Why pending bills could double Kenya's budget deficit under new system

Kenya is staring at a double-digit budget deficit as the government plans to include pending bills and other liabilities in the budgeting process in line with the accrual accounting system.

Such a gap could mean that the government may be forced to borrow more to fill in the deficit despite President William Ruto’s intention to slow down on debts.

National Treasury and Economic Planning Cabinet Secretary John Mbadi noted the intention to have pending bills be part of the budget deficit during the launch of the 2026-2027 budget-making process.

However, an analysis of this inclusion using the current figures shows that the budget deficit will double to almost 10 per cent of the country’s gross domestic product (GDP).

In this financial year, the government plans to borrow almost Sh1 trillion, a majority of it from the domestic market, to finance the deficit.

This is besides the privatisation of Kenya Pipeline Company (KPC) that targets to raise Sh100 billion once the firm gets listed on the Nairobi Securities Exchange (NSE).

Latest figures from the Controller of Budget (CoB) shows that pending bills stood at Sh524.8 billion as at June 30.

This represents a growth from Sh516.3 billion as of June 30, 2024.

State corporations led in growing this figure as pending bills in this category ballooned by Sh24.5 billion to Sh404.3 billion. Pending bills owed by ministries, departments and agencies (MDAs) in the period dropped by Sh15.4 billion to Sh120.5 billion.

Adding this figure to the 2025/2026 budget, the deficit shoots the gap to Sh1.4 trillion.

CS Mbadi, while revealing the inclusion of pending bills to the budget numbers, said the accrual accounting system will include all government liabilities and obligations.

“With accrual accounting, we will capture all government commitments and liabilities, including pending bills which don’t form part of our budget deficit,” said the CS.

“Going forward, it will be in the budget deficit so we will have a much more realistic deficit.”

Accrual accounting, unlike the traditional cash-based system that records when money is received or paid out, documents when revenue is earned and expenses incurred.

Fiscal deficit

In his 2025/2026 budget statement, the CS documented that the resultant fiscal deficit, including grants in the current financial year, was projected at Sh923.2 billion, equivalent to 4.8 per cent of the country’s gross domestic product (GDP).

This is down from the estimated Sh997.5 billion or 5.7 per cent of the GDP in the 2024/2025 period.

“The fiscal deficit for the FY 2025/2026 budget will be financed by net external borrowing of Sh287.7 billion, equivalent to 1.5 per cent of GDP and net domestic borrowing of Sh635.5 billion, which is equivalent to 3.3 per cent of GDP,” said the CS when he presented the budget in Parliament in June.

With the plan to do accrual accounting, when this deficit is combined with the current pending bills, the gap grows to Sh1.4 trillion, equivalent to 7.5 per cent of GDP. “Remember, there was a time when it was 8.3 per cent,” said the CS during the budget preparation launch.

In the event, which was attended by National Treasury Principal Secretary Dr Chris Kiptoo, the figures presented showed the committee in charge of verifying pending bills had received 115,617 claims amounting to Sh664.8 billion.

These amounts, if included in the 2025/2026 budget, will shoot the 7.5 per cent deficit to 8.3 per cent.

Kiptoo said of the claims, some 78,567 bills had been analysed amounting to Sh571.5 billion. There are 37,050, which are undergoing analysis equivalent to Sh93.3 billion.

The committee recommended settling 26,785 bills amounting to Sh226.5 billion.

“This could have changed because there was a retreat by the committee recently. We will be updating the public soon,” he said.

Pending bills menace

The PS added that of the Sh226.5 billion, Sh80.3 billion in the roads sector has been settled through the securitisation model on the road maintenance levy.

“We have indicated in the fiscal framework that we intend to settle this amount this fiscal year.  It is tied to the State-owned Enterprises (SOE) privatisation reforms that we indicated earlier,” said Kiptoo.

Controller of Budget Margaret Nyakang’o documents in the just-released National Government Budget Implementation Review 2024/2025 notes pending bills as one of the critical issues affecting budget implementation.

She says the accumulation of pending bills restrains business cash flows, resulting in liquidity constraints, especially for small and medium-sized enterprises (SMEs), as they have to endure the long wait to settle overdue payments.

“This may force SMEs to either scale back operations, lay off workers, or shut down operations. It also leads to high government business costs due to the accumulation of interest charges and penalties on unpaid invoices, eroding trust between the government and the private sector,” she says in the report.

However, pending bills are not the only obligations and liabilities that the government has.

As it stands, the country’s debt is at Sh12 trillion. When these amounts are presented, it has been noted by the Auditor General Nancy Gathungu that guaranteed debts owed by state enterprises are rarely included.

As of June 2024, the amount of non-guaranteed debt for state enterprises stood at Sh78.2 billion.

“Guaranteed debt is not complete because we have some entities that are not providing financial statements for audit,” she said during the launch of the Annual Debt Management report 2023/2024.

“Non-guaranteed debt is not being adequately reconciled with public debt, yet at the end of the day, we will still pay with our public resources.”