Pandemic sets stage for IMF-led reforms in Kenya’s state owned enterprises

By Friday April 9, the International Monetary Fund will have wired about KES33 billion to Kenya as part of the three-year disbursement of the newly acquired KES255 billion loan.

The Fund is, however, envisaging a number of key reforms that the government must meet as part of the must meet conditions for the post-Covid recovery financing.

While approving the Sh255 billion loan, which has elicited a lot of opposition from a section of Kenyans, IMF said that Covid-19 economic shock has exacerbated the country’s pre-existing fiscal vulnerabilities, pushing Kenya into high risk of debt distress.

The Fund singles out state owned enterprises as the most likely source of fiscal risk for the country.

The profit of public entities outside the budgetary central government declined by a third in FY2019/2020 to KES62.5 billion (0.6 per cent of GDP), as many state owned businesses saw reduced profits while others suffered huge losses, said the Bretton Woods institution in a statement.

With declining income position of these businesses, Kenya will likely get less revenue contribution to support her budget. A further fiscal pressure is likely to occur from public entities debt on-lent or guaranteed by the government, IMF noted.

Read also: Kenya gets Sh255bn IMF loan to fight Covid-19 pandemic

For Kenya’s public entities, Coronavirus economic fallout exposed preexisting underlying financial weaknesses. Take utility giant Kenya Power, for instance. Over the last five years, Kenya Power has been posting declining financial performance as the institution cracked under the weight of increasing costs, tanking demand, and inordinate delays in tariff approvals.

For Kenya Railways, despite an uptick in revenues, the transport company has seen worsening profitability starting financial year 2019/2020 when it started to repay the billions in loans contracted by the national government for construction of the Standard Gauge Railway (SGR), the IMF said.

The national carrier Kenya Airways, which was equally battered like its competitors globally due to biting travel restrictions since the outbreak of Covid-19, has been in the red since 2015. Kenya Airways flew into KES36 billion loss for the year ended December 2020, so far the largest loss in Kenya’s corporate history.

In response, the IMF proposes a phased approach to evaluate the extent of fiscal risks from Kenya’s public entities and begin addressing them.

Read also: US firm raises red flag over late payments by Kenya Power

By end of March, Kenya committed to undertake financial evaluation of the 9 State owned enterprises with largest fiscal risks to the FY2020/21 budget. The evaluation will cover Kenya Airways, Kenya Airports Authority, Kenya Railways Corporation, Kenya Power, Kenya Electricity Generating Company, Kenya Ports Authority and the three largest public universities. The evaluation will inform the extend of the necessary support to these public entities during the current financial year.

Further, by the end of May, the National Treasury is expected to prepare a detailed financial report of the top 15 to 20 state owned enterprises that pose biggest fiscal risks as well as a plan of action on how to address the financial pressures bedeviling the SOE sector, including a framework for deciding on interventions and reforms while taking into account the limited fiscal space and the program’s fiscal targets.

By end of May also, the auditor general is expected to publish an audit of all Covid-related spending in FY2019/2020. An audit of the Kenya Medical Supplies Authority and covering the period March 13 to July 31 2020 was presented to Parliament last September. It unearthed numerous violations of the procurement and the Public Finance Management Acts and inefficiencies in the procurement. Parliament has subsequently initiated investigations of the infringements identified by the audit.

By July, the government is expected to present a draft blueprint that will qualify the necessary actions and legal reforms to enhance oversight, monitoring, and governance in state entities with a view to enhance their resilience amid the pandemic hit. 

Read also: KQ flies into record Sh36bn loss – the highest in Kenya’s corporate history

By start of the third quarter this year, the government will develop an integrated monitoring and reporting system that establishes a performance management monitoring and evaluation framework of state entities while also initiating a review of institutional structures in these enterprises.

Equally in order to step up the transparency of fiscal risk reporting, the government will by end of September, prepare an expanded fiscal risk analysis that quantifies the contingent liabilities from high-risk state owned enterprises and Public Private Partnerships to be included in the annual budget review and outlook paper.

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