CRA Releases Recommendation for Sharing of Revenue Between National and County Governments for FY2022/2023

The Commission on Revenue Allocation on Tuesday, 2^nd November 2021 released the recommendation on the basis for equitable sharing of revenue between national and county governments for the financial year 2022/2023.

The Commission recommended that: based on a revenue projection of Ksh. 2,142 billion for the financial year 2022/23, the national government be allocated Ksh. 1,765.2 billion, county governments Ksh. 370 billion and Equalisation Fund Ksh. 6.8 billion. The county governments’ allocation of Ksh. 370 billion is equivalent to 27.3 per cent of the most recent audited and approved accounts for the financial year 2016/17 amounting to Ksh. 1,357.7 billion.

The Commission further recommended that the projected revenue increase of Ksh.366.4 billion above the financial year 2021/22 estimate of Ksh.1, 775.6 billion if realised, be used to reduce the national government’s fiscal deficit as a matter of national interest.

The shareable revenue for the financial year 2022/23 is projected to increase by Ksh. 366.4 billion from an estimate of Ksh. 1,775.6 billion in the financial year 2021/22 to Ksh. 2,142 billion.

The Commission noted that since revenue collection has remained below target in the last 9 years of devolution, the national government has been bearing the revenue shortfall given that the Division of Revenue Act locks in the counties’ allocation. In effect, financing of the revenue shortfall increases the national government’s fiscal deficit and subsequently the stock of public debt.

This recommendation is underpinned by the following:

1. Economic growth: The Commission is cognizant of the need to stimulate the economy following the slump occasioned by the COVID-19 global pandemic. However, given the limited fiscal space, the Commission recommends that each level of government restructures its expenditures to stimulate the economy.
2. Revenue performance: The expected slow recovery of the economy and the 2022 general election are likely to affect revenue performance negatively in the financial year 2022/23. To contain the fiscal deficits within the recommended target, there is a need for equitable shares to be retained at the financial year 2021/22 levels.
3. Debt Sustainability: Persistent underperformance of revenues has led to increased fiscal deficits occasioning the accumulation of more debt to finance government functions. This call for fiscal consolidation to contain the public debt.
4. The 2022 General Election: The general election will be held in August 2022. The national government must restructure its expenditures to finance the election as a matter of national interest.

Sharing of Revenues from Natural Resources

The Commission recommends that the Ministry of Petroleum and Mining and Parliament expedite the enactment of a proposed framework proposed by a task force established by the State Department for Mining to guide the sharing of revenues from natural resources.  The National Treasury should formulate procedures for receiving royalties into the Exchequer and disbursement of the same to the beneficiary counties.

Article 69(1)) of the Constitution obligates the government to ensure not only sustainable exploitation, utilization, management and conservation of the environment and natural resources, but also ensure equitable sharing of the accruing benefits (Though there are legal provisions on revenue sharing from natural resources as stipulated in the Petroleum Act 2019, Energy Act 2019 and Mining Act 2016, the national government has not operationalized these Acts to ensure that counties and communities where mining activities take place benefit.)

Sharing of Revenues Among County Governments

Section 190 (1) (b) of PFMA 2012, requires the Commission to submit the determination of each county’s equitable share in the county share of the revenue. The approved Third Basis for revenue sharing for the financial year 2021/22 to 2024/25 is summarised in Table 1.

Table 1: Third Revenue Sharing Basis

Source of data: CRA

The Third Basis for revenue sharing provides for a baseline allocation to each county equivalent to 50 per cent of a county’s actual allocation for the financial year 2019/20.

Based on a recommendation of allocating counties Ksh. 370 billion for the financial year 2022/23, Ksh. 158.25 billion is therefore shared based on the 2019/2020 county allocation index and the balance of Ksh. 211.75 billion shared using the approved Third Basis for revenue sharing summarized in Table 1.

The allocations to each county for the financial year 2022/23 are as shown in Table 2.

Table 2: Allocation to each County government for FY 2022/23

Source of data: CRA 2021