FINANCIAL GOVERNANCE AND FISCAL SUSTAINABILITY OF COUNTY GOVERNMENTS IN KENYA: THE MEDIATING ROLE OF BUDGET IMPLEMENTATION EFFICIENCY
Winnie Nyamute - University of Nairobi, Kenya
ABSTRACT
This study examined how financial governance influences the fiscal sustainability of county governments in Kenya and whether budget implementation efficiency transmits that influence. Devolution transferred substantial service-delivery and financial responsibilities to Kenya's 47 counties, yet weak own-source revenue performance, high wage burdens, low development absorption, unresolved audit findings and accumulating pending bills have persisted, indicating that formal public financial management rules have not consistently produced sustainable county finances. Financial governance was conceptualized through three pillars, namely revenue governance, expenditure discipline and audit accountability, each measured using objective accounting ratios rather than perceptions, and budget implementation efficiency was specified as the mediating mechanism linking governance to sustainability. The study adopted a positivist orientation and an explanatory longitudinal design, using archival county-year data for all 47 county governments over the period FY2016/17 to FY2023/24, yielding 376 county-year observations. Data were extracted from Controller of Budget county budget implementation review reports, Auditor-General county audit reports, audited county financial statements, Commission on Revenue Allocation own-source revenue studies, Kenya National Bureau of Statistics population and economic data, and National Treasury budget review documents. The constructs were specified as composites of non-interchangeable accounting indicators and estimated using partial least squares structural equation modelling with 5,000 bootstrap subsamples. The descriptive results revealed wide variation across counties, with own-source revenue effort (mean = 0.117) and development-share compliance (mean = 0.191) recording the weakest performance. The structural results showed that revenue governance and audit accountability had positive and significant effects on budget implementation efficiency, whereas expenditure discipline did not. Expenditure discipline, audit accountability and budget implementation efficiency had significant positive direct effects on fiscal sustainability, while revenue governance did not. The model explained 25.1% of the variance in budget implementation efficiency and 75.5% of the variance in fiscal sustainability, and both endogenous constructs recorded positive predictive relevance. Budget implementation efficiency fully mediated the relationship between revenue governance and fiscal sustainability and partially mediated the relationships involving expenditure discipline and audit accountability. The study concludes that budget execution is the principal channel through which financial governance is converted into fiscal sustainability, and recommends that county treasuries, county assemblies, the Controller of Budget, the Auditor-General and the National Treasury treat realistic revenue forecasting, audit follow-up and execution capacity as one integrated reform agenda rather than as separate interventions.