By JAMES ANYANZWA

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Kenya has set a three-year road map towards fully shifting its government financial transactions to a buildup basis of accounting, in a new financial reporting plan that promises to reduce the cost of foreign loans.

The idea is to also provide full disclosures on public debt whose legitimacy and usage of the proceeds have become a matter of public concern.

This comes as the National Treasury assembled a steering committee, chaired by the Principal Secretary Chris Kiptoo to oversee the smooth transition of the government’s financial operations from the current cash-based accounting system that has been in use since 2014, and which only recognises transactions involving an exchange of cash.

“We have had a problem with the cash system because we do not see a full picture of all government transactions. Not all fixed assets and liabilities are recorded in government books and things like public debt liabilities and pending bills are not found in government books because of cash accounting,” Jonah Wala, the National Treasury’s director in-charge of Accounting Services said in an interview on Thursday (August 5).

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Under the plan which is set for full implementation in the 2026/2027 fiscal year, the National Treasury will record all borrowings by the State in government books and provide full disclosures on key details including linking the proceeds of the loans to particular projects.

Currently, pending bills, pension liabilities and public debt are not recorded in government books but in separate government registers, a move that has, for instance, made it difficult to relate public debt to particular projects, according to the National Treasury.

Kenya’s cash accounting system which has been in force for the last 10 years exclusively focuses on cash that has been received, meaning that only transactions where cash has been received are recorded in government bools.

This is opposed to the accrual accounting system which paints a more comprehensive picture of the government’s financial health.

Accrual accounting recognises revenues which have already been earned and expenses which have already been incurred, irrespective of the actual cash movement.

For instance, when an individual or a business receives a tax invoice, that revenue is immediately recorded by the taxman in government books under the accrual system of accounting as opposed to the cash accounting which waits until there is an actual exchange of cash.

By disclosing the assets and liabilities of the government in a balance sheet, the National Treasury says the policy shift will help bolster transparency in the management of public debt and pending bills and help the government negotiate for cheaper loans from foreign lenders to support the country’s budgetary operations.

“You know when the balance sheet is strong people like the IMF give loans based on the strength of a country’s balance sheet. If you don’t have these assets in your balance sheet, then the cost of loans that they are giving you will be more expensive because you will have to compensate for that,” says Mr. Wala.

“We believe that putting all our assets in our balance sheet will reduce the cost of the loans that we borrow.”

The project which is supported and supervised by the Bretton Woods institutions (World Bank and the International Monetary Fund) seeks to ascertain the correct state of affairs of the government’s financial position on quarterly and annual basis by identifying and valuing the assets and liabilities of the government.

Under the cash accounting for government operations, the balance sheet cannot be prepared since there are no assets and liabilities.

The total project cost is estimated at Ksh3.1 billion ($24.8 million) (for both national and county governments), with most of the funds going towards valuation of assets and enhancing ICT equipment and servers. The project is financed by the World Bank and the government of Kenya which has allocated Ksh1.2 billion ($9.6 million) in the 2024/2025 fiscal year.

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Within the three-year period (2024/2025- 2026/2027) the National Treasury will focus on the identification and valuation of the government’s fixed assets, total overhaul of the Integrated financial management information system (IFMIS) to a new version compatible with the accrual accounting system and conversion of standard chart of accounts (government expenditure codes) from cash system to accrual system.

Other areas of focus are development of a dual ledger where the budgeting system remains on the cash basis while accounting transactions move to accrual basis to ensure financing commitments remain on cash basis and capacity building where all 6,000 government accountants will be retrained.

Kenya joins Tanzania and Uganda in the implementation of accrual accounting while Rwanda is in the tail end of completing the transition process. Uganda is operating both cash and accrual system of accounting on a 50-50 basis.

The development of standard charts has since been completed pending roll out under the new accounting system (accrual accounting system).

The National Treasury through a gazette notice dated August 30 2024 appointed a technical committee chaired by the Principal Secretary National Treasury Chris Kiptoo to among others provide overall direction and co-ordination of the transition from cash accounting basis to accrual accounting basis and adopt a roadmap for the transition process.

“We have received enough support from the World Bank. The Government of Kenya also has committed budgetary support and so as National Treasury we are ready to go,” said Wala.

In July Auditor- General Nancy Gathungu said the government cannot show projects funded with Sh1.13 trillion of expensive it took in 11-and-a-half years even as an audit revealed huge risks since the credit facilities were taken illegal.

The Auditor- General in a special audit on utilisation of commercial loans in Kenya between July 2010 and December 2021 revealed that Treasury took 13 expensive syndicated loans sovereign bonds used to settle recurrent expenditures in government contrary to the law.

In the same month July President William Ruto appointed an independent Taskforce to carry out a Forensic Audit of the Public Debt, but the High court temporarily suspended the taskforce from carrying out its work following a petition by Nakuru-based surgeon Dr Magare Gikenyi and Mr Eliud Matindi who argued that the President assumed powers outside the constitution.