REPUBLIC OF KENYA LAMU COUNTY 2015 COUNTY FISCAL STRATEGY PAPER VISION A PROSPEROUS COUNTY OFFERING HIGH QUALITY OF LIFE FOR ITS PEOPLE

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1 REPUBLIC OF KENYA LAMU COUNTY 2015 COUNTY FISCAL STRATEGY PAPER VISION A PROSPEROUS COUNTY OFFERING HIGH QUALITY OF LIFE FOR ITS PEOPLE 1 P a g e

2 County Fiscal Strategy Paper (CFSP) 2015 To obtain a copy of this document, please contact The County Treasury Lamu County Headquarters P.O. Box Lamu Tel: This document is also available on the internet at: 2 P a g e

3 Table of Contents Legal basis for the publication of County Fiscal Strategy Paper... 5 Foreword:... 6 Acknowledgment... 7 CHAPTER ONE: THE OVERVIEW Introduction County Treasury Rationale for CFSP Role of other ministries/departments Fiscal Responsibility Management Outline of the CFSP Summary CHAPTER TWO: ECONOMIC ENVIRONMENT AND OUTLOOK Global Environment Growth and prospects of global economy Likely impact on county economic performance County economic performance and prospects CHAPTER THREE: FISCAL AND BUDGET FRAMEWORK Overview Promoting Prudent Fiscal Policy County Government Fiscal Projections, 2015/ / Observing Fiscal Responsibility Principles Fiscal Structural Reforms RESOURCE ALLOCATION FRAMEWORK Resources Available P a g e

4 4.1.1 Equitable Shares Revenue Allocation from the national government for FY 2015/ Additional Resources Revenue projections Total Unconditional Revenue Available Expenditure Forecasts Recurrent expenditures Development expenditures Fiscal Discipline Key Focus areas Ministerial Priorities and Budget Estimates Introduction Table 1: SUMMARY OF HALF YEAR RECURRENT EXPENDITURE 2014/ Table 2: SUMMARY OF HALF YEAR DEVELOPMENT EXPENDITURE 2014/ Table 3:2014/2014 HALF YEAR PERFORMANCE Table 4: SECTOR CEILINGS P a g e

5 Legal basis for the publication of County Fiscal Strategy Paper The County Fiscal Strategy Paper is published in accordance with section 117 of the Public Finance and Management Act, The law states that (1)The County Treasury shall prepare and submit to the County Executive Committee the County Fiscal Strategy Paper for approval and the County Treasury shall submit the approved Fiscal Strategy Paper to the county assembly, by the 28th February of each year. (2) The County Treasury shall align its County Fiscal Strategy Paper with the national objectives in the Budget Policy Statement. (3) In preparing the County Fiscal Strategy Paper, the County Treasury shall specify the broad strategic priorities and policy goals that will guide the county government in preparing its budget for the coming financial year and over the medium term. (4) The County Treasury shall include in its County Fiscal Strategy Paper the financial outlook with respect to county government revenues, expenditures and borrowing for the coming financial year and over the medium term. (5) In preparing the County Fiscal Strategy Paper, the County Treasury shall seek and take into account the views of (a) The Commission on Revenue Allocation; (b) The public; (c) Any interested persons or groups; and (d) Any other forum that is established by legislation. (6) Not later than fourteen days after submitting the County Fiscal Strategy Paper to the county assembly, the county assembly shall consider and may adopt it with or without amendments. (7) The County Treasury shall consider any recommendations made by the county assembly when finalising the budget proposal for the financial year concerned. (8) The County Treasury shall publish and publicise the County Fiscal Strategy Paper within seven days after it has been submitted to the county assembly. 5 P a g e

6 Foreword: In the 2015 County Fiscal Strategy Paper (CFPS), we set our policy priorities for implementation over a three year period. The policy mix comprised of a transformative five pillar strategy aimed at transforming our county as follows: i. Creating conducive business environment in order to encourage innovation, investment, growth and expansion of economic and employment opportunities ii. Investing in agriculture and food security in order to expand food supply and reduce food prices. iii. Investment in key infrastructure areas, including roads, energy and water to reduce cost of doing business and improve competitiveness iv. Investing in quality and accessible healthcare services and education as well as social safety net to reduce the burden on the households and complement and sustain our long term growth and development through enhanced productivity. v. Further entrenching the further entrenching devolution for better service delivery and enhanced rural economic development. We have made progress in most sectors so far but our economy is being held back by emerging challenges particularly insecurity and its impact on our budget implementation. We shall continue to cooperate with the national government to deal with the security threat. Beside insecurity, there are other challenges that continue to hold our economy back from achieving its full potential. We shall build on the achievements made so far in most sectors of our economy and through the policies set out in this CFSP; we will scale up our efforts in order to address the existing as well as emerging challenges. In this 2015 CFSP, therefore, we review the progress we have made in the five pillar thematic economic transformative strategies spelt out in the 2014 CFSP. In addition, we re-emphasize the economic transformative policy adopted in 2014 as a basis to decisively deal with the concerns on: the high cost of living, joblessness, protecting the poor and vulnerable and minimizing unnecessary public expenditures across the County Government. Through this policy paper we shall lay a firm foundation for accelerated growth and shared prosperity in which we will enjoy peace and access to gainful social and economic opportunities. As a result, we shall sustain and accelerate a strong broad-based economic growth in order to catapult our economy development. AHMED ALBEITY EXECUTIVE MEMBER FOR FINANCE, STRATEGY AND ECONOMIC PLANNING 6 P a g e

7 Acknowledgment This is the Second County Fiscal Strategy Paper (CFSP) to be prepared for tabling in the County Assembly under the Public Finance Management Act (PFMA) It outlines the broad strategic issues and fiscal framework together with summary of government revenues and spending, as a basis for 2015/16 budget and in the medium term. It is expected that this document will create and improve the understanding of the public finances. It is also expected it will inform and guide the public debate on the county development matters. The preparation of the 2015 CFSP has been collaborative. The information and data used to produce the report was obtained from the ministries and other government entities. We are very grateful for the support received by the Treasury in producing this Paper. We are particularly grateful for the views received from stakeholders during the public participation forum held on all wards in the county during the month of January We would like to register sincere gratitude to the Governor and the Deputy Governor for the direction and guidance they gave us in the process of putting together this strategy. Special thanks go to the Executive Committee Members, Chief Officers, Directors, sub county administrators, ward administrators and other members of staff who participated. Special recognitions go to Ahmed Albeity CECM Finance, Strategy and Economic Planning for overall guidance of the entire CFSP preparation process. A core team chaired by Treasury spent a significant amount of time putting this strategy together. We wish to express special thanks to the following members of the task force who worked tirelessly to prepare this document under my chairmanship and guidance: Andrew Waweru, Mariam Bunu, Sebastian Owanga and Nana Abdulrahman. Since it would not be possible to list everybody individually in this page, I would like to take this opportunity to thank the entire staff of the Treasury for their dedication, sacrifice and commitment to public service ATHMAN AHMED ATHMAN CHIEF OFFICER FINANCE, STRATEGY AND ECONOMIC PLANNING 7 P a g e

8 CHAPTER ONE: THE OVERVIEW 1.1. Introduction County Treasury The Lamu County Treasury is established in accordance with Section 103 of the Public Finance Management (PFM) Act, It is responsible for managing the public finances and economic affairs of the County. Its specific functions and powers include: i. Develop and implement financial and economic policies; Ii. Prepare and coordinate the implementation of annual budget, including estimates of revenue and expenditures; Iii. Mobilize resources to finance county functions; Iv. Manage the public debt; V. Prepare annual appropriation accounts; Vi. Custody of county assets; Vii. Ensure accounts are managed and controlled in accordance with prescribed standards; and, Viii. Report to the county assembly on the execution of the county budget. In order to achieve these responsibilities the executive member for finance is empowered by legislation to issue regulations governing county financial management, including the budget making process. One of the important aspects of budget preparation is the requirement by Section 117 of the PFM Act that before 28 th February of each financial year, each County Treasury shall submit a County Fiscal Strategy Paper (CFSP) to the County Assembly. The Paper is also expected to be aligned to the national policies and objectives outlined in the Budget Policy Statement. 8 P a g e

9 1.1.2 Rationale for CFSP The CFSP outlines the macroeconomic performance of the county which informs and guides the formulation of budget, tax and revenue policies. The main result of the CFSP process is an estimate of resources that will be available to finance county recurrent and development expenditures. In other words, the CFSP will establish the ceilings for the county budget, including those of departments. The ceilings shall be estimated for a three year budget cycle and once approved shall be binding for the next two years. The information on the county s economic position which informs the process includes the current and a two year forecasts of economic performance of the county in general and at the sector level; the cost of living; and the rate of investments. The assumptions underpinning the forecasts should be discussed in sufficient detail. The county budget, including three year forecasts, shall include: i. Revenues Classified By Main Categories; Ii. Expenditures by Economic and Functional Classifications; Iii. Capital Expenditures; Iv. Deficit/Surplus Position; And, V. Level of Public Debt and Guaranteed Debt. Analysis and explanations of any policy changes should be provided and may include: revenue policy and any change in taxes which may have an impact on revenues; deficit and debt policy; and, expenditure policy. The expenditure policy will include expenditure priorities, consolidated budgets and budget ceilings. Whether the fiscal strategy adheres to the fiscal responsibility principles will be explained. A risk analysis of issues which may have material effect on the fiscal and economic forecasts will be provided. Finally, the Paper will outline the county s spending plans for the next financial year and estimates for the following three years and actual estimates for the current year. The plans will include details of expenditure priorities; detailed budget expenditures by budget line; and, priority investments by spending authority Role of other ministries/departments The role of county departments during the process has been to identify and develop priorities and programmes and estimate of expenditures and revenues. The departments will actually take the 9 P a g e

10 lead in implementation of these activities since they have the information and will take responsibility for the outcomes Role of other stakeholders In compliance with the constitutional requirements on public participation stakeholders were consulted before this document was finalized. The PFM Act (s. 107(5)) requires that the following stakeholders must be consulted and that their views should be taken into account: Commission on Revenue Allocation Among the constitutional functions of CRA is to provide advice by way of recommendations on the financing of activities of county governments and financial management by the counties. Some of the matters.cra is expected to consider and provide advice on revenue enhancing measures and sources and adherence to fiscal responsibility principles. It is in these respects that CRA is an important stakeholder in the budget process in the counties. The public During the month of January 2015, county treasury organized public hearings in nine wards.due to security reasons, the team was unable to visit Basuba ward. The turnout was impressive and participants gave valuables contribution which was used to enrich the document Fiscal Responsibility Management These principles apply to both levels of government, but in practice the application of the principles will differ in some cases. The review of the principles here places emphasis on how they apply to the county government. i. Total expenditure should not exceed total revenue: the application of this principle will differ between national and county governments. At the national level recurrent expenditure can take up even all the total revenue. This is why development is usually funded through local borrowing or external loans or grants. This is not possible for the counties because access to local borrowing and external resources is constraint by law. ii. In the medium term 30% of the budget shall be allocated to development expenditure: in light of the argument above this principle means that 70% of the budget will be allocated to recurrent expenditure. iii. Wages shall not exceed a percentage of total revenues prescribed by regulations: as discussed above neither the national nor county regulations have been passed, however the draft 10 P a g e

11 national regulations proposes a ratio of 35 percent. This translates to about 50% of recurrent expenditure meaning that the remaining resources will be allocated to allowances and O&M. This percentage will suffice for this financial year, but actual target will be agreed through public participation in the process of discussing draft county PFM regulations to be developed by the county executive for finance. iv. In the medium term borrowing shall be undertaken only for the purpose of financing development expenditure: as discussed this in the short term is not possible for the county as modalities for borrowing are not yet in place. This includes legislation and regulations governing borrowing by the county and a clear policy on the terms and conditions for guarantees by the national government. v. Short term borrowing shall be for purpose of cash flow management and shall not exceed 5% of the most recent audited revenue: any such borrowing will mostly be in the form of bank overdrafts, but regulations should be enacted to provide for the terms and conditions under which the county departments can overdraw their accounts in the banks. Arrangements similar to those available to the national government should be considered and provided for by legislation. vi. Debt shall be maintained at a sustainable level approved by the assembly: the county does not intend to finance any of its activities through debt in the short term. vii. Fiscal risks to be maintained prudently: the budget projections do not provide for deficits hence the risks are minimized viii. Tax rates and tax bases shall be predictable: taxation has been a thorny issue and is being addressed comprehensively through extensive stakeholder consultations. It is expected that the next finance bill will provide for tax rates which meet the best practices in tax policy and predictable tax bases Conclusion The main message of this section is that CFSP has a legal founded and requires the contribution not only of the Treasury, which initiates the process, but also those of other stakeholders particularly the public. The role of county ministries in the process is to identify and allocate resources to priorities. As ministries develop spending plans it is important that they adhere to 11 P a g e

12 the required fiscal responsibility principles. Thus the plans must be within ceilings set by the Treasury Outline of the CFSP Economic Environment and Outlook Section 2 outlines the economic environment in which the 2015/16 county MTEF budget is prepared. An overview of global and national economic outlook and their implication on the county economy is also provided. This is followed by a review of the economic performance and prospects of the county. Fiscal and Budget Framework Section 3 outlines the fiscal performance of the county, including the sources of revenue and projections into the medium term. It is evident that the county has a narrow tax base and thus the county will depend on national revenue allocations into the foreseeable future. This section provides for fiscal reforms which are administrative and legal in nature. Administrative reforms are geared to improve tax administration while legal reforms are to provide the powers to the county to raise revenues assigned by the constitution. In the fiscal year 2015/16 and the medium term the county will run a balanced budget. This implies that there will be low or no fiscal risks and the county budget thus the county is likely to meet all the fiscal responsibility principles. Medium Term Expenditure Framework The resource envelope for the county and spending projections for 2015/16 are provided in section 4. Sector priorities are given in detail to illustrate the importance of taking into account budget constraints in priority setting. Over 35 percent of the budget is allocated to development expenditure and the sectors will the largest allocations are health, Lands and education and executive. Conclusions Section 5 of CFSP concludes Summary The CFSP has been prepared to provide information and to explain to the public county priorities for 2015/16 and the medium-term and how the priorities are to be funded. The paper provides details of major public investments the county proposes to undertake to realize the objectives of 12 P a g e

13 CIDP and Kenya Vision These investments will be funded through equitable share from the national Government. 2. CHAPTER TWO: ECONOMIC ENVIRONMENT AND OUTLOOK 2.1. Global Environment Growth and prospects of global economy The global economy has an impact on the county economy and therefore has to be taken into account in formulating the county s economic policies. With world growth in the first half of 2014 slower than expected, we now project uneven and sluggish global recovery. World economic output is expected to gradually strengthen from 3.3 percent growth in 2014 to 3.8 percent in 2015 driven mainly by growth in advanced economies. Although the euro area has exited recession, growth remains anaemic, hampered by high unemployment, large debt stocks, and tight private sector borrowing conditions. Despite deceleration in 2014, growth in emerging markets and developing economies is projected to increase modestly into 2015, supported by stronger domestic demand and slow recovery in global demand. With increased strife in some countries in the region, the projected pickup in growth in 2014 of 2.7 percent in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region is projected to increase to 3.9 percent in 2015, on account of security improvement, allowing for a recovery in oil production, particularly in Libya. Economic activity in the oil importers is projected to improved only gradually as they continue to deal with difficult socio-political Transitions, subdued confidence, and setbacks from regional conflicts. In Sub-Saharan Africa, growth is expected to remain strong, at about 5 percent in 2014 and 5 ¾ percent in 2015, driven by sustained infrastructure investment, buoyant services sectors, and strong agricultural production, even as oil-related activities provide less support. In a few countries, economic activities are facing headwinds from, recent Ebola outbreak (Guinea, Liberia and Sierra Leon), inappropriate domestic policies (South Africa), and more recently, macroeconomic imbalances (Ghana and Zambia). 13 P a g e

14 These projections are predicated on the assumption that key drivers supporting the recovery in advanced economies including moderating fiscal consolidation (Japan being one exception) and highly accommodative monetary policy remain in place. Projections also assume a decline in geopolitical tensions, supporting some recovery in stressed economies. Growth prospects across both advanced economies and emerging markets exhibit sizable heterogeneity Likely impact on county economic performance The performance of the economies of Kenya s trading partners affects the county economy directly through demand for goods and services produced in the county and indirectly through increased investments in the national economy. The growth of major trading partners may also directly positively affect the county economy if that affords them to invest directly in the county. As the county promotes tourism the same trading partners will be the major source of tourists. Therefore as they prosper there will be increased demand for exports originating from the county and more tourists will visit the county. The contribution of the regional economies on the economic performance of Lamu County is likely to be minimal. This is largely because most of Kenya s exports to the two regional blocs are manufactured goods which originate mainly from Nairobi and possibly a couple of other counties. Promotion of industrial enterprises is the only way for the county to benefit from Kenya s trade relations with EAC and COMESA. 2.2 National Situation I. Growth, challenges and prospects for national economy The economy grew by 5.7 percent in 2013, up from 4.5 percent growth in The increase in growth in 2013 was supported by improved activities in agriculture, forestry and fishing (5.1 percent), manufacturing (5.9 percent), wholesale and retail trade (9.2 percent), financial and insurance activities (9.3 percent) and information and communication (13.5 percent). In the first three quarters of 2014 the economy expanded by 5.2 percent on average compared with 6.6 percent in the same period in On account of performance during the first three quarters and the projected growth of 5.3 percent in 2014, the fourth quarter growth of 2014 is estimated to be at 5.5 percent. The economy is estimated to have expanded by 5.5 percent in the third quarter of 2014 compared to a revised estimate of 6.2 percent in the same period of The growth was mainly supported by robust growths in; construction (11.0 percent), finance and 14 P a g e

15 insurance (9.9 percent), wholesale and retail trade (7.2 percent); information and communication (6.6 per cent); and agriculture and forestry (6.2 per cent). All the sectors of the economy recorded positive growths except accommodation and food services (hotels and restaurants) which has consistently been on the decline since last year.. ii. Likely impact on economic performance of the county Growth of the national economy is inextricably linked to those of the counties. An expanding national economy will lead to higher revenues and ultimately higher allocations to the country governments to finance development and provision of social services. Higher growth also raises household incomes thus generally raising demand for goods and services. More importantly good macroeconomic policies are vital for improving the livelihood of all Kenyans, especially the poor. Low inflation and interest rates are key to higher overall economic growth and improved social welfare, while stable exchange rates will promote exports. It is therefore in the interest of counties that macroeconomic stability at the national level is maintained. The declining performance in tourism has affected the county resulting with low tourism arrivals with average bed occupancy below 50% and even closure of some hotels. This has resulted to increased rate of unemployment and decline county revenue performance. iii. National objectives and economic policies The specific policies that the national government plans to implement to promote a vibrant economy include ensuring stable inflation, interest rates and exchange rates. Inflation is targeted to decline from the current projected average rate of 6 percent to 5 percent and to stabilize at that rate in the medium term. On the fiscal side the policy is to ensure sustainability of public debt through sustained fiscal consolidation. At the sector level, agriculture reforms, irrigation and value addition in agriculture are seen as the drivers of growth. Investments in infrastructure which have contributed to economic progress in the last few years are to be continued. The major areas in this process are roads, energy, ports and the construction of the standard gauge railway. Other initiatives are reforms to improve investment climate, including security; and, increased investments in education, health and social protection. The national government plans to enhance the growth of exports by expanding regional markets and through establishment of special economic zones and commodity exchanges. 15 P a g e

16 The national government identifies several risks which could negate the impact of the reforms and policy initiatives on growth. This include lower than expected growth in developed economies that may have a negative impact on earnings from exports and tourism; poor geopolitical environment which have a negative impact of the world oil market and Kenya s manufacturing sector; high recurrent expenditures especially linked to wages and interest rates. The national government also views devolution as a risk and particularly with respect to the management of public finances County economic performance and prospects Overview of county economy The economy of the county is dominated by fisheries agriculture, livestock and tourism and most households earn their livelihood from these sectors. The services sector such as trade small. The coming up of LAPSSET, Coal and Fertilizer plants will have a major economic impact in the county. This will create job opportunities for the youths in the county hence increased revenue. Review of the global and national economic performance indicates good prospects for growth which bodes well for the county as demand for its products is likely to rise. However, the county can only benefit from these prospects if its products are competitive. Other challenges that should be addressed are insecurity which has led to decline in county economy because of the imposed curfew. The most serious challenge facing development planning in the county is lack macroeconomic data for analyzing the performance of the county. This means specific indicators such as economic performance of the county and key prices are not available. Unless these are developed effective budgeting will not be possible. There is need for the county to work closely with the national government and other institutions to develop a macroeconomic framework for the county which will help to generate all the required data for planning purposes. This will be accompanied by building capacity for planning and economic analysis in the Planning Department. 16 P a g e

17 Strategic Priorities and Policies In allocating resources the county will give priority to the following sectors which have been agreed as priority sectors: health, lands, water, agriculture and social protection. The main objectives and activities in these sectors are: Health: employment of more health personnel, equipping of health facilities, upgrading of facilities and ensuring availability of drugs for improved health services. Lands: Planning, surveying and regularization of villages to ensure citizens have ownership of the lands. This will improve livelihoods of the people as citizens can use the titles as collaterals for securing loans from financial institutions. This will also reduce conflicts related to land sector which are frequently experienced in the county. Water: Plans are underway resolve the perennial water problem in the county and especially Lamu East. Several programmes will be lined in the next budget to address these water shortages. Agriculture, livestock and fisheries: productivity of this sector will be enhanced by provision of increased and relevant extension services, enhanced surveillance and control of pests and crop and animal diseases, and availability of sufficient quality and affordable inputs. Modern fishing methods will be adopted to increase productivity. Social Protection: The County will continue to offer bursaries to bright and needy secondary school students. Alignment of Priorities to National Objectives The medium term strategy and policies are contained the 2015 Budget Policy Statement. The following priorities outlined in the BPS clearly indicate that county priorities are aligned to national priorities. Creating conducive business environment: to encourage innovation, investment, growth and expansion of economic and employment activities. Investing in agricultural transformation and food security: to expand food supply, reduce food prices, support expansion of agro-processing industries and spur export growth. Investment in transport and logistics: including roads, energy and water to reduce cost of doing business and improve competitiveness. 17 P a g e

18 Investing in quality and accessible health care services and education as well as social safety net: to reduce burden on household and compliment and sustain our long term growth and development. Entrenching devolution: for service delivery and enhanced economic development. Risk to Implementation of Priorities The risks to the outlook for 2015/16 and the medium-term include continued weak growth in advanced economies that will impact negatively on our exports and tourism activities. Further, geopolitical uncertainty on the international oil market will slow down the manufacturing sector. Public expenditure pressures, especially recurrent expenditures, pose a fiscal risk. Wage pressures and the inefficiencies in devolved services may limit continued funding for development expenditure. The impact of insecurity on tourism and depressed rainfalls which could affect exports and agricultural production respectively remains a risk to the growth outlook. The government will undertake appropriate measures to safeguard macroeconomic stability should these risks materialize. The continued conflict between the assembly and county executive also poses risks due to late passage of county key policies like finance bill and budgets. 18 P a g e

19 3. CHAPTER THREE: FISCAL AND BUDGET FRAMEWORK 3.1. Overview The county will pursue prudent fiscal policy to ensure economic and financial stability. The activities in the county will be implemented within sustainable public finances. The current Medium-Term Fiscal Framework aims at striking an appropriate balance between fiscal consolidations and supporting the expenditures of the county government all these within sustainable public finances. Specifically, the 2015 Budget Policy Statement emphasizes: Fiscal consolidation while ensuring that the resources in the County are adequate to promote growth. The County Government is committed to a reduction in the recurrent expenditure to devote more resources to development. Reforms in expenditure management and tax administration. This will improve revenue collection and thus create fiscal space for spending on infrastructure and other priority development programmes. Efficiency and improving the productivity of expenditure while at the same time ensuring that adequate resources are available for operations and maintenance. The county government will create the appropriate political and economic environment to attract private investors and create the possibility of public private partnerships in the financing of key development projects especially flagship projects which will have positive economic impact and multiplier effect to accelerate development in the county. 3.2 Promoting Prudent Fiscal Policy Fiscal policy will continue to support economic activity within a context of sustainable public financing. The county Government has reoriented expenditure towards priority programmes in water, health, agriculture, infrastructure and education under the medium-term expenditure framework. 19 P a g e

20 3.3 County Government Fiscal Projections, 2015/ /18 Item 2014/ / / /18 Revenue & Grants Allocation from National GoK 1,746,977,915 2,051,883,746 2,154,477, ,262,201, Revenue 64,500,000 50,000, ,500, ,125, Others(grants 59,967,344 62,965, ,113, from Nation Government and development partners) Balance bf (2014/15 300,000, Total 1,811,477,915 2,461,851,090 2,584,943, ,714,190, Expenditures Recurrent 1,096,727,041 1,579,285, ,658,249, ,741,162, Development 714,750, ,565, ,694, ,028, The recurrent expenditure in the FY 2015/16 is expected to increase marginally from the allocation in FY 2014/15. This can be attributed to the devolved functions and the continued recruitment by the County Government. The ratio of recurrent to the total revenue is 64% leaving 36% for development. This meets the threshold set in the Public Finance Management Act, 2012 for the minimum government revenue allocation to development. 3.4 Observing Fiscal Responsibility Principles The County Government recognizes that the fiscal stance it takes today will have implications into the future. The county will uphold the principle of sharing the burdens and benefits of the 20 P a g e

21 use of resources and public borrowing between the present and future generation. To achieve this, the government will make prudent policy decisions to avoid an unwarranted debt burden to the future generations. Lamu county Government shall ensure adherence to the ratio of development to recurrent of at least 30:70 over the medium term, as set out in the PFMA The projected development to recurrent ratio for FY2015/16 will be 36% maintaining the FY2014/15 percentage. The respect and observance of these fiscal rules set out in the PFM Act and its regulations is important and necessary to entrench fiscal discipline. The County Treasury shall manage its public finances in accordance with the principles of fiscal responsibility set out in section 107 of PFMA. Fiscal responsibility has become even more important since the Constitution requires the County Governments to progressively provide for a minimum basic standard of economic and social rights to its citizens within available resources. In order for spending to increase on a sustainable basis to meet these basic needs, we should be prepared to match the increased expenditure demands with a corresponding increase in tax revenue yield through efficient collection and widening of tax bases. It is therefore imperative to reform and modernize the tax regimes to ensure stability of revenue effort, while at the same time continuing to restructure expenditure systems to ensure efficiency and create fiscal space required to fund these basic needs expenditures on sustainable basis. 3.5 Fiscal Structural Reforms Underpinning the fiscal program are measures to raise revenue collection to Kshs 50,000,000.This will be achieved through measures to enhance revenue collection; improved tax compliance, minimized delays and digitization of revenue collection. The lamu County Government will create and maintain effective revenue collection and accounting system from the revenue sources available. Measures to achieve this will include improved surveillance, public awareness and broadened revenue sources. Measures will also be instituted to reform tax administration, eliminate leakages and expand revenue base. The county is also in the process of automating/outsourcing of its revenue collection. 21 P a g e

22 On the expenditure side, the County Government will undertake expenditure management reforms to improve efficiency and reduce wastage in line with the PFM Act. Expenditure management will be strengthened with expansion of IFMIS modules which are being used across all departments in the County. Financial management in the county will be done in accordance with the provisions of The Constitution of Kenya 2010, The Public Finance Management Act, 2012 The Public Procurement and Disposal Act, 2005 and all other applicable regulatory statutes. The County Government will institute measures to contain the public wage bill and release needed resources for development funding. These would include implementation of Capacity Assessment and Rationalization of the Public Service (CARPS) recommendations. To increase absorption rate of development funds, the county shall restructure the procurement entity to ensure efficiency and effective service delivery. The budget section will prepare monthly budget expenditure reports to the county executive committee as means of tracking budget implementation. The revenue section will introduce regular awareness creation to the citizenry as means of ensuring adherence to the Finance Act. Monitoring and evaluation is an important component in budget execution and implementation. The County planning unit will develop a monitoring and evaluation framework that will be institutionalized in all departments. The framework is fundamental in monitoring development projects. 4.0 RESOURCE ALLOCATION FRAMEWORK 4.1 Resources Available Equitable Shares Article 202 of the Constitution requires that revenue raised nationally be shared equitably among the national and county governments. According to Article 203(2) of the Constitution, in dividing the shareable revenue between the two levels of government each financial year, county governments must be allocated an equitable share of revenue that is not less than 15% of most recent audited revenue received as approved by the National Assembly. In this regard, the equitable share of revenue allocated to county governments in 2015/16 is not 22 P a g e

23 expected to be less than Kshs 258 billion, based on the latest audited revenues of the national government. In addition, the Government has set aside Sh20.6 billion as conditional allocation bringing total allocation to counties to Sh283.7 billion during 2015/2016 Financial year. The equitable share of revenue is an unconditional allocation to the county governments and therefore county governments are expected to plan, budget, spend and account on the funds allocated independently Revenue Allocation from the national government for FY 2015/16 Type Ratio(%ge) FY 2013/14 FY 2014/15. FY 2015/16. Equitable Share ,500,755,102 1,790,321,879 2,051,883,746 Conditional grants Danida Health sector programme support III World bank Kenya Health Sector Support project 7,640,000 7,132,526 Leasing of medical 95,744,681 equipments 1 Free maternal health care Compensation for user fees foregone 16,762,200 2,366,871 Allocation from road 26,065,747 1 The county Government allocation for the leasing of medical equipments will only be included in the national government and shall be submitted to the parliament for approval provided that the National Government and the county Government will have an international agreement in line with article 187 of the constitution. 23 P a g e

24 maintaince fuel levy fund Local sourses 50,000,000 Expected balance b/f 300,000, /2015 TOTAL 2,461,851, ALLOCATION Conditional Grants These grants shall be transferred to the county revenue fund, but shall only be accessed by each county government after meeting conditions set by the cabinet secretary responsible for that function at the beginning of financial year and such transfers shall be included in the budget estimates of the county government and submitted to county assembly for approval. The departments of Health and roads are therefore required to include the funds in the budget estimated of the respective departments in the FY 2015/2016 as revenues Additional Resources In addition to the equitable share of revenue, county government of Lamu is expected to get additional resources from own revenues through imposition of property taxes, entertainment taxes, as well as any other tax they are authorised to impose by an Act of County Assembly as well as user fees Revenue projections The FY 2015/2016 budget will target increased revenue collection in the county from Kshs 23,200, in the FY2013/2014 budget to Kshs 50,000, as tabulated below. The reductions in revenue projections were arrived after carefully analysing the previous revenue performance trends. The main reasons for decreased revenues are as result of the security issues that have of late been experienced in the county.the curfew that has been imposed on the county had an advance effects on the county ability to generate revenue due to reduced tourism and business activities. The Lamu County Government will create and maintain effective revenue collection and accounting system from the revenue sources available. Measures to achieve this 24 P a g e

25 will include improved surveillance, public awareness and broadened revenue sources. Measures will also be instituted to reform tax administration, eliminate leakages and expand revenue base. The county is also in the process of automating/outsourcing of its revenue collection. The county is also in the process of developing three key revenue bills that aims at improving revenue administration in the county which includes the Rating Bill, Revenue Administration and Management bill and trade licensing bills. The county is in the process of regularizing plots in Mpeketoni and majembeni areas which will increase the revenues raised from the land rates. It is also finalising the data base on land ownership on already existing lease holders. The county Government is also planning to undertake the updating of valuation roll which is also expected to increase the local revenue. The other measures includes tax waivers to encourage more people to pay their arrears which they owe the county Type FY 2013/14 FY 2014/15. FY 2015/16. Projection Actual Projection Projection Local Revenues 86,124,909 23,200, ,440,000 50,000, TOTAL OWN REVENUE 86,124,909 23,200, ,440,000 50,000, Change (Ksh) -20,684,909-25,378, Change (%ge) -24% % Total Unconditional Revenue Available Total revenue available for allocation amongst the prioritized programme for the 2015/2016 financial year will therefore be equal to Kshs 2,101,883, P a g e Type Allocation % Contribution

26 Equitable Share 2,051,883, % Local Resources 50,000, % Total 2,101,883, % The National Government is expected to fund the 2015/2016 Lamu County Budget to the tune of % while local resources at 2.38% Expenditure Forecasts In FY 2015/16, overall expenditures are projected at Kshs. 2,461,851,090 compared to the estimated KsH. 2,509,718,285 FY 2014/15 supplementary budget due to increased recurrent and capital expenditures. Type FY 2013/14 FY 2014/15.(supplementary budget) FY 2015/16. Actual Projection Projection Projected expenditure 1,580,997, ,509,718,285 2,461,851,090 TOTAL EXPENDITURE 1,580,997, ,509,718,285 2,461,851,090 Change (Ksh) 928,720, ,867, Recurrent expenditures The recurrent expenditure in FY 2015/2016 is projected to be 64 % of the total budget and a moderate increase from 63.47% in 2014/2015 budget. This is majorly attributed to the fact that most departments will be recruiting to fill various key posts and also to cater for increase in House and hardship allowance as recommended by SRC. The wage bill is expected to stabilize at 37 %.of revenue in the FY 2015/2016. Expenditure ceilings on goods and services for the departments are based on funding allocation in the FY 2014/2015 budget as the starting point. Then an adjustment factor is applied to take into account the general increase in prices and the CIDP which is the development strategy for the county. 26 P a g e

27 4.3.9 Development expenditures The ceiling for development expenditures will be Kshs. 882,565,745, an increase from Kshs 714,750,874 in the FY 2014/ Fiscal Discipline Article 201 (d) of the Constitution requires public money to be used in a prudent and responsible way while Section 107 of the PFM Act, 2012 sets out the fiscal responsibility principles to be enforced by the County Treasuries. Current trends in the county planning and budgeting as well as execution of budgets suggest that county governments may have difficulty meeting these requirements. The County government of Lamu will therefore be conservative in projecting its revenue collections. In addition, it will not include deficits in its budget for financial year 2015/16 without a clear and realistic plan of how the deficit will be funded. To ensure a sustainable wage bill, the County Government will embark on staff rationalization and salary harmonization aimed at commiserating the staff based on the duties and responsibilities assigned. This will be achieved through implementation of the CARPS recommendation and other recommendations by the County Public Service Board. The County government will also ensure compliance with the requirement of section 107(2) (b) of the PFMA 2012 which requires county governments to spend a minimum of 30 per cent of their budgets on development expenditure over the medium term. To ensure openness and accountability in management of the county funds, the county treasury and the county government at large with adhere to Principles and Framework of Public Finance as provided for in chapter twelve of the constitution of Kenya Key Focus areas The key focus areas for the county government are; i. The county government is aiming at improving the development expenditure absorption rate from the current absorption to 70% by streamlining the procurement procedures in 27 P a g e

28 the county. The county will also recruit quantity surveyors in order to fasten preparations of Bills of Quantities which have also been contributing to low absorption of development funds. The County has also developed a procurement plan which will be strictly adhered to in order to improve absorption rate. ii. develop a clear development road map for Lamu County build on available natural, financial and non-financial resources iii. Investing in agricultural transformation and food security to expand food supply, support agro-processing industries and promote irrigated agriculture; iv. Creating conducive environment in order to encourage innovation, investments, growth and expansion of economic and employment opportunities v. Scaling up of investments in other key infrastructure including health, roads and energy to reduce cost of doing business and improve competitiveness; vi. Investing in quality and accessible healthcare services and education as well as social safety net to reduce burden on the households and complement and sustain long term growth and development Ministerial Priorities and Budget Estimates Introduction Allocation of budgetary resources to county departments is based on their priorities which have been identified in the County Integrated Development Plan. The Plan was produced after intensive stakeholder consultations and therefore reflects the expectations of the people of the county with regard to county development and service delivery. However, departments have had to prioritize the citizens priorities according to available financial resources. This is important to point out so as to sensitize the public and public servants of the budget constraints and the need for prudent management of public resources. Priorities of Ministries and Department Summaries of the priorities of each department are outlined in this part. Where necessary resource requirements and budget allocations are provided to illustrate the budget constraints the county government faces and the need for prudence in the utilization of resources. Office of the Governor (Administration) 28 P a g e

29 The Office of the Governor provides overall coordination of departments in the County for the effective and efficient implementation of government programs. It provides shared support services to other departments and coordinates development and implementation of policies and programmes, including Kenya Vision 2030 and millennium development goals (MDGs) One of the challenges the office faces is lack of office space for accommodating the executive, Sub County and Ward Administrators. To address the above challenge the county has for the three years continued to allocate more funds for setting up structures in the office of Governor to accommodate all the staff in county Headquarters, Subcounty and ward level in order to improve service delivery to the people of Lamu. Tourism This is one of the key sectors of the Lamu economy. This is one of the sectors that has been severely affected by insecurity and the imposed curfew. This has resulted to low tourism arrivals leading to closure of many hotels and thus job loss to many Lamu people. The sector employs many people directly and indirectly. The county Government is the FY 2015/2016 will allocate a substantial amount of resources to promote Lamu as a tourist destination. The county will also work closely with the National Government in order to restore security which is a critical requirement of tourism sector. The county will also join hands with the other five coast counties under the JUMUIYA YA PWANI to form the Coast Tourism Board which is expected to jointly market the six counties as a tourist destination within and outside Kenya. The sector challenges mainly remains the insecurity issues and lack of staffs in the department. Key achievements includes participating in four local and one international travel fairs and exhibitions, development of website face book and twitter account for tourism promotions, renovations of tourism information officer and establishment of tourist police office and collection of data for tourism directory among others. Trade. This subsector has also been affected by the insecurity and the imposed curfew. The Subsector has prioritized completion of the ongoing projects like construction of Mpeketoni market, majembeni and Hindi Markets. The department will also continue with its programme of giving 29 P a g e