which

creates additional administrative structures and new constitutional ofces;

and rising public sector wage bill. Table 1.2 and Figure 1.8 summarise the scal

performance for the period 2009/2010 to 2012/13 scal years.

Recurrent

Development

0

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

10

5

1.0

20

25

Percent

Expenditure (Percent of GDP)

Figure 1.7: Narrowing gap in recurrent and development spending

Source: The National Treasury Data

20

22

24

26

28

30

32

34

1998/99 2001/02 2004/05 2007/08 2010/11

PercentofGDP

Revenue and expenditure trends

Total revenue and grants Expenditure and net lending

Debt

financing

Figure 1.8: Widening gap between revenue and expenditure

Source: QBER various reports, IMF and WDI 2012 scal results




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1.3.2 Revenue performance

Revenue performance in Kenya has remained strong (tax in proportion to GDP)

and is among the highest in low-income Africa.1Kenyas self-reliance in revenue

performance stems strongly from the challenges of low access to development

partner nancial support since 1990s. Combined income tax and value added

tax have been above 12 percent of GDP since 2000/01 while total domestic

revenues nance more than 80 percent of the annual budget. This leaves

Kenya in a good position to use scal policy for both short and long-term growth

objectives and to position the State as a key provider of public services.2

1 We nd the usual positive correlation between GDP per capita and government expenditure in proportionto the economy, denoting that wealthier countries in general have larger public sectors, which holdsfor Africa as well as most regions (although the extent to which the government sector increases withdevelopment depends in large part on the social preference of the population to have the state provide

social services, especially social protection and health care, which is considerably more the case inEurope than it is in Asia).

2 Kenyas net ofcial development assistance (ODA) as percent of gross national income (GNI) is about 6percent compared to more than double that for the other countries in the EAC. Burundi is even more aiddependent with ODA to GNI at 42 percent. All data is from WDI 2009.

Table 1.2: Budget outturn 2009/10 to 2012/13

2009/10 2010/11 2011/12* 2012/13**

Total revenue 586 668 748 955

Expenditure and net lending 725 812 948 1,258

Recurrent expenditure 511 592 647 803Development and net lending 215 219 301 456

Decit (cash basis including grants) (108) (126) (184) (252)

Financing 174 119 172 251

Net foreign nancing 23 28 99 144

Net domestic nancing 151 90 73 107

Of which domestic borrowing 117 90 73 107

Other (including privatisation) 34 - - -

Nominal GDP (KSh. million) 2,458 2,787 3,306 3,867

Total debt (public + private external) (US$ billion) 14 17 17 20

Gross domestic product, current prices (US$ billion) 32 34 41 46

GDP growth rate*** 3 6 4 5

Population growth rate*** 3 3 3 *

GDP per capita (US$)*** 775 795 808 *

Shares of GDP (percent)

Revenue 24 24 23 25

Expenditure 30 29 29 33

Decit (4) (5) (6) (7)

Total Debt (public + private external) 45 49 42 43

Source: QBER various reports, IMF and WDI 2012




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Total revenue signicantly increased between 2004 and 2011, increasing

from KSh. 207,563 million in 2004 to KSh. 669,442 million in 2011. Total revenue

signicantly increased between 2004 and 2011, rising from KSh. 207,563 million

in 2004 to KSh. 669,442 million in 2011 (Figure 1.9). This growth can largely be

attributed to signicant increases in income tax, which increased from KSh. 88,361million in 2004 to KSh. 284,360 million in 2011, equivalent to 7.0 and 9.5 percent

of GDP respectively (Figure 1.9). There were also steady increases in all the other

taxes except import duties, which stagnated following the commencement of

the East African Community treaty in 2000, but gradually increased since 2005.

For all the taxes, there were sharp rises in 2004 after the Kenya Revenue Authority

offered an amnesty which waived interest on all tax arrears. This, in addition to

the principle of self-assessment, led to signicant increases in tax collections.

VAT collections also increased steadily despite a reduction in the standard VAT

rate from 18 percent to 16 percent in 2003/04. Excise tax revenues have also

steadily increased over the ten year period. Taxation of major excisable products

has mainly been shifting between an ad valorem regime (an optimal excise tax

rate as a percentage of the price of the commodity) and a specic regime

(specic value per unit of excisable commodity). Experience has shown that ad

valorem taxes are more buoyant than specic taxes and would therefore lead

to higher tax revenues. In addition, ad valorem rates adjust automatically to

ination, as compared to specic taxes which have to be adjusted periodically

to keep up with ination. Looking at excise tax rates, there has been a shifttowards specic rates, especially for beer and cigarettes. These shifts in taxation

Income tax

VAT

Import duty

Excise duty

0

2

4

6

8

10

12

Percent

1998/99 2001/02 2004/05 2007/08 2010/11

Sources of revenue (percent of GDP)

Figure 1.9: Trends in revenue performance

Source: KRA data




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regime have not resulted in signicant changes in excise tax revenue collections.

Looking at the proportion of particular taxes in total tax revenue, the proportion of

income tax has been stable, accounting for 42.6 percent in 2004, which reduced

to 38.7 in 2005 and 2006, and later increased to 42.5 percent in 2011 (Figure 1.10).

The improved performance of income taxes can largely be attributed to highertax compliance after the tax amnesty and the use of the personal identication

number (PIN) for purposes of tax assessment. The share of Value Added Tax (VAT)

on the other hand declined from 18 percent in 2004 to 15.4 percent in 2011. The

poor performance of VAT can be attributed to lower tax compliance, especially

in the use of the electronic tax registers (ETRs). After introduction of the ETR system,

a compliance rate of 90 percent was targeted (KRA, 2012). A survey done by

KRA in 2009/10 found that whereas installation rates were high at 98 percent,

the utilisation (compliance) rate was in the range of 60 to 65 percent. There are

also many small and medium-sized entities that do not le VAT because they

fall below the VAT threshold. Thus, attempts to impose a turnover tax on smaller

entities will greatly complement VAT revenue collections.

The proportion of excise taxes in total taxes has also gradually declined since

2003/04. This can largely be attributed to a shift from ad valorem to specic

taxation regime in 2003/04, especially for beer and spirits which account for the

largest share of excise tax revenue. This provides evidence of the superiority of

ad valorem rates over specic rates in relation to their tax buoyancy. In order tomaximise excise tax revenue collections, there is need to consider reverting back

to the ad valorem taxation regime. The proportion of VAT on imports and import

duties have also declined gradually which is in line with the regional integration

efforts aimed at reducing tax rates on imports.

Overall, the increasing share of income taxes in total tax revenue and the

declining share of VAT are not in line with the governments deliberate policy of

shifting reliance from direct taxes towards indirect taxes to nance the budget,

which is a way of reducing the burden on income taxation in order to stimulate

savings and investment.

Figure 1.11 shows actual tax collections vis--vis targeted revenue collections.

Statistics indicate that only Pay As You Earn (PAYE) taxes have exceeded the

target between 2006/07 to 2011/12. The corporate, VAT and excise tax collections

have fallen below target, with the gap between actual and targeted revenue

collection widening over time. One can attribute the impressive performance

of PAYE on their administrative ease. In addition, as earlier indicated, incometaxes have largely performed well because of use of the personal identication

number and also the self-assessment tax payment system.




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0

10

20

30

40

50

60

70

80

90

100

0

100

2000

2001

2003

2002

2004

2005

2007

2006

2008

2009

2011

2010

200

300

400

500

600

700

800

KESmillion

Year

Total revenue

0

2000

2001

2003

2002

2004

2005

2007

2006

2008

2009

2011

2010

20

40

60

80

120

100

KESmillion

Year

VAT, local

0

50

2000

2001

2003

2002

2004

2005

2007

2006

2008

2009

2011

2010

100

150

200

250

300

KSh.million

Year

Income tax

2000

2001

2003

2002

2004

2005

2007

2006

2008

2009

2011

2010

KSh.million

Year

VAT, imports

2000

2001

2003

2002

2004

2005

2007

2006

2008

2009

2011

2010

KSh.million

Year

Excise duties

0

10

2000

2001

2003

2002

2004

2005

2007

2006

2008

2009

2011

2010

20

30

40

50

60

KSh.million

Year

Import duties

0

10

20

30

40

50

60

70

80

90

100

Figure 1.10: Performance of various revenue sources

Source: Kenya Revenue Authority




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Figure 1.12 shows the relationship between tax revenue collections by type and

the respective tax bases. For income tax, we use Gross Domestic Product (GDP)

as the tax base, while private nal consumption is a proxy for excise taxes and

VAT. From the graph, we can deduce that income tax revenue increased at a

faster rate than its tax base (GDP). This implies that there has been potential for

increasing income tax revenue mainly through increased compliance, which

has been achieved through the system of self-assessment. On the contrary,

VAT has grown at a slower pace than the tax base (private nal consumption)

except between 2003 and 2005 and also in 2011. This is mainly because of two

reasons. First, not all goods and services consumed attract VAT, given that some

goods and services are exempt or zero rated. Thus improving VAT performance

would require a review of what proportion of private consumption of goods and

services is taxable. Secondly, VAT compliance has been low. From the graph,

we can see that the gap between VAT and its tax base signicantly narrowed

between 2004 and 2005, which can be attributed to increased compliance

resulting from the tax amnesty granted to taxpayers in 2004. Thus, measures to

improve tax compliance would lead to higher VAT collections. A look at theperformance of excise taxes shows that the growth in excise taxes has largely

-4

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KSh.million

KSh.million

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KSh.million

PAYE

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Corporate tax

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VAT

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Excise tax

Figure 1.11: Deviations between actual and targeted revenue collections

Source: Kenya Revenue Authority




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mirrored the growth in private nal consumption even though excise taxes grew

faster than private consumption between 2000 and 2003, which could be due to

the ad valorem taxation that was being applied at that time.

When VAT was introduced in Kenya in 1990, it replaced the sales tax and was

charged on taxable goods or services made or provided in Kenya, and on

taxable goods or services imported into Kenya. Under the current VAT Act Cap

476, there are three different classes of goods and services: designated, zero-

rated and exempt. Designated goods and services are those that are deemed

0

5

10

15

20

25

30

Percent

Nominal growth in VAT and private consumption

VAT growth rate Growth in final consumption

2000

/01

2001

/02

2002

/03

2003

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2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

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2010

/11

Figure 1.13: Relationship between VAT and private consumption

Source: KRA data and CBK

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2002

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2003

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2004

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2005

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2010

/11

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25

Percent

Nominal growth in income tax and GDP

Income tax growth rate GDP growth rate

Figure 1.12: Relationship between tax revenue types and their respective tax bases

Source: KRA data and CBK




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taxable at other than the zero rate. Goods and services that are zero-rated are

deemed taxable but at the rate of 0 percent, while exempt goods and services

are not taxable.

The Value Added Tax is largely regarded as being highly regressive. This impliesthat the tax places a greater tax burden on the poor as compared to the rich,

mainly because low-income individuals spend a higher percentage of their

income on consumption compared to higher-income individuals. Worldwide,

countries have put in place several measures to reduce the huge burden of VAT

on the poor by (i) exempting or zero rating food and social necessities, and (ii)

taxing luxuries at high rates and necessities at lower rates.

While the VAT Act Cap 476 makes considerable provisions to exempt basic

necessities to make the VAT less regressive, the VAT Bill 2012 proposed several

changes, which effectively reduces the number of items that are zero-rated.

Table 1.3 summarises the key changes between VAT Act Cap 476 and VAT Bill

2012 in terms of goods and services that are zero rated and exempt.

Table 1.3: Comparison between VAT Act Cap 476 and VAT Bill 2012

Exempt goods and services underVAT Act Cap 476

Exempt goods and services underVAT Bill 2012

Exempt goods andservices

Goods: Poultry, livestock(unprocessed meat and dairy),

fresh sh & other sea foods, fresh(unprocessed) agricultural foods,petroleum products, currency,charcoal, military weapons,sanitary towels, raw skin and hides,cinematographic lm, cereals andcereal ours.

Goods: Agricultural inputs,petroleum products, laboratory

products, live animals,unprocessed milk, eggs, meat,fruits and nuts, machinery, cerealsexcept corn, wheat, barley and rye,petroleum products.

Services: Exempt supplies includenancial services, insurance, publiceducation and training services,health (including veterinary)services, sanitary services,agricultural services, transport,burial and cremation, rentingand leasing of land and housing,

postal services, and social welfareservices.

Services: Exempt supplies includenancial services, insurance, publiceducation and training services,health (including veterinary)services, sanitary services,agricultural services, transport,burial and cremation, rentingand leasing of land and housing,

postal services, and social welfareservices.

Zero rated goodsand services

Goods: Milk, rice, maize our,agricultural inputs, medicines andmedical equipment, kerosene andgas, insecticides, newspapers and

journals, agricultural machineryand parts, generators, textilemachinery and equipmentincluding parts, ambulances,educational materials, purchase ofpublic transport vehicles.

Goods: Medicines and medicalsupplies.

Services: Exports, services intransit, supply of coffee and tea

for export, supply of domesticelectricity consumption (


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We can deduce that:

a. It is expected that the VAT Bill 2012 if implemented will make the VAT more

regressive given that it introduces a standard rate of taxation on basic

necessities that are largely consumed by the poor.

b. It is also expected that more revenue will be collected as envisaged, given that

the Bill proposes measures that considerably increase the VAT base. Currently,

the base is narrow because of exempting and zero-rating some goods and

services. Also, the VAT threshold currently pegged at KSh. 5 million effectively

reduces the tax base as many small traders are exempted from registering

for VAT due to lower annual turnover. However, from current administrative

measures, these small traders will fall under turnover tax. Figure 1.14 below

shows a comparison between the VAT collections and the VAT potential. The

VAT potential is derived by assuming that all goods and services are taxable

at the standard rate of 16 percent, which implies that there are no goods and

services exempt or zero rated. The VAT potential is then derived as the tax rate

(in this case the standard tax rate of 16 percent) multiplied by the tax base

(which is private nal consumption). Thus, the VAT potential is the maximum

amount of VAT that can be collected given the current level of private nal

consumption. We see a clear disparity between the VAT collections and

the VAT potential, which is expected to narrow through an increase in VAT

collections when the VAT tax base is expanded, mainly through reducing the

number of goods and services that are exempt and zero rated as proposedin the VAT Bill 2012.

0

50

100

150

200

250

300

350

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

KSh

.million

VAT, local Potential VAT

Figure 1.14: Approximation of the VAT potential

Source: KRA data




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Current tax administration measures

The performance of the turnover tax has been below target, with revenue in

2010/11 being KSh. 130 billion against a target of KSh. 147 billion. The Budget Policy

Statement 2012 envisaged a rapid growth in ordinary revenue, which Kenya

Revenue Authority (KRA) hopes to achieve through a number of initiatives. This ismeant to target tax collection in sectors with low tax compliance and scaling up

taxation of the SME sector in order to enhance tax collection. The initiatives being

undertaken by KRA are the use of the Electronic Cargo Tracking System (ECTS)

on all the goods subject to customs control and those domestically excisable,

use of cargo scanners at the port and major airports, and adopting the Block

Management system (BMS) for physical location of taxpayers.

In addition to revamping the turnover tax, a Medium Tax Ofce (MTO) was set up

to cater for taxpayers who have an annual turnover between KSh. 300 million and

KSh. 750 million. The review of the Turnover Tax (ToT) regime and establishment

of the MTO ofce gives KRA an opportunity to penetrate the informal sector and

exploit revenue potential among the medium taxpayers, respectively.

1.3.3 Sectoral spending, shares and trends

Spending has increased by more than 5 percent of GDP since 2006 and the

approved budget exceeded KSh. 1 trillion for the rst time in 2011/12. The budget

has doubled in real terms from KSh. 300 billion in 2002/03, and pushed the size of

the government sector to one third of the economy. Not only has the size of the

pie increased, but the share of the budget that is discretionary, i.e. not already

committed to debt and pension payments, has also increased from 65 percent to

89 percent of the budget. The increased budget permitted a shift in composition

toward physical infrastructure investment. Figure 1.15 shows that spending has

increased signicantly with very marginal increase in revenues compared to

neighbouring countries; this expenditure envelope remains highest.

Composition of expenditures has already undergone a signicant shift toward

development spending. This has doubled since 2005 and reached 9 percent

of GDP in 2011/12 mainly for infrastructure, particularly roads and energy,

which account for 75 percent of the budget in the sector. The education

sector accounts for 30 percent of the total recurrent budget equivalent to 6.4

percent of GDP. This sector receives over 20 percent of the budget on average

and 70 percent is spent on salaries. Smarter spending in the human resources

development sector is required, particularly education, since public investments

in this sector need to look beyond the objective of getting children into school

and providing inputs; there needs to be a focus on the quality of service delivery.




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Infrastructure, energy & ICT; education; governance, justice, law & order; and

public administration, are the top four sectors accounting for over 65 percent of

the total sectoral budget (Figure 1.17).

The health sector received only 8.5 percent of the total budget allocation in

2011/12 which is far below the Abuja declaration3target of 15 percent (Figure

1.18). Total health expenditure has remained at a constant 5 percent of GDP since

2001/02. While low government spending on healthcare remains an important

3 In April 2001, African Union countries meeting in Abuja, Nigeria, pledged to increase government funding

for health to at least 15 percent, and urged donor countries to scale up support.

9.0 7.9

4.6 7.7

3.3

3.63.2

3.32.3

2.31.6

0.8

0

5

10

15

20

25

30

Percent

2007 2008 2009 2010 2011

Economic composition of expendirure, percent of GDP

Use of Goods &

Interest Payments

Compensation of

Grants

Other Expenses

Benefits

Figure 1.16: Economic composition of expenditures, percent of GDP

Source: IMF data

10

12

14

16

18

20

22

24

26

28

15 17 19 21 23 25 27 29 31

Revenue,percentofGD

P

Expenditure, percent of GDP

Expenditure and revenue, percent of GDP (2002/11)

Kenya, 2002-2007Kenya, 2008-2011

South Africa, 2002-2007

South Africa, 2008-2011

Uganda, 2002-2007

Uganda, 2008-2011

Ethiopia, 2002-2007

Ethiopia, 2008-2011

Figure 1.15: Kenyas spending has increased to reach 30 percent of GDP in 2011

Source: IMF data




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concern, the sector also faces other systemic challenges including available

resources not being optimally used due to inequitable resource allocation

(favouring hospitals and curative care), inefciencies in the public health

system that adversely affect the poor, and huge out-of-pocket expenditure.

Health, agriculture and rural development, water and environment, and social

protection account for an average of 24 percent of the total sectoral budget in

2009/10 to 2011/12, equivalent to the total education sector budget in 2010/11.

Table 2.3 provides detailed sector budget allocation and actual expenditure.

0

5

10

15

20

25

30

2009/10 2010/11 2011/12

Percentoftotalsectoralbudget

Energy, Infrastructure and ICT EducationGovernance, Justice, Law and Order Public Administration and International Relations

Figure 1.17: Infrastructure, energy and ICT and education sectors receives the lions share of the budget

Source: MTEF Sector reports 2013/14 to 2015/16

3

8

13

18

23

28

Percent

2009/10 2010/11 2011/12

Budget allocation, share of total sectoral budget

Health Agriculture and Rural Development Environmental and Water Social Protection*

Figure 1.18: Sectors accounting for the least shares of the budget

Source: MTEF Sector reports 2013/14 to 2015/16




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1.3.4 Budget execution

Budget execution has improved in recent years, particularly development,

though it still lags. From a low rate of 55 percent in 2004/05, it has improved to

about 70 percent in 2010/11. Execution of recurrent budget remains broadly on

track with an execution rate of about 95 percent. However, overall execution

rates mask the underlying sectoral differences. A comparison of execution rates

by MTEF sectors shows that execution is highest in the human development

sectors and it is basically education that returns the high execution levels (Figure

1.19). The infrastructure sector records the lowest budget execution rate, though

this has improved remarkably in the last decade.

1.4 DEFICITS AND DEBT DYNAMICS

1.4.1 Budget decit

The evolution of public sector debt can be traced through the budgetdecit and the way it is nanced. Figure 1.20 shows the budget decit andthe sources of nancing, domestic and external. The negative bars show net

repayment and these are the years when the government retired debt, the

period of scal consolidation. The retrenchment turned to stimulus with a budget

decit averaging 4.0 percent between 2008 and 2011, after economic growth

slumped in 2008/09. During the stimulus period government debt doubled andincreased from 39 percent to 43 percent of GDP (See Figure 1.21).

Table 1.3: Sectoral budget allocation and expenditure (KSh. million)

MTEF sectorBudget allocation Actual expenditure

2009/10 2010/11 2011/12 2009/10 2010/11 2011/12

Agriculture and ruraldevelopment

40,651 55,949 55,575 35,382 45,937 48,595

Social protection, culture andrecreation

32,849 32,785 37,104 29,600 30,697 35,402

Health 45,852 63,831 81,035 43,887 48,654 67,187

Public administration andinternational relations

73,998 76,059 98,103 62,571 61,406 87,706

Education 129,102 193,109 213,877 126,060 182,436 203,052

Governance, justice, law andorder

77,806 90,293 105,476 73,086 77,846 93,045

Environmental protection,water and housing

36,304 47,419 46,438 29,066 36,461 39,335

Energy, infrastructure andinformation communicationstechnology

146,296 165,030 217,476 118,356 133,551 183,601

General economic,commercial and labour affairs

14,664 18,417 17,263 13,438 16,050 15,591

National security 58,644 56,686 78,560 - - -

Source: MTEF sector reports 2013/14 to 2015/16, BROP 2012 and BOPA 2011




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1.4.2 Public sector debt

Kenyas public sector debt has doubled between 2007 and 2012, increasing

from KSh. 700 billion in 2007 to KSh. 1.4 trillion at the end of 2012. During the

period 2000/01 to 2007/08 scal policy aimed to bring the debt position down

and the debt-to-GDP ratio fell from 63 percent to 37 percent. This reduction was

achieved as a result of strong economic growth and scal consolidation. Thescal headroom created by the debt retirement permitted the implementation

of the scal stimulus programme between 2009 and 2011. The government

95.7

93.1

89.5

85.584.9 84.9

82.180.6

70

Ed

ucation

Ag

riculture

andRural

Develop

ment

Health

Energy

,

Infrastructure

andICT

Public

Administratio

n

Enviro

nmental

andW

aterSo

cial

Pro

tection

*

Governance,

Justice,

Law

andO

rder

75

80

85

90

95

100

Percent

Average budget execution, 2009/10 to 2011/12

Figure 1.19: Human development sector accounts for the highest execution rate

Source: MTEF sector reports 2013/14 2015/16, BROP 2012 & BOPA 2011

-2

-1

0

1

2

3

4

5

6

7

8

1999 2001 2003 2005 2007 2009 2011 2013

Evolution of public debt (percent of GDP)

Percent

Foreign financing Domestic financing

Net

repayment

New

debt

Figure 1.20: Budget decit averaged 4 percent of GDP during the scal stimulusincreasing debt by 4 percent points

Source: The National Treasury and IMF data




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issued more debt to stimulate growth and avert a recession. Consequently,

debt as a proportion of GDP has now increased by about 4 percentage points

from 39 percent in 2007 to 43 percent at the end of 2012 but it is still below the

policy target of 45 percent. Figure 1.21 shows the total debt stock split between

domestic and external debt (KSh. billion), and total debt as a share of GDP.

The debt dynamics reect three important scal developments worth highlighting.

First, it reects the commitment to nance the ambitious infrastructure

development programme outlined in vision 2030, linking budgets with plans.

Second, it reects the capacity to mobilise resources domestically and externally

which previous constrained budget implementation. Third, it reects the

enhanced counter-cyclical role of the budget through the economic stimulus

programme in 2009/11 to avert a potential economic recession. Kenyas debt

management history has earned it a B+ credit rating from Standard and Poors,

and it has never been in the highly indebted category of countries.4

1.4.3 External debt

The debt is evenly split between domestic and external sources at 20 and 23

percent of GDP respectively. By the end of 2012 Kenyas external debt stood

at KSh. 782 billion5, (23 percent of GDP), while domestic debt stock was KSh.

708 billion (20 percent of GDP) totalling KSh. 1.4 trillion (43 percent of GDP).

Multilateral donors are the main creditors, accounting for 60 percent of Kenyas

debt, bilateral creditors are second at 32 percent and the balance is split

between commercial lenders and export credits (see Table 1.4).

4 Since November 2010, when it was raised from a B. B+ is four steps below investment grade.

5 There is a different between this gure and the one in the table mainly because they come from differentsources.

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40

45

50

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60

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200

400

600

800

1,000

1,200

1,400

1,600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Percento

fGDP

KSh

.billion

Evolution of public debt

External debt Domestic Percent of GDP

Figure 1.21: Public debt has reached 1.4 trillion but it still sustainable below 45 percent of GDP

Source: The National Treasury and IMF data




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1.4.4 Domestic debt

At the beginning of the decade (2002) treasury bills nanced 49 percent of

the budget decit, today this share has declined to 19 percent as government

intensied borrowing through long-term bonds (Figure 1.22). The trend reects

the achievement of a policy target of 25:75 ratio of treasury bills to bonds. Thus,

through the issuance of bonds, the government can now nance development

projects with long maturity periods without heavy reliance on external nancing.

The capacity to mobilise domestic resources has seen a gradual reduction in the

signicance of external nancing in the budget.

Table 1.4: Composition public debt and publicly guaranteed debt KSh. billion

2008 2009 2010 2011 2012

Bilateral 127.79 152.99 159.69 215.04 246.24

Multilateral 268.22 327.63 348.65 436.84 462.96

Commercial banks 18.54 23.84 20.46 25.04 65.35External Total 414.55 504.46 528.79 676.91 774.56

Domestic

Bank 228.48 290.78 401.79 424.33 459.25

Non-bank 202.13 227.73 258.47 339.89 399.58

Domestic Total 430.61 518.51 660.27 764.22 858.83

Grand Total 845.16 1,022.96 1,189.06 1,441.14 1,633.38

Source: MTEF sector reports 2013/14 to 2015/16, BROP 2012 & BOPA 2011

Treasury Bills

Treasury Bonds

0

10

20

30

40

50

60

70

80

90

100

Pe

rcent

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Domestic debt composition

Figure 1.22: Composition of domestic debt

Source: CBK data



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COMPREHENSIVE PUBLIC EXPENDITURE REVIEW

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