Cablegate: Budget Reform: A Key to Better Governance in Kenya

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 NAIROBI 001756

SIPDIS

SENSITIVE

DEPT FOR AF/E, AF/EPS, EB/IFD/OMA

USAID FOR AFR/DP WADE WARREN, AFR/EA JEFF BORNS AND
JULIA ESCALONA

TREASURY FOR ALEX SEVERENS

LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: ECON EAID EFIN KCOR PGOV KE
SUBJECT: BUDGET REFORM: A KEY TO BETTER GOVERNANCE IN KENYA

Refs: A. Nairobi 001593, B. Nairobi 000514

Sensitive-but-unclassified. Not for release outside USG
channels.

1. (U) This is a joint State-USAID cable.

2. (SBU) Summary: Kenya's system for allocating its scarce
national resources though the national budget process is
broken and has long been a factor in the country's slow
economic decline. Recognizing this, the government,
spearheaded by the Ministry of Finance with help from
donors, is rolling out badly needed reforms of the budget
planning and public expenditure management systems. These
multifaceted efforts center on improving the planning
process to ensure that the country's annual budget actually
reflects its strategic economic priorities, such as "pro-
poor" spending on health and education programs aimed at
reducing poverty. On the spending side of the budget coin
are related initiatives to monitor public expenditures to
ensure that monies allocated for priority programs are
actually utilized for these purposes, and to identify and
eliminate spending bottlenecks in order to accelerate
utilization of budgeted funds.

3. (SBU) While there has been great progress over the past
year, Kenya's budget reforms are still in their infancy and
are constrained by inertia, human capacity limitations, and
resistance to change from a bloated bureaucracy dependent
on the status quo for jobs and influence. But should
transparent and more accountable budget systems become
firmed rooted over the next 2-3 years, the resulting
benefits would be enormous. Better budget planning would
generate efficiency gains across the entire economy, and
better public expenditure management would reduce the scope
for pervasive graft. In short, un-sexy though the topic
may be, successful budget reform holds one of the keys to
improving governance and strengthening democracy in Kenya.
End summary.

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The Budget: At the Nexus of Economic Reform in Kenya
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4. (U) The Government of Kenya's (GOK) Economic Recovery
Strategy (ERS) was published by the reformist National
Rainbow Coalition (NARC) administration in early 2003, just
after it came to power. Ambitious and articulate, it maps
out in broad brushstrokes a plethora of inter-related
economic and governance reforms designed to jumpstart
economic growth and reduce poverty in a country which has
grown steadily poorer over the course of the past ten years
(ref B). One set of intended reforms is the overhaul of
the processes by which the country formulates and
implements its national budget. Such an overhaul,
important in its own right as a purely fiscal measure, is
also a prerequisite for the success of other, more profound
structural reforms and development goals detailed in the
ERS. These include civil service reform, privatization,
the elimination of corruption, and poverty reduction. Dry
though the topic may be, budget reform thus sits at the
nexus of economic development and improved governance in
Kenya.

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Broken System, Squandered Resources, Poor Country
--------------------------------------------- ----

5. (U) It was clear well before the NARC administration
came to power that Kenya's budget processes were broken and
badly in need of radical surgery. During the previous era
of rampant corruption under President Daniel arap Moi, the
budgeting, accounting and performance monitoring processes
in Kenya had been systematically undermined in order to
facilitate resource allocation based on personal enrichment
and political patronage, as opposed to the achievement of
national development objectives. Despite several periods
of budget reform in the 1970s, '80s, and '90s, Kenya's
budget process was (and still is) characterized by a number
of inter-related flaws that continue to contribute
materially to the country's economic decline. First and
foremost, the process has suffered from inadequate-to-
nonexistent institutional linkages between the planning and
budgeting processes, as well as between budgeting and
actual budget implementation.

6. (SBU) Without such linkages, Kenya's budget - both as
planned and as implemented - has perennially failed to
truly reflect the country's development priorities, which
at best are only integrated into the budget process on an
inconsistent, ad hoc basis. Even today, Kenya's planning
and budget processes are undertaken by two separate
bureaucracies - the Ministry of Planning and National
Development, and the Ministry of Finance. (Note: This
division of responsibilities impeded program and policy
implementation during the initial eighteen months of the
NARC government. However, over the past year, modalities
of coordination between the two Ministries have greatly
improved. End note).

7. (U) Second, with the absence of effective linkages
between planning and budgeting came a still-prevalent
dichotomy between recurrent and development spending.
Thus, and in the face of ever-present resource constraints,
Kenya's budget process has tended to heavily favor
recurrent spending - the money needed to keep government
running on a day-to-day basis - at the expense of spending
on multi-year development projects, even though the latter
might better reflect the country's longer-term development
priorities and the needs of its economy. This bias is
exacerbated by a budget cycle which has in the past always
been done on an annual basis, often leading to development
projects being started when resources are available in year
one, but then not completed because funding is diverted to
recurrent needs in the out years. (Note: This analysis is
an oversimplification, since the costs of upkeep for many
development projects, once completed, migrate to the
recurrent budget and become productive investments. But
most observers agree that the development budget is under-
funded in Kenya, and that the recurrent budget is too high.
End note).

8. (U) Fiscal discipline has been another perennial
problem for Kenya. The government has tended to put very
little emphasis on determining a realistic medium-term
macro-economic and fiscal framework - the basis for the
"fiscal envelope" of resources available for the budget.
Resource availability has often been determined on a short-
term annual basis, with revenue estimates typically being
overly optimistic and expenditures under-estimated. The
lack of hard budget constraints on ministries, combined
with the lack of overall prioritization and the bias in
favor of recurrent spending noted above, has typically
generated large, unplanned budget deficits over the years,
including a deficit totaling 4.4% of GDP in FY 2003-04.
This has forced the government to increase its borrowing
(primarily domestic) time and again, further undermining
macro economic stability and economic development.

--------------------------------------------- -
MTEF to the Rescue! But What the Heck is It??
--------------------------------------------- -

9. (U) In light of these interconnected problems and the
country's economic regression during the 1990s, Kenya
signed on in 1999 to a budget reform process known as the
Medium-Term Expenditure Framework, or MTEF, initially with
support from the World Bank, and later from other donors,
as well. However, the MTEF was not implemented until the
current budget cycle, after the NARC administration decided
to make it the centerpiece of its reform of the budget
planning process. Easier to explain than to implement,
the ultimate goal of the MTEF is deceivingly simple: to
better align the country's development priorities with the
government's actual spending patterns, or in the words of
Minister of Finance David Mwiraria, "to make the budgetprocess a more effective
tool for realizing the
Government's key strategic objectives."

10. (U) The MTEF attempts to do so by introducing a
realistic three-year planning horizon for making medium
term forecasts of revenues and expenditures. Within this
three-year macro and fiscal framework, the MTEF then aims
to set more predictable expenditure ceilings for each of
eight sectors (e.g. social services), and these overall
ceilings in turn are converted into hard budget ceilings
for line ministries. Thus, in contrast to the past
practice of each ministry receiving roughly the same
increase in printed estimates on an annual, ad hoc basis,
in theory, the MTEF process should allow GOK planners to re-
allocate resources over time from lower priority areas to
those given greater priority in the ERS, such as health and
education.

--------------------------------
2004/05: A Year of Real Progress
--------------------------------

11. (U) In practice, Kenya has made a great deal of
progress in making the MTEF an effective new format for
allocating public resources. After a review of the MTEF to
date in early 2004, the GOK appointed a new team of senior
technocrats at the Finance Ministry which is spearheading a
number of improvements to the current planning cycle. A
key change begun last year is pushing the entire timetable
for the MTEF process to earlier in the year to better
include cabinet ministries and (in theory) Parliament in
the planning process. During the current cycle for the FY
2005-06 budget (to be presented to Parliamant in June), the
GOK achieved several important milestones. First, in
December, it kicked off the planning process by publishing
its first-ever Budget Outlook Paper. The paper reiterates
the GOK's development strategy articulated in the ERS,
provides realistic medium-term resource estimates, and lays
down annual performance targets derived from the ERS for
line ministries.

12. (U) Used as guide for line ministries in the initial
stages of formulating their own budget plans, the paper was
followed in early April by a second innovation, the GOK's
Budget Strategy Paper (BSP), also a first. Like the
Outlook Paper, the BSP provides a realistic medium-term
"resource envelope" expected to be available for recurrent
and development budgets for fiscal years 2005-2008. It
also includes a strategy on how the GOK will restructure
spending to patterns more in line with ERS development
priorities. In this respect, it goes beyond the Outlook
Paper in providing specific guidance to line ministries on
aligning their spending patterns with stated national
priorities. It calls, for example, for a 15% average
annual increase in "core poverty programs", a shift which
will change the ratio of such programs from the current
4.8% of GDP to 5.7% by 2007/08. Overall, spending on
economic and social sectors is planned to increase from
59.3% of total spending now to 60.9% by 2007/08.

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The Other Side of the Coin: Actually Spending the Money
--------------------------------------------- ----------

13. (U) The BSP is one side of the budgetary coin in that
it helps determine how national resources are allocated.
It does not speak, however, to budget outcomes, i.e. how
the money allocated is actually spent. As such, an
integral and parallel reform within the MTEF process is
Public Expenditure Review (PER). PERs have been carried
out in Kenya in 1997, 2003, 2004, and 2005, and are meant
to reveal to policymakers whether the money allocated to
ministries for specific purposes is actually spent, and
spent for those purposes. As such, PERs also reveal which
units of government are overspending their budgeted
allocations, and which are underspending. In so doing,
PERs constitute a "diagnostic expose of any mismatches"
between "the desired policy ideal as stated in the printed
budget and actual spending outcomes."

14. (U) Kenya's 2003 and 2004 PERs revealed that the
overall budget reform process still has a long way to go in
achieving its goals. While the variance between the
printed budget and overall spending is small on an
aggregate basis, the variances at the ministry level are
often quite large, with government units not directly
involved in service delivery or poverty reduction (e.g. the
Defense and Home Affairs Ministries, State House, and
Parliament) typically overspending their budget allotments
by a wide margin, while those in theory directly involved
in providing public services (e.g public works, water, and
agriculture) underspending their allotments. Moreover,
across ministries, allocated recurrent budgets are
typically fully spent (or overspent), while budgets for
development programs are underspent, suggesting that the
GOK is having institutional problems utilizing available
funds for this purpose. These deviations collectively
point to long-standing structural problems, alluded to in
paras 3-5 above, which the GOK hopes to address as the MTEF
process continues to be pushed down to line ministries.
PERs themselves are forcing line ministries to improve
fiscal discipline and improve public expenditure management
systems.

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Striving to Meet International Standards
----------------------------------------

15. (U) In a complementary attempt to fix the budget
planning and public expenditure systems, the Finance
Ministry is pushing to meet 16 international performance
benchmarks established in a dialogue with donors under the
Public Expenditure Management and Assessment Plan (PEMAAP).
PEMAAP tracks seven benchmarks in budget formulation, four
in budget execution, and four in budget reporting. At the
end of the 2003/04 budget year, only four of the 16
benchmarks had been met. Another two have since been met,
bringing the total to six. Like the PERs - but on a
broader scale - the PEMAAP process is both a report card
and a diagnostic tool for policymakers, allowing them to
focus reform efforts on clearly identified systemic
weaknesses, and to work towards tangible, internationally
recognized benchmarks. While the GOK currently meets less
than half of the PEMAAP benchmarks, it now falls within the
upper range of African countries. Moreover, the direction
is positive, and during Consultative Group meetings in mid-
April (ref A), the GOK committed itself to meeting 13 of
the benchmarks by June 2006, and all 16 by June 2008.

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Budget Reform in Political Perspective
--------------------------------------

16. (SBU) Budget reform is a positive story for Kenya, and
progress is being made. But it remains a slow, grinding
process thanks to general political uncertainty, the need
for better donor coordination, human capacity constraints,
and resistance to change throughout the broader civil
service bureaucracy. Even in the current budget cycle,
despite major strides forward, the planning process has
been fraught with maddening delays and missed deadlines.
The reforms are still being introduced and internalized.
They are not yet firmly rooted.

17. (SBU) Politically, the process is fragile, as well,
as it amounts in essence to an ambitious effort by the
Ministry of Finance, backed by donors, to enforce both
coordination and discipline across all ministries in the
budget planning and expenditure management process. This
flies in the face of the instincts and interests of the
majority of civil servants, most of whom are not merely
content with the dilapidated status quo, but dependent upon
it for their positions and influence. The reform effort is
centered very much on a small cadre of dedicated
technocrats at the Ministry of Finance working under
Permanent Secretary Joseph Kinyua, and the Ministry of
Planning and National Development under Permanent Secretary
David Nalo. One wonders whether, once the implications of
budget rationalization become better understood by the line
ministries, front-line reformers like Kinyua and Nalo will
be pushed out, particularly in light of the general lack of
political will at the leadership level of the NARC
administration to push through painful-but-necessary
reforms. It is clear that without sustained leadership,
commitment, and the requisite expertise, the MTEF process
would quickly grind to halt in Kenya.

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Comment: But What if it Works?
------------------------------

18. (SBU) That said, if the various budget and public
expenditure reforms being rolled out under the MTEF
actually begin to take root over the next 2-3 years, with
buy-in from key line ministries, the gains to Kenya would
be immense. First, the GOK would be better able to direct
its scarce public resources toward achieving its strategic
economic development priorities. Second, in turn, it wouldalso be able to
ensure that those resources, once
allocated, are actually being utilized as planned. In the
process, both the planning and expenditure systems would
become far more transparent and accountable, both in
political and financial terms. This would mark a quantum
leap forward in improving governance, eliminating now-
pervasive graft, and strengthening democracy in Kenya. As
such, and despite the confusing plethora of acronyms and
technical terms, the USG needs to closely monitor, and
strongly support, the unfolding budget reform effort in
Kenya.

BELLAMY

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