REPUBLIC OF KENYA VIHIGA COUNTY COUNTY BUDGET REVIEW AND OUTLOOK PAPER (CBROP) 2016 KENYA Towards a Globally Competitive and Prosperous Nation FOREWORD This County Budget Review and Outlook Paper (CBROP), prepared in accordance with the Public Financial Management Act, 2012, It shows the Budget and actual fiscal performance of the 2015/2016 Financial Year so as to inform the future planning and budgeting. The County Budget Review and Outlook Paper (CBROP) reviews the past and present and set the future outlook of fiscal performance by presenting the fiscal outcome for 2015/16 and how it affected the financial objectives set out in the 2015/2016 County Fiscal Strategy Paper (CFSP). Vihiga County Government remains steadfast in maintaining macroeconomic stability, even in the face of expenditure pressures associated with devolution of functions to the County and a swollen wage bill. The county has continued to allocate more resources in investment of key sectors in the County in order to improve the economy of the county and spur growth. Particularly the County will continue to allocate more funds to infrastructure projects especially roads; water projects; agriculture projects and investment on health projects. These efforts are geared to improving the living standards of the County citizens as well as reduce the poverty levels. The County will implement sound economic management and establish structures geared to increasing the local revenue collection which will be diverted towards capital investment. We will ensure that a stable macroeconomic environment is maintained and that implementation of the set strategies and priorities is done with high level of transparency and accountability in management of public funds in the County. MOSES LUVISI COUNTY EXECUTIVE MEMBER - FINANCE AND ECONOMIC PLANNING TABLE OF CONTENTS TABLE OF CONTENTS.......................................................................................1 ABBREVIATION AND ACRONYMS.....................................................................2 INTRODUCTION ................................................................................................3 OBJECTIVE OF THE CBROP ................................................................................3 REVIEW OF FISCAL PERFORMANCE IN 2014/15................................................4 A. Overview................................................................................................4 B. Fiscal Responsibility..................................................................................4 C. Fiscal Performance......................................................................................5 D. Revenues................................................................................................5 E. Expenditures..............................................................................................11 F. Implication of 2014/15 Fiscal Performance .........................................16 ECONOMIC POLICY AGENDA………………………………….........................................16 A. Recent Development....................................................................................21 B. Economic Risks.............................................................................................22 Going Forward Macroeconomic-Fiscal Policy and Projection...........................34 Risk to the Macroeconomic – Fiscal Outlook....................................................36 CONCLUSION AND WAY FORWARD..................................................................37 ANNEX I: Approved Programme Based Budget 2015/16 .................................40 ANNEX 11: Budget Calendar for the FY 2016/17..............................................44 ABBREVIATIONS AND ACRONYMS CBROP County Budget Review Outlook Paper CECM County Executive Committee Member CFSP County Fiscal Strategy Paper CG County Government CIDP County Integrated Development Plan CPSB County Public Service Board FY Financial Year PFMA Public Financial Management Act SRC Salaries Remuneration Commission SBP Single Business Permit I. INTRODUCTION 1. Public Finance Management Act, 2012 section 118.The Act requires that every County prepares a CBROP by 30th September of that financial year and submit the same to the County Executive Committee Member (CECM). The CECM shall in turn: i. Within fourteen days after submission, consider the CBROP with a view to approving it, with or without amendments. Not later than seven days after the CECM has the approved the paper, the County treasury shall ii. Arrange for the paper to be laid before the County Assembly iii. As soon as practicable after having done so, publish and publicize the Paper. II. OBJECTIVE OF THE CBROP 2. The objective of the County Budget Review and Outlook Paper is to provide; i. A review of the County Fiscal performance in the financial year 2015/16 compared to the appropriation of that year and how this had an effect on the economic performance of the County. ii. An updated economic and financial forecast with sufficient information to show changes from the forecasts in the most recent County Fiscal Strategy paper. iii. Information on any changes in the forecasts compared with the County Fiscal Strategy Paper. iv. Reasons for any deviation from the financial objectives in the CFSP together with the proposals to address the deviation and the time estimated for doing so. II. REVIEW OF FISCAL PERFORMANCE IN 2015/16 A. Overview 3. This section provides an overview of the performance and implementation of the budget for the Financial Year 2015/16 and how this may have affected compliance with the fiscal responsibility with regard to the CFSP. This will be useful in providing a basis for setting out broad fiscal parameters for subsequent budgets as well as a way forward for Vihiga County. B. Fiscal Responsibility 4. In observing fiscal responsibility the PFMA section 15(2) states that; i. Over medium term a minimum of thirty percent of the County government’s budget shall be allocated to the development expenditure. ii. The County expenditure on wages and benefits for its public officers shall not exceed a percentage of the County revenue as prescribed by regulations. iii. Over medium term the County government borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure. iv. Public debt and obligations shall be maintained at a sustainable level as approved by the County assembly. v. Fiscal risks shall be managed prudently. vi. A reasonable degree of predictability with respect to the level of tax rates and tax bases shall be maintained, taking into account any tax reforms that may be made in future. C. Fiscal Performance 5. The fiscal performance for 2015/16 was faced with a number of challenges which included; i. Delays in disbursement of funds as scheduled by the national government continued to be experienced. ii. Under performance of the local revenue falling far below the target in the budget. iii. Delay in enactment by Commission of Revenue Allocation Act 2016 iv. When revising the budget, the county assembly don’t refer to the county fiscal strategy paper i.e. failure to adhere to PFM Act 2012 in the budgeting process v. Hidden budget deficit resulting from previous and present under collection of local revenue and under funding by the national Government. D. Revenues 6. During the period under review the County had two sources funding namely the National Government and County own revenue. The financing from the equitable share amounted to Ksh. 3.87 Billion, DANIDA 7.085 Million, Kenya Roads Boards Fund 49.18 Million, Maternity 49.8 Million and that of own County revenue Ksh. 141.3 Million. NOTE that DANIDA Funding has drastically reduced from Kshs.11.20 Million to Kshs. 7.85 Million TABLE 1A. REVENUE ANALYSIS FY 2014 /2015 ITEM SOURCE 2014/15 2014/15 2014/15 2014/15 Budgeted Actual Deviation % Exchequer issue 3,378,093,964 3,378,093,964 (0) 0 Departmental revenue(others) 377,743,491 114,387590 (263,355,901) 70 TOTALS 3,755,837,455 3,492,481,554 (263,355,901) 70 TABLE 1 B. REVENUE ANALYSIS FY 2015 /2016 2015/16 2015/16 2015/16 2015/16 ITEM SOURCE Budgeted Actual Deviation % Exchequer issue 4,190,825,816 3,871,411,960 (319,413,856) 8 Departmental 277,000,000 141,321,463 (135,678,537) revenue(others) 49 TOTALS 4,467,825,816 4,012,733,423 (455,092,393) 10 7. The under-collection of revenue was due to; i. Inadequate Revenue Administration and reporting resulting into under reporting for instance some department do not avail their returns in time, revenue collected through payroll is not captured. Delay in banking the day’s collection 100% leading to loss of revenue through forgery, team and lading and other ways. ii. Automation of revenue collection has not taken effect hundred per cent in all departments. The automation process has been slow and only covers market collections. It also faced challenges such as internet connectivity, technical challenges and poor supervision. There has been a challenge of incompetence. The revenue collection system does not operate on collection plat form. There have been cases of tempering of the gargets and abuse of the process. iii. Delay in implementing the Vihiga County Revenue Administration Act 2015. iv. Delay in enacting other laws on revenue such as:  Law on property rates.  Law on trade licenses.  Law on mining, sand harvesting and quarrying.  Law on cess  Laws on entertainment and gambling.  Law on other fees and charges for services. v. Under performance by the enforcement team in enforcing the current County Laws. vi. Lack of proper intensive supervision resulting in poor, uncoordinated collection system and revenue management vii. Resistance from the business community caused by lack of awareness and political interference viii. Revenue Cartels e.g. in the Departments of Transport and Infrastructure, Health and Trade where official receipts are not used or sometimes not issued to collect revenue. ix. Inadequate collection of property and entertainment tax from dance halls, cinema, pool tables, betting and gambling. x. Over ambitious and unrealistic targets such as in the Department of Gender, Culture, Youth and Sports that expected to collect revenue from stadiums which were still under construction. xi. Under-collection of revenue from murram sites, sand cess, noise pollution, and public toilets caused by collusion malpractices by staff and contractors from Departments of infrastructure and enforcement unit. xii. Weak internal control systems that result to pilferage of revenues, expenditure at source, use of fake receipts and lack of proper records. xiii. Majority of the collectors are on temporal terms which put revenue collection at risk. xiv. Lack of motivation for staffs in charge of collection. 8. Some of these challenges can be addressed through the implementation of the Vihiga Revenue Administration Act 2015 so as to establish a directorate of revenue collection. Other possible solutions would include; i. Automation of all revenue streams through use of plat forms like Local Authority Integration Finance Management and Health Management Systems ii. Enhance supervision and enforcement by laying down proper revenue Administration structure and a revenue enforcement unit. iii. Ensure disciplinary action is taken against members of staff colluding with traders/ members of the public. iv. Motivate the revenue staff by providing uniform, transport, support them through enforcement in cases of difficulties, pay their allowances promptly and provide the necessary supervision and guidance. v. Reduction in revenue leakages and evasions vi. Linkages of revenues with service provision, local development and public accountability and participation vii. Improved funding the systems improvement, capacity building, and enhanced capacity for supervision and monitoring of revenue collection and management. viii. Expansion of own local revenue sources and ensure stable, sustainable and predictable sources to meet local needs. TABLE 2: LOCAL REVENUE PERFORMANCE IN KSHS. 2015/16 I. QUARTER LY REVENUE REPORT SOURCES QTR 1 QTR 2 QTR 3 QTR4 TOTAL S.B.P. 2,897,496 1,310,130 9,995,228 7,320,917 21,523,771 MARKETS 4,597,555 4,483,735 4,185,379 4,479,773 17,746,442 BUS PARK 9,934,130 9,815,160 9,889,050 9,159,940 38,798,280 RATES 146,657 188,375 699,107 404,875 1,439,014 STALL RENT 381,545 633,200 710,975 681,935 2,407,655 HOUSE /OFFICE RENT 47,200 186,500 42,573 41,500 317,773 PLOT RENT 34,790 25,083 86,433 52,653 198,959 PLAN APPROVAL 274,200 226,550 451,920 527,460 1,480,130 GROUP REGISTRATION /RENEWAL 64,600 42,845 55,600 52,700 215,745 ADVERTISEMENT 3,800 4,300 2,200 6,200 16,500 WALL BRANDING 93,500 139,820 169,100 263,200 665,620 CONVEYANCE 1,500 1,500 HIRE OF MACHINERY 1,112,630 584,930 1,108,290 467,380 3,273,230 CESS 53,502 32,500 47,900 41,800 175,702 OTHER FEES AND CHARGES 34,670 182,190 125,090 167,256 509,206 MOTORBIKE STICKERS 79,000 158,000 225,580 462,580 HIRE OF GROUND/HALL 9,800 11,900 4,500 56,820 83,020 LOCAL RATE 15,070 5,610 82,820 47,610 151,110 PUBLIC HEALTH 147,650 213,450 731,730 581,300 1,674,130 SUB-COUNTY HOSPITAL 463,770 468,670 434,640 708,865 2,075,945 VETERINARY 376,477 557,885 367,530 410,906 1,712,798 REFFERAL HOSPTAL 5,221,150 4,599,120 5,495,065 8,396,350 23,711,685 SURVEY/ LAND 175,000 107,300 5,200 287,500 NOISE POLLUTION 6,600 22,000 7,000 19,800 55,4000 HOUSING 351,120 351,120 ALCOHOL LCENCE 1,826,000 58,000 273,250 3,012,500 5,169,750 WATER 32,700 61,890 47,740 13,500 155,830 CONSERVANCY 266,000 76,000 851,500 503,000 1,696,500 FERTILIZER 1,175,300 1,175,300 OTHER INCOME 5,410,446 7,765,835 13,176,281 OTHER DEPATMENTAL REVENUES 8,317 842 106,118 497,710 612,987 33,987,875 31,882,820 37,309,238 38,141,530 141,321,463 TOTAL Chart Title 39,000,000 38,000,000 37,000,000 36,000,000 35,000,000 34,000,000 33,000,000 32,000,000 31,000,000 30,000,000 29,000,000 28,000,000 QTR 1 QTR 2 QTR 3 QTR4 TABLE II. REVENUE COMPARISON PER QUARTER From table II above shows that more revenue was collected in the third and fourth quarters this because it is during this period when the single business permit fall due and attract penalties same to liquor license Chart Title 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 - TABLE II CAMPARISON PER REVENUE SOURCE 9. As indicated in table 2 above, the highest sources of revenue are, Bus Park, Health, Single Business Permits and Market which contributed Ksh 38,798,280, 23,711,685, 21,523,771and 17,746,442 to the County revenue account respectively. However, measures need to be put in place to ensure all revenue collectors comply with the County Revenue Policies. Also there is need for public awareness to ensure all stakeholders know why and when various fees need to be paid. S.B.P. MARKETS BUS PARK RATES STALL RENT HOUSE /OFFICE RENT PLOT RENT PLAN APPROVAL GROUP REGISTRATION /RENEWAL ADVERTISEMENT WALL BRANDING CONVEYANCE HIRE OF MACHINERY CESS OTHER FEES AND CHARGES MOTORBIKE STICKERS HIRE OF GROUND/HALL LOCAL RATE PUBLIC HEALTH SUB-COUNTY HOSPITAL VETERINARY REFFERAL HOSPTAL SURVEY/ LAND NOISE POLLUTION ALCOHOL LCENCE WATER CONSERVANCY FERTILIZER HOUSING TABLE 3 LOCAL REVENUE PERFORMANCE IN KSHS. COMPARED TO PREVIOUS YEAR TOTAL TOTAL SOURCES 2014/15 2015/16 INCREASE % INCREASE S.B.P. 18,161,680 21,523,771 3,362,091 15.62 MARKETS 17,747,534 17,746,442 (1,092) (0.01) BUS PARK 37,552,782 38,798,280 1,245,498 3.21 RATES 990,751 1,439,014 448,263 31.15 STALL RENT 1,608,675 2,407,655 798,980 33.18 HOUSE /OFFICE RENT 412,200 317,773 (94,427) (29.72) PLOT RENT 237,788 198,959 (38,829) (19.52) PLAN APPROVAL 600,084 1,480,130 880,046 59.46 GROUP REGISTRATION 272,475 /RENEWAL 215,745 (56,730) (26.29) ADVERTISEMENT 118,200 16,500 (101,700) (616.36) WALL BRANDING 348,300 665,620 317,320 47.67 CONVEYANCE 19,500 1,500 (18,000) (1,200.00) HIRE OF MACHINERY 207,840 3,273,230 3,065,390 93.65 CESS 278,300 175,702 (102,598) (58.39) OTHER FEES AND CHARGES 447,700 509,206 61,506 12.08 MOTORBIKE STICKERS 510,350 462,580 (47,770) (10.33) HIRE OF GROUND/HALL 28,500 83,020 54,520 65.67 LOCAL RATE 163,143 151,110 (12,033) (7.96) PUBLIC HEALTH 1,054,790 1,674,130 619,340 36.99 SUB-COUNTY HOSPITAL 202,480 2,075,945 1,873,465 90.25 VETERINARY 389,573 1,712,798 1,323,225 77.26 REFFERAL HOSPTAL 26,082,644 23,711,685 (2,370,959) (10.00) PRESS/COMMUNICATION 13,200 (13,200) SURVEY/ LAND 287,500 287,500 100.00 NOISE POLLUTION 55,400 55,400 100.00 ALCOHOL LCENCE 5,169,750 5,169,750 100.00 WATER 552,935 155,830 (397,105) (254.83) CONSERVANCY 813,300 1,696,500 883,200 52.06 FERTILIZER 1,632,848 1,175,300 (457,548) (38.93) OTHER INCOME 3,796,310 13,176,281 9,379,971 71.19 OTHER DEPATMENTAL 40,000 REVENUES 612,987 572,987 93.47 HOUSING 315,100 351,120 36,020 10.26 GRAND TOTAL 114,598,982 141,321,463 26,722,481 18.91 10. As indicated in the table 3 above there was tremendous improvement in revenue collection in overall and among some revenue sources. This was attributed to the fact that the County Government has put in place proper structures of revenue collection (devolved units) as compared to the previous year. There is need to note the drop in collection in the Health sector which needs to be looked into to establish the reasons why. TABLE 4 TREND OF REVENUE FOR THE PAST THREE YEARS 2013 T0 2016 Year Budget Actual Variance Variance % 2013/14 200,000,000 113,576,509 86,423,491 43 2014/15 377,743,491 114,387,590 263,355,901 70 2015/16 277,000,000 141,321,463 135,678,537 49 Accumulated budget Deficit 485,457,929 Chart Title 160,000,000 140,000,000 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 - 2013/14 2014/15 2015/16 The above table shows that local revenue:  increasing trend in revenue collection  un realistic revenue projection in the budgets  increasing trend of budget deficit leading to an accumulated deficit of Ksh. 485,457,929 EXPENDITURES 11. The total approved expenditure for financial 2015/16 as per was Ksh 4,367,756,767. The expenditure during the year was Ksh. 3,170,748,486. This represents absorption rate of 73%, this low rate of absorption was attributed to delay in disbursement among other factors. TABLE3 APPROVED ESTIMATES AND EXPENDITURES PER DEPARTMENT ANALYSIS AGAINST ACTUAL EXPENDITURE 2015/16 RECURRENT ABSORPTION PROGRAMME ACTUALS BUDGETTED DIFFERENCE % AGRICULTURE, LIVESTOCK, FISHERIES & COOPERATIVES 103,913,186 130,125,768 26,212,582 80 LANDS, HOUSING & PHYSICAL PLANNING 16,794,672 28,311,760 11,517,088 59 TRANSPORT & INFRASTRUCTURE 39,194,292 55,875,581 16,681,289 70 INDUSTRILIAZATION, TRADE & TOURISM 16,164,595 45,700,000 29,535,405 35 HEALTH SERVICES 603,584,614 738,666,435 135,081,821 82 EDUCATION, SCIENCE & TECHNOLOGY 90,682,621 114,133,180 23,450,559 79 COUNTY EXECUTIVE 201,292,791 262,092,996 60,800,205 77 COUNTY ASSEMBLY 595,961,290 669,131,656 73,170,366 89 COUNTY TREASURY 243,208,607 279,562,390 36,353,783 87 PUBLIC SERVICE BOARD 36,734,218 54,316,780 17,582,562 68 PUBLIC SERVICE & ADMINISTRATION 174,676,994 225,189,899 50.512,905 78 GENDER, CULTURE YOUTH & SPORTS GENDER 38,589,632 49,700,456 11,110,824 78 ENVIRONMENT, NATURAL RESOURCE, WATER & FORESTRY 36,374,584 73,370,060 36,995,466 50 TOTALS 2,197,172,096 2,726,176,961 529,004,865 81 Table 5 APPROVED ESTIMATES AND EXPENDITURES PER DEPARTMENT ANALYSIS AGAINST ACTUAL EXPENDITURE 2015/16 DEVELOPMENT ABSORPTION PROGRAMME ACTUALS BUDGET DIVIATION % AGRICULTURE, LIVESTOCK, FISHERIES & COOPERATIVES 11,770,000 30,750,000 18,980,000 38 LANDS, HOUSING & PHYSICAL PLANNING 750,000 44,050,000 43,300,000 2 TRANSPORT & INFRASTRUCTURE 320,742,955 230,079,806 90,663,149 139 INDUSTRILIAZATION, TRADE & TOURISM 28,886,000 81,400,000 52,514,000 35 HEALTH SERVICES 31,648,716 181,206,619 149,557,903 17 EDUCATION, SCIENCE & TECHNOLOGY 77,634,405 204,200,000 126,565,595 38 COUNTY EXECUTIVE 40,157,660 50,000,000 9,842,340 80 COUNTY ASSEMBLY 32,810,389 103,000,000 70,189,611 32 COUNTY TREASURY 404,231,660 598,993,381 194,761,721 67 PUBLIC SERVICE & ADMINISTRATION 0 6,400,000 6,400,000 0 GENDER, CULTURE YOUTH & SPORTS 17,840,730 70,900,000 53,059,270 25 ENVIRONMENT, NATURAL RESOURCE, WATER & FORESTRY 7,103,875 40,600,000 33,496,125 17 TOTALS 973,576,390 1,641,579,806 668,003,416 59 Source: County Treasury 12. During the year the development expenditure was Ksh. 973,576,390 against the target of Ksh. 1,641,579,806, this represents an absorption rate of 59%. This means the County was unable to fully implement the budget and was mainly due to late disbursement of funds from the national government and the underperformance of the own County revenue. 13. Recurrent expenditure incurred amounted to Ksh. 2,197,172,096 against a target of Ksh. 2,726,176,961 representing 81% absorption rate. 14. As indicated in Table above the department of Health Services was allocated the highest recurrent budget of Ksh. 738,666,435. This is because the department has a huge workforce and large amount of allocation of drugs F. Implication of 2015/16 Fiscal Performance of the fiscal responsibilities and financial objectives contained in the CFSP of 2016. 15. The underperformance of own County revenue in the FY 2015/16 has implications in the resource envelop and the base used to project the revenue for the tax items in the FY 2016/17. Therefore, in projecting the revenue for FY 2016/17 new base of the current trend of revenue has been taken into account. 16. The under spending in both Recurrent and development expenditure for the FY 2015/16 has implication on the base used to project expenditures in the FY 2016/17 and the medium term. Budget Ceiling Variation Budget Ceiling Variation Column1 Departments 2015/16 2015/16 2015/16 2016/17 2016/17 2016/17 1 County Executive 350,092,996 439,171,532 89,078,536 293,747,275 308,434,639 14,687,364 2 County Assembly 515,896,442 515,896,442 0 613,773,279 644,461,943 30,688,664 County Health 3 929,652,502 889,652,502 -40,000,000 1,278,707,143 1,342,642,500 Services 63,935,357 Agriculture, 4 Livestock, Fisheries 231,654,464 231,654,464 0 179,550,683 188,528,218 &Co- operatives 8,977,535 Education, Science, 5 405,946,555 315,424,555 -90,522,000 492,119,547 516,725,524 &Technology 24,605,977 Gender, Culture, 6 109,989,650 119,989,650 10,000,000 201,250,456 211,312,979 Youth &Sports 10,062,523 Industrialization, 7 130,437,418 160,437,418 30,000,000 82,855,965 86,998,763 Trade, &Tourism 4,142,798 Environment, 8 Natural, resources, 146,027,672 146,027,672 0 140,743,951 147,781,149 Water and forestry 7,037,198 9 County Treasury 364,542,390 332,064,390 -32,478,000 483,055,091 507,207,846 24,152,755 Transport 10 584,547,288 654,547,288 70,000,000 450,769,091 473,307,546 &Infrastructure 22,538,455 County Public 11 75,516,780 85,516,780 10,000,000 46,792,161 49,131,769 Service Board 2,339,608 Land, Housing 12 159,431,760 159,431,760 0 72,997,028 76,646,879 &Physical Planning 3,649,851 Public Service, Administration and 13 487,089,899 441,011,363 -46,078,536 394,266,247 413,979,559 Special programmmes 19,713,312 Total Proposed 4,490,825,816 4,490,825,816 0 4,730,627,917 4,967,159,314 236,531,397 Expenditure 17. It is noted from the figure above that some of the departments ceilings are extensively varied beyond the PFMA (2012) and it regulations 18. The deference resulting from the above variations are moved to other departments causing changes in departmental programmes and objectives. 19. The above can be draw backs can be eliminated if the two arms of County Government can follow the law strictly and also engage in pre-budget consultations. Citing the law the Public Finance Management (County Governments) Regulations, 2015. …….. 37. (1) Where a county assembly approves any changes in the annual estimates of budget under section 131 of the Act, any increase or reduction in expenditure of a Vote, shall not exceed one (1%) percent of the Vote’s ceilings’. Economic Policy Agenda 20. Creating a conducive business environment for job creation – Address insecurity; Maintain macro-economic stability; Implement key structural reforms to reduce the cost of doing business and encouraging innovation and investment growth 21. Investing in agricultural transformation to ensure food security: Bring down cost of food, cost of living; Enhance agro- processing to foster export growth; Support manufacturing and tourism 22. Investing in infrastructure: This will improve productivity and competitiveness in the domestic and international markets; Develop an elaborate and modern transport and logistic network 1b. Economic Policy Agenda 23. Investing in quality and accessible healthcare services and quality education as well as strengthening the social safety net to reduce the burden on the households 24. Reducing unemployment among our youth and women, by providing access to affordable credit, encouraging entrepreneurship and skills development; and 25. Supporting Devolved system of Government for better service delivery and enhanced economic development 2. Recent Economic Developments. 26. The resilience built over the years on account of sound macroeconomic management has sustained strong economic growth and resulted in macroeconomic stability 27. Economic growth prospects remain strong under strong foundation for economic transformation 28. Global growth is therefore estimated at 3.1 percent in 2015 (lower than the 3.4 percent in 2014) and 3.2 percent in 2016 (a 0.2 percentage point downward revision relative to the January 2016 Update). Recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalize. (as per the Budget statement for 2016/17 from National treasury) BUDGET SUMMARY: POLICY FRAMEWORK FOR FY 2016/17 AND THE MEDIUM TERM FOR NATIONAL TREASURY Underlying Assumptions Global Outlook 29. The 2016/17 Budget has been prepared against a backdrop of slower global growth and increased uncertainty. Global economic recovery continues to be moderate, although the outlook has weakened further since October 2015 due to increased risks. The impact of lower commodity prices on commodity importers is less positive than expected and commodity exporters have to adjust their economies in a more difficult environment. Nonetheless, terms of trade developments have led to a narrowing of global imbalances, even as net creditor and debtor positions continue to expand. 30. Global growth is therefore estimated at 3.1 percent in 2015 (lower than the 3.4 percent in 2014) and 3.2 percent in 2016 (a 0.2 percentage point downward revision relative to the January 2016 Update). Recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalize. 31. Growth Prospects 32. Our economy is estimated to have expanded by 5.6 percent in 2015, up from 5.3 percent growth in 2014. The growth in 2015 was supported by the prevailing macroeconomic stability and increased output in sectors such as agriculture (5.6 percent); construction (13.6 percent); finance and insurance (8.7 percent); transport and storage (7.1 percent); real estate (6.2 percent); manufacturing (3.5 percent) and public administration (5.4 percent). The recovery in the tourism sector supported growth in accommodation and restaurant sector that contracted by only 1.3 percent in 2015 compared with 16.7 percent in 2014. Growth in other sectors, particularly information and communication, mining and quarrying, wholesale and retail, education and health, remained robust but lower than their corresponding levels in 2014. 33. Because of the need to accelerate this growth, the policies supporting the 2016/17 budget aim to entrench fiscal prudence, ensure value for money and delivery of programs that will sustain the current economic growth. Going forward, we project the economy will expand further to 6.0 percent in 2016 from 5.6 percent in 2015 and 6.5 percent in the medium. This growth will be supported by strong output in agriculture with a stable weather outlook and 34. Policies to accelerate and sustain economic growth in 2016 and in the medium term will continue to focus on: a. Improving the business environment. This will entail improving security; maintaining macro-economic stability and reducing the cost of doing business, so as to encourage investment opportunities in the country. b. Continued spending in infrastructure to unlock constraints to growth. The Government will continue with public investments in the Standard Gauge Railway, modernizing seaports and airports, improving road networks and expanding energy and water supplies iii. Sustaining sectorial spending for employment creation. This will entail continued investments in agriculture for food security and support of the manufacturing sector through growth of exports. iv. Sustained investment in social services for the welfare of Kenyans by investing in quality and accessible health care services and relevant education, as well as strengthening the social safety net; v. Enhancing service delivery through devolution by consolidating gains made in devolution in order to provide better service delivery; vi. Continued structural reforms in the public sector, financial sector and business regulation for better service delivery and enhance competitiveness Fiscal Policies for FY 2016/17 and the Medium Term 35. The budget policy framework for FY 2016/17 and the medium term aims at striking a balance between supporting rapid and inclusive economic growth and continued fiscal discipline. The Government will continue to reduce the overall fiscal deficit and put emphasis on efficiency and effectiveness of public spending and improve revenue performance. Specifically, the fiscal policy aims at raising revenue effort above 21.0 percent of GDP over the medium term and containing growth of total expenditure (Table 1) below. F ISCAL YEAR 2015/16 2016/17 2017/18 2018/19 2015/16 2016/17 2017/18 2018/19 Revised Printed Revised Printed Estimates Proj Proj Estimates Proj Proj Estimates Estimates/1 Estimates/2 Estimates Estimates/1 Estimates/2 KSh Million As % o f GDP 1.0 TOTAL 2,034,625 1,842,691 2,262,216 31.0 28.1 27.8 26.9 EXPENDITURE AND 2,046,775 2,269,304 2,462,274 30.6 27.7 NET LENDING 1.1 Ministerial 804,279 850,304 11.2 10.9 Recurrent Expenditure 804,279 850,304 913,214 993,415 12.2 12.2 11.5 11.5 o/w Wages (civil 333,527 360,776 4.9 4.8 Service & TSC) 333,527 360,776 396,854 436,539 5.1 5.1 4.9 4.9 Contributory - - - - - - - - 0.2 0.2 Pensions 17,701 18,763 1.2 Development 718,572 526,637 809,044 593,603 699,140 772,753 8.6 8.4 Expenditure 10.9 8.0 10.9 8.0 O/w Domestically 305,003 305,003 398,430 398,430 440,880 487,175 5.4 5.3 Financed 4.6 4.6 5.4 5.4 Foreign Financed 413,569 221,634 410,614 195,173 258,260 285,577 3.2 3.1 6.3 3.4 5.6 2.6 1.3 Interest Payments & 240,500 240,501 310,957 310,957 347,678 365,752 4.3 4.0 Pensions 3.7 3.7 4.2 4.2 1.4 Net Lending 2,055 2,127 0.0 0.0 2,055 2,127 2,001 1,975 0.0 0.0 0.0 0.0 1.5 Contingencies Fund 5,000 5,000 0.1 0.1 5,000 5,000 5,000 5,000 0.1 0.1 0.1 0.1 1.6 County Allocation 264,219 284,785 3.7 3.5 264,219 284,785 302,271 323,379 4.0 4.0 3.9 3.9 2.0 TOTAL REVENUES 1,295,379 1,500,612 19.7 19.7 20.8 21.0 1,295,379 1,500,612 1,695,408 1,920,330 20.3 20.3 2.1 Ordinary Revenue 1,184,368 1,376,424 19.2 19.4 1,184,368 1,376,424 1,561,398 1,776,912 18.0 18.0 18.6 18.6 2.2 Ministerial A-I-A 111,011 111,011 124,188 124,188 134,010 143,417 1.6 1.6 1.7 1.7 1.7 1.7 3.0 GRANTS 76,643 72,552 0.6 0.7 31,008 32,915 51,739 60,682 1.2 0.5 1.0 0.4 3.1 Grants - AMISOM 6,440 6,440 0.1 0.1 6,440 6,440 6,100 6,100 0.1 0.1 0.1 0.1 3.2 Project Grants 69,703 65,612 0.6 0.6 24,068 25,975 45,139 54,082 1.1 0.4 0.9 0.4 3.3 Debt Swap 500 500 0.0 0.0 500 500 500 500 0.0 0.0 0.0 0.0 4.0 DEFICIT (662,603) (516,305) (689,052) (513,249) (522,157) (481,262) (10.1) (7.9) (9.3) (6.9) (6.4) (5.3) 5.0 FINANCING 662,603 689,052 10.1 6.4 5.3 516,305 513,249 522,157 481,262 7.9 9.3 6.9 5.1 Project Loans 344,710 198,410 345,424 169,620 213,544 231,918 2.6 2.5 5.2 3.0 4.7 2.3 5.2 Commercial 154,332 154,332 153,778 153,778 150,000 125,000 1.8 1.4 Financing 2.4 2.4 2.1 2.1 5.3 Program Support 8,213 8,213 3,855 3,855 0 0 - - 0.1 0.1 0.1 0.1 5.4 Foreign Repayments (38,379) (38,379) (43,623) (43,623) (132,178) (135,883) (0.6) (0.6) (0.6) (0.6) (1.6) (1.5) 5.5 Other Domestic 2,579 Financing 2,579 (11,424) (11,424) (11,482) (11,537) 0.0 0.0 (0.2) (0.2) (0.1) (0.1) 5.8 Domestic 191,149 191,150 241,042 241,042 302,273 271,764 3.7 3.0 Borrowing 2.9 2.9 3.3 3.3 6.0 FINANCING GAP - - - - - - - - - - - - NOMINAL GDP 6,566,445 6,566,446 7,392,247 100.0 100.0 100.0 100.0 100.0 7,392,247 8,149,000 9,149,000 100.0 Notes: /1 With full absorption of committed financing from Development Partners /2 With adjusted committed financing from Development Partners to reflect lower absorption 36. The FY 2016/17 budget targets revenue collection including Appropriation-in-Aid (AiA) of Ksh 1,499.4 billion (20.3 percent of GDP) from Ksh 1,294.3 billion (19.7 percent of GDP) in FY 2015/16 (As shown in Table 1). Ordinary revenues is projected at Ksh 1,375.2 billion (18.6 percent of GDP) in FY 2016/17, up from the estimated Ksh 1,183.3 billion (18.0 percent of GDP) in FY 2015/16. 37. Much progress has been achieved towards broadening the tax base and improving revenue administration. The Government has simplified and modernized the VAT legislation and consolidated all the appeals in the tax legislation into one legislation. Similarly, a modern and simplified Excise Duty and Tax Procedure legislation have been enacted, while a review of the Income Tax Act has commenced. 38. The Kenya Revenue Authority instituted measures to seal revenue leakages in customs administration (PVoc requirements) and border areas for all imports. Other measures include: expansion of withholding VAT agents for suppliers to County Governments; targeting nil and nonfilers; Rental Income Programme and operationalization of the Tax Appeals Tribunal. Further, a reputable consulting firm has been engaged to deep-dive into KRA business processes and systems to propose realistic adjustments intended to reverse the revenue shortfalls currently obtaining. Expenditure Projections 39. The expenditures in FY 2016/17 are guided by the Medium Term Plan II (2013-2017) of Vision 2030 and the strategic priorities of the Government. The Government will continue with rationalization of public expenditures to enhance efficiency and productivity in service delivery. To improve efficiency and effectiveness in public resource utilization and budget execution key recommendations of the Capacity Assessment and Rationalization of the Public Service (CARPS) Programme will be implemented. Other initiatives include: developing a policy framework that entrenches at least 40 percent local content; full adoption of the Treasury Single Account (TSA) to improve the efficiency of the government payment processes; full implementation of the e-procurement to entrench transparency and accountability; enforce performance benchmarks for execution of the development budget; and strengthen accountability and discipline in the use of devolved resources. 40. Overall expenditure and net lending are projected at Ksh 2,262.2 billion (30.6 percent of GDP), up from the estimated Ksh 1,842.7 billion (28.1 percent of GDP) in the FY 2015/16 budget. Development and Net Lending 41. Overall, development expenditure outlays are expected to support ongoing infrastructure projects in roads, Standard Gauge Railway, ports, energy and security, among others. Part of this development budget will be funded by project loans and grants from development partners, while the balance will be financed from domestic resources. 42. In the FY 2016/17, domestically financed expenditure is estimated at Ksh 398.4 billion (5.4 percent of GDP), up from Ksh 305.0 billion (4.6 percent of GDP). On the externally financed expenditure, we have received commitments from donors amounting to Ksh 410.6 billion (5.6 percent of GDP) in FY 2016/17. However, going by historical absorption uptake, the received commitments are not expected to be wholly absorbed during the year and, therefore, we expect an absorption of Ksh 195.2 billion (2.6 percent of GDP) in the budget year. Contingency Fund In line with the constitution and the PFM Act 2012, a contingency provision of Ksh 5.0 billion has been provided for in the FY 2016/17 budget to cater for unforeseen expenditures. Equalization Fund 43. In the FY 2016/17, Equalization Fund has been allocated Ksh 6.0 billion to cater for critical development expenditure in water, roads, health, and energy in marginalized areas to improve services in those areas. This together with the accumulated arears of Ksh 6.4 billion brings the total available resources in Equalization Fund to Ksh 12.4 billion. The National Treasury has proposed utilization of these funds as per the recommendations of Commission for Revenue Allocation. Debt and Deficit Financing Policy 44. The Government will continue borrowing as guided by the medium term debt management strategy (MTDS). The MTDS is a policy document which aims at achieving a desirable debt portfolio and ensuring public debt sustainability. The strategy envisages borrowing from both the domestic and external sources. Domestic borrowing will be not only to raise resources for the Government budget implementation but also to develop the domestic debt market. 45. External borrowing will largely be biased towards concessional loans. While external financing will be largely on concessional terms, the Government will continue to diversify financing sources by continuing to access commercial sources of financing. A well-managed external commercial borrowing program will help alleviate the pressures in the domestic market. Maintaining a certain volume of presence in international markets, as part of a well-designed borrowing program, will enhance the predictability and credibility of the sovereign, leading to better borrowing conditions. This program will be accompanied by improved market investor relations that includes enhanced communication with current and potential investors and improved information disclosure policies. 46. Assuming that we utilize all the committed externally funded development expenditure of Ksh 410.6 billion in FY 2016/17, we project the overall fiscal deficit including grants of Ksh 689.1 billion (equivalent to 9.3 percent of GDP). However, going by historical absorption uptake where spending agencies have not been able to utilize all the committed external financing previously, we expect an absorption of about 50 percent. This would therefore lower the projected fiscal deficit including grants to Ksh 513.2 billion (equivalent to 6.9% of GDP) in the FY 2016/17, down from the estimated Ksh 516.3 billion (7.9 percent of GDP) in the FY 2015/16. The deficit will be financed by net domestic borrowing of Ksh 241.0 billion (3.3 percent of GDP) in both cases and net external financing of Ksh 459.4 billion (6.2 percent of GDP) in the case of higher absorption and Ksh 283.6 billion (3.8 percent of GDP) in the case of lower absorption. A net repayment of 0.2 percent of GDP is assumed in both cases. 47. Going forward, we remain committed to bringing the fiscal deficit down gradually from the 6.9 percent of GDP in FY 2016/17 to 5.3 percent of GDP in FY 2018/19 and below 4.0 percent of GDP in the outer years. 4a. Risks to the Macroeconomic – Fiscal Outlook 50. Public expenditure pressures, especially recurrent expenditures continue to pose a fiscal risk, wage pressures and the inefficiencies in devolved services may limit continued funding for development expenditure. 51. The impact of insecurity on tourism, and depressed rainfall which could affect exports and agricultural production 52. Continued weak growth in advanced economies that will impact negatively on our exports and tourism activities. 53. Further, geopolitical uncertainty on the international oil market will slow down the manufacturing sector. 4b. Measures to Mitigate Against Risks The government has put in place measures to safeguard macroeconomic stability to mitigate the effects of the above risks as follows: 54. The Government has negotiated a Stand-By Arrangement and Stand-By Credit Facility (SBA/SCF) with the IMF that will provide US$ 688.3 million in the event of exogenous shocks. This protects the ongoing public investments ensuring they are not disrupted in the event of shocks 55. Construction of irrigation dams across the country to moderate the effects of drought on agricultural productivity and food prices 56. Continuing with the security modernization programs so as to tackle the insecurity concerns in the country and attract investments and tourists VI. REVENUE OUTLOOK 2015/16 2016/17 2017/18 ITEM SOURCE Budgeted Budget Projection at 10% National equalization Fund 4,190,825,816 4,252,745,786 4,316,536,973 Departmental revenue(others) 277,000,000 220,000,000 176,000,000 57. The 2015/16 budget targeted local revenue receipt of Ksh. 277 Million and receipt from national equalization fund of Ksh 4.19 Billion. The performance will be underpinned by the measures that have been put in place to enhance revenue collection. 58. The 2016/17 budget targeted local revenue receipt of Ksh. 220 Million and receipt from national equalization fund of Ksh 4.25 Billion. The performance will be underpinned by the measures that have been put in place to enhance revenue collection. 59. Projections for 2017/18 is based on progressive growth in revenues in previous years ie at 1.5% for equitable share Kshs. 4,316,536,973 and - 20% for local revenue Kshs 176,000,000 VII. CONCLUSION AND WAY FORWARD 60. The Fiscal outcome of 2015/16 together with updated macroeconomic focus and financial objectives elaborated in the County Fiscal Paper will seek to achieve the objectives outlined in the PFMA, 2012. Fiscal discipline will be important in ensuring proper management of funds and delivery of expected output. Effective and efficient utilization of funds by the various departments will be crucial in ensuring the County delivers her functions. 61. Going forward the set of policies outline in this CBROP reflect the changed circumstances and National Policy pursued by the National Government as the basis of allocation of the Public Resources.