Division of Revenue Recommendation between National and County Governments for The FY 2022/23

The financial year 2022/23 recommendation on the basis for equitable sharing of revenue between the national and county governments is being prepared against a backdrop of slow economic growth. Gross Domestic Product (GDP) across the world declined in 2020 as a result of the COVID-19 pandemic. World GDP shrank by 3.6 per cent while that of OECD members, Sub-Saharan Africa and Africa Eastern and Southern regions contracted by 4.7, 2.4 and 3.6 per cent respectively. Projections show that despite the Covid-19 pandemic, the global economy and Sub-Saharan Africa are expected to grow at  5.9 and 3.7 per cent respectively in 2021. Given the expected slow recovery of the global and regional economies, Kenya’s economic recovery is likely to slow down.

The expected slow economic recovery is likely to impact negatively on the revenues in the medium term. This affects the quantum of revenues available for sharing between the two levels of government. 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. Given that revenue collection has remained below target in the last 9 years of devolution, the national government has been bearing the shortfall given that the Division of Revenue Act locks in the counties’ allocation. This in effect increases the national government’s fiscal deficit and subsequently the stock of public debt.

Therefore, the Commission recommends 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 government Ksh. 370 billion and Equalisation Fund Ksh. 6.8 billion. The Commission further recommends 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 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.

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.

The Commission further recommends that the Ministry of Petroleum and Mining and Parliament expedite the enactment of the proposed framework for sharing natural resources revenues among beneficiary counties. The National Treasury needs to formulate procedures for receiving royalties into the Exchequer and disbursement of the same to the beneficiary counties.