Uhuru's MoU with IMF fuelling county funding row

By David Ochami

International Monetary Fund (IMF) is at the centre of the tussle between the Treasury and Ministry of Local Government over how national and county governments will share revenue.

Apparently, Treasury, which is insisting only money raised through taxes would be shared with counties, signed a prohibitive agreement with IMF as one of the conditions for a multi-million-dollar loan to Kenya.

Finance Minister Uhuru Kenyatta during a past Budget Day. Details are emerging that the Treasury and IMF signed a Memorandum of Understanding, restricting sharing of funds with county governments. [PHOTO: FILE/STANDARD]

It also turned out the Public Financial Management Bill fronted by the Treasury to direct IMF prescribed Devolution early this year. This is the draft Bill contested by a key Task Force on Devolution in the Ministry of Local Government, which is insisting on its own draft. Local Government PS Karega Mutahi on Monday reportedly gave the Task Force until today to give its views on the draft, failure to which it would be assumed it agrees with the Treasury.

It is this falling out between the ministries headed by two Deputy Prime Ministers – Uhuru Kenyatta (Finance) and Musalia Mudavadi (Local Government) – that forced President Kibaki and Prime Minister Raila Odinga to try to broker an agreement on Monday.

Details are now emerging that on January 17 the Treasury and IMF, which Kenya owes Sh1.4 trillion, signed a Memorandum of Understanding, which put restrictions on sharing of funds with county governments. The MoU also placed the control of all fiscal policies under the Ministry of Finance. It appears IMF’s reluctance for full sharing of funds with counties was motivated by fears of misuse and challenges of accounting within the 47 counties whose capacities for fiscal management are untested.

Documents held by The Standard indicate the MoU was signed between Uhuru and IMF on January 31, as a condition for extending a three-year US$508.7 million loan to Kenya.

The agreement negates recommendations of the Task Force headed by Mutakha Kangu. The team proposed county governments control revenue from the Exchequer and other sources of funding. The Treasury insists only funds raised by the Kenya Revenue Authority would be shared, but not those given by donors or raised by national government, say through shares and grants.

The MoU was preceded by a January 17 Letter of Intent in which Kenyan negotiators agreed to enforce a law to repeal most of Kenya’s Procurement, Value Added Tax, Income Tax regulations, and Fiscal Management Act. These are to be replaced with an integrated Public Financial Management Act.

Anti-devolution

Charles Abugre, a prominent critic of IMF policies in Africa from Ghana, now accuses the financial institution of "wading into the Constitution implementation" and being "blatantly anti-devolution". This follows a condition set for the loan that the proposed law must allow the establishment of a single Treasury Account for all public finances at all levels.

Uhuru and Central Bank Governor Njuguna Ndung’u signed the Letter of Intent, pledging to strengthen the Treasury’s control of public finances at national and county levels.

Uhuru and his team have been accused by Kangu’s Task Force of plotting to "recentralise financial resources" and impose an unconstitutional law that reintroduces immense powers for the Treasury to define and determine how much revenue should be remitted to each of the 47 counties.

Kangu said despite its mandate to spearhead laws on devolution, the IMF mission behind the Treasury’s proposed legislation did not meet the Task Force members when it came to Kenya.

The Task Force has proposed two laws – the Integrated Fiscal Relations Bill and County Governments Financial Management Bill to manage devolution and finances at the two layers of government. But the Treasury wants a single law with the Minister for Finance holding overall control of revenue, procurement, fiscal and related issues at both levels.

In the January 17 MoU, Uhuru and Ndung’u promised IMF they would ensure Public Financial Management Act would be enacted by the end of this year to "facilitate adoption of a Single Treasury Account by June 2012". They also pledged to former IMF Managing Director Hans Strauss Kahn to implement the Integrated Financial Management Information System "across government ministries and departments" to control all budget processes at national and county levels.

But even before this, Uhuru had invited four officials from the Fiscal Affairs Department of the IMF to "provide guidance on the drafting of the legal framework, for public financial management" following the enactment of the new Constitution.

A review of IMF papers exposes the minister’s thinking on devolution, and the rationale for recent storm the Treasury triggered over the making of the budget this year.

The documents shows that Mr Duncan Last, Ms Katharine Christopherson Puh, Mr Michael Schaeffer, Ms Lynne McKenzie and Ms Guy Anderson of the IMF were in Kenya to meet officials at the Treasury, chairpersons of Parliamentary committees, and officials of the Local Government and Finance ministries between January 10 and January 21.

The team, which came up with radical proposals for the Treasury’s draft Public Financial Management Bill, curiously held that the Executive should retain power to veto any changes Parliament makes to the national budget.

The experts note in their report dated March that with new changes in the Constitution limiting the Finance minister’s discretion in budget making, "the Ministry of Finance fears loss of fiscal control" especially with a constitutional provision allowing the Judiciary and Parliament to present their annual budget estimates independent of the Treasury.

They were also concerned by oversight of the Treasury by Commission for Revenue Allocation (CRA) and Controller of Budget (CoB) in national revenues and budget making. They also expressed shock that in future the Minister for Finance will not read the traditional budget speech in Parliament.

Annual estimates

Under Article 221 Parliament can alter the minister’s annual estimates of expenditure and revenue, including allocations of money. But the IMF experts declared, "Changes that Parliament can make to the budget need to be regulated". They suggested that the Executive ought to be accorded powers to "reject changes" made by Parliament after public views have been received on the minister’s estimates.

"The Act should regulate changes that Parliament can make to the national budget," they say. They add that in their proposed law, the Treasury should, solely hold discretionary authority on how counties may borrow. The experts also recommended that the new Act should enable the Minister for Finance to prescribe "the process of determining the funding of counties" and power to determine who can be employed there besides unfettered authority to "collect data for revenue sharing" notwithstanding the constitutional mandates of the CRA, the Senate, and CoB.

The IMF officials also recommend that the proposed law should allow the minister to present the national budget alongside those of county governments, besides proposing to limit CoB and CRA’s roles in this matter.