Treasury has indicated for the first time that the government is running on empty, and that it can't fund counties in a timely manner.
The situation was revealed in a letter Treasury Cabinet Secretary Ukur Yatani wrote to county governments on delayed financing.
"Disbursements to county governments are falling behind by two months," Mr Yatani says in the January 13 letter, blaming the situation on the effects of the Covid-19 pandemic and the containment measures "that have generally slowed down the pace of economic activities".
Usually, devolved governments receive their equitable share on the 15th day of the month, with Sh25 billion to Sh26 billion credited to the collective County Revenue Fund account at the Central Bank of Kenya (CBK) already.
The letter says Sh133 billion, which is about 36 per cent of the Sh369.87 in equitable and conditional allocations from the government to counties in the current financial year, has been disbursed to the devolved units.
This disbursement is from July 1, 2020, when the County Allocation of Revenue Act came into force. Of the global funding to the devolved units, some Sh316.5 billion is in equitable allocation from the government.
Despite Mr Yatani's claims, Council of Governors Chairman Wycliffe Oparanya said counties have not received their October, November, December 2020 and January 2021 disbursements totalling Sh94.7 billion.
"The delays have affected services and the lives of county government workers," Mr Oparanya says in a January 11 letter to Treasury. "This is despite civil servants and public officers at the national level receiving their pay promptly."
The CoG boss added that counties have not received money for several months and not just two as reported by Mr Yatani.
"We have not received allocations for October, November, December and January. The situation in counties is deplorable. We are left to make arrangements with financial institutions so as to pay our staff who are not even working as there are no projects to be undertaken," the Kakamega governor said.
"We need a national debate on this recurring situation."
A status report by the Office of the Controller of Budget shows Sh126.1 billion had been sent to counties by January 11.
Of the money the government says it has given devolved units in this financial year, some Sh120.2 billion is part of the equitable share and Sh13 billion is in conditional grants. This is despite the fact that the disbursements are behind schedule.
The government has found a perfect scapegoat in the global pandemic for its failure to meet the revenue projections contained in the 2020 budget policy statement approved by Parliament.
Mr Yatani's letter comes as county governments threaten to shut operations.
Besides funding counties, Treasury has not paid out the more than Sh39 billion meant for the National Government Constituency Development Fund.
Suppliers and contractors have also not been paid as pending bills continue to pile up.
The problem is serious.
As the minister told counties to bear with the situation, Kikuyu MP Kimani Ichung'wah said the earlier the government admits that it is broke and initiates urgent measures to contain the problem, the better.
"The government should not bury its head in the sand. The problem is serious. The government is dead broke.
"The situation is made worse by the fact that the priorities of the government are upside down," the lawmaker told the Nation yesterday.
Mr Ichung'wah once chaired the National Assembly Budget and Appropriations Committee.
"The situation facing the government requires an urgent intervention. If the government can get money for the Building Bridges Initiative (BBI) to amend the Constitution, it should get money for counties," he added.
The Independent Electoral and Boundaries Commission says at least Sh14 billion is needed to finance the BBI-sponsored referendum expected this year.
Mr Yatani said the government expects revenue to improve with the opening up of the economy and the reversal of the Covid-19 tax relief measures.
He added that disbursements to the devolved units would be prioritised.
In the letter, the CS tells the counties to make use of the Sh34.6 billion - their balances at the CBK accounts.
"Treasury appeals to counties to make full use of these funds in the meantime as more disbursements are made in due course," he says.
Delayed disbursement means county governments cannot provide critical services like health, road repairs, water and bursaries.
According to the Constitution, the interests of the devolved units rank fourth after the national interests, public debt and the requirements of the national government.
Mr Ichung'wah told Treasury to stop blaming revenue constraints on the pandemic.
He said the BAC that he chaired had warned the government in its reports on the budget policy statements for the 2017/18, 2018/19 and 2019/20 financial years that were adopted by Parliament that the government revenue projections are faulty and needed reworking.
"Nobody should pretend that these problems were born in Covid-19 times. We warned the government for three consecutive financial years that the country was facing the threat of revenue distress, but it did not take our advice," he said.
With constraints in raising revenue, the small and medium enterprises that are barely surviving and a non-performing agricultural sector - historically regarded as the country's backbone - the government has no option but to borrow more to finance this year's Sh3 trillion budget.
The borrowing is likely to breach the debt limit of Sh9 trillion set by Parliament in November 2019.
The country's public debt is at Sh8.5 trillion.
Already, the International Monetary Fund (IMF) has warned that Kenya may not meet its debt repayment obligations if it continues to borrow more without growing the economy.
The IMF has also advised the government to retrench its workforce as well as freezing employment before it can get cheap financing from the Bretton Wood institution.
According to the estimates read in the National Assembly last year, the Kenya Revenue Authority (KRA) is projected to collect Sh1.6 trillion in the 2020/21 financial year.
It will be interesting how KRA manages this with Covid-19 challenges given that in 2019/20 year, KRA collected Sh1.6 trillion against a target of Sh1.8 trillion when there was no Covid-19 pandemic.
Recently, the Paris Club of international creditors gave Kenya a Sh32.9 billion loan-repayment break for six months - from January to the end of June.
The money according to the rich western countries - Belgium, Canada, Denmark, France Germany, Italy, Japan, Republic of Korea, Spain and the US - will go towards fighting the Covid-19 pandemic.
But China, Kenya's single largest lender, is yet to spell out any measures to alleviate Nairobi's debt pain.
This is as the country struggles with low tax revenues against spiralling public debt.
KRA has not been able to raise enough revenues this year to meet the budget expenses.
The lower revenues mean budget shortfalls and more borrowing even as debt continues to grow out of control.
As an indication that Kenya's economy will be facing a difficult moment, Moody's Investors Service, a global credit rating firm based in New York, has downgraded the outlook of Kenya's ratings from stable to negative.
Moody's notes that the deterioration is due to the erosion of the revenue base and a debt structure that exposes Kenya's fiscal metrics to exchange rate and interest rate shocks.
The credit rating firm further notes that while Kenya does not face acute financing pressures, the severe tightening of financial conditions will challenge the government's ability to meet larger gross financing needs without increase in borrowing costs that would threaten medium-term fiscal consolidation efforts.