By Ephraim Njega
2023 has lived up to its initial billing as a challenging year. The cumulative impact of the economic mismanagement over the last ten years has crystallised. The global economic slowdown and mounting geopolitical risks have worsened matters.
The cost of living and doing business has remained elevated. Improved weather has helped lower the cost of some food items. However, the steep depreciation of the shilling, high taxation and rising interest rates have more than reversed such gains.
Many Kenyans hoped that the government change in late 2022 would have brought quick economic gains. More than a year into the new regime, there is no sign that such hopes will materialise. The new government has followed in the footsteps of its predecessor. There is neither policy clarity nor strategic certainty on the economic direction the country is headed.
Key macroeconomic indicators have mainly remained stable. Inflation has declined to within the government’s target of 5 ±2.5%. GDP growth remains resilient, with the second quarter of 2023 GDP registering an impressive 5.4% uptick.
On the flip side, interest rates have risen significantly. All the three T-Bills are now being issued at over 15% interest rate. The most recent infrastructure bond was issued at a 17.9% interest rate. This is unsustainable. The rapid depreciation of the shilling continues unabated. Since the beginning of the year, it has lost over 19% to the dollar, thus imposing a heavy toll on businesses and households.
The public debt crisis remains the greatest economic risk, and there is no evidence that we are working to resolve the issue. In the last financial year, the public debt rose by a whopping Sh1.6 trillion, driven by a weakening shilling. We are quickly inching towards the Sh 11 trillion mark. This is exclusive of pending bills. The national and county governments collectively owe suppliers close to Sh 800 billion in pending bills. This is a tragedy that continues to weigh down the economy.
The public debt is now over 70% of the GDP, indicating that we are on a ruinous path to debt distress. The debt servicing burden is exerting an unbearable cost on the economy. During the first quarter of the current financial year, public debt interest consumed KSh 188 billion.
The depreciating shilling and rising interest rates are making things worse. The foreign debt interest expense increased by 75% during the first quarter. If the trend continues, we might spend Sh 800 billion on debt interest expense by the end of the financial year. Besides the fact that the government cannot afford the amount, it erodes its capacity to meet other crucial expenses.
The country’s credit rating remains under downward pressure. Major rating agencies such as Fitch, Moodys and Standard & Poor’s have maintained a negative outlook on Kenya’s creditworthiness. Such sentiments depress foreign investment and pile uncertainties on local businesses.
The sad state of the country’s stock market is yet another grim indicator of an economy in ruins. Market capitalisation has declined by 30% since the start of the year. The Nairobi Securities Exchange has been ranked as the worst-performing in the world by reputable players in the global investment theatre.
In an informal economy like ours, economic statistics don’t always tell the true picture of the state of the economy. Bank sector indicators are usually more telling since the economy, whether formal or informal, must pass through the banking system.
The continuing rise in Non-performing Loans (NPLs) is the clearest indicator of a sickly economy. NPLs rose to Sh 611 billion as of August 2023, representing 15% of the gross loan book. By the time one stops servicing a loan, it is likely that everything else has been tried and failed. Such high default rates, therefore, point to an economy teetering on the brink of collapse.
Politicisation of economic crisis barrier to solutions
One would think that with such a dire situation, the political class would be united in search of answers. On the contrary, the opposition is seemingly comfortable ‘playing politics’ while the government is steeped in denial and has heavily invested in propaganda to cover its failures.
The buck-passing, endless blame games and finger-pointing are denying us the time to save the economy from collapse. A docile population obsessed with individualistic solutions to a national crisis isn’t helping either.
This crisis requires a genuine acceptance and truthful articulation of our reality. It demands unity of purpose among the political class. We will struggle to extract ourselves from this economic morass if selfish politics trump national interests.
The political mockery of asking Kenyans to tighten their belts while the politicians loosen theirs must end. Some politicians even throw the belt away in an unbridled fit of arrogance. Resolving the crisis must be a shared responsibility.
Policy uncertainty remains
Resolving any problem requires accurate diagnosis and acceptance of the results. The problem we are facing is one of reckless and bloated spending. But the government seems fixated on the flawed thinking that this is a revenue issue that over-taxation can cure.
For years, we have run a bloated budget in which vendor-pushed priorities create a rich ecosystem for plundering public resources. This has made a fiscal madhouse where the absurd is the norm.
Everyone agrees that we have lived beyond our means for years. Yet there remains a frustrating lack of political will to mend things. We continue to borrow for recurrent spending. Recently, the controller of budget likened our situation to taking a Fuliza loan and heading straight to the bar to celebrate.
Even at the household level, no one can sustain spending on items such as rent, groceries, school fees, etc., by borrowing. Partying on debt is fiscally suicidal. At some point, the lights will dim, the music will fade, and reality will check in as the party glides to a halt. We have flown close to the sun for so long that we can’t escape unscathed.
Over the years, the government has sung the song of fiscal consolidation without any tangible results. Plans to reduce the budget deficit are made and unmade with impunity that beggars belief. Currently, we are doing a supplementary budget to raise spending, yet revenue collection is behind schedule. Who does that?
The longer we delay swallowing the bitter pill of austerity, the faster we will sink into the economic abyss. Operating without a fiscal margin of safety predisposes the country to the brutality of economic shocks, whether domestic or external.
The argument has always been that the government’s spending plan is so tight that nothing is left to cut. This only makes sense for as long as someone is willing to finance your excessive spending. When there is no such person, you must cut your coat according to your cloth, no matter what. The truth is that we have exhausted the taxation and borrowing capacity.
The only sustainable revenue mobilisation option is through economic growth. Harsh tax measures, regulatory overload and bureaucratic red tape, wouldn’t deliver the much-needed tax revenues.
Pupil-master obedience to IMF’s copy-paste prescriptions is the worst approach to attempting to reverse our economic fortunes. The so-called rules-based, market-focused way of doing things ignores national uniqueness and innovative problem-solving. The commercialisation of public services risks disenfranchising the majority of Kenyans. It will needlessly add to the cost of living and doing business.
Any policy which diminishes disposable incomes is a threat to production. There can be no production without consumption. The endless raids on payslips erode consumers’ buying power and risk turning the country into an enterprise graveyard.
2024 economic outlook
Barring any miracles, 2024 will be another difficult year for Kenyans. Unless there is a shift in the fiscal trajectory, we will enter into debt distress. The risks of a debt restructuring are rising by the day. Such a restructuring might involve changes in tenor (elongation of repayment period), haircut (reduction in principal) and interest rate (reduction or scraping). The Ghana experience makes for a good study in anticipating what is coming.
Banking institutions, pension funds and insurance firms collectively hold 81% of the government’s domestic debt. Any restructuring of the debt will have devastating outcomes. Bank deposits, pension contributions and insurance policies are all in the line of fire.
A possible alternative to this restructuring would be the government monetising the debt. This would involve printing money to offset maturing domestic debt. However, such a move risks triggering hyperinflation and a steeper devaluation of the shilling. None of these outcomes is enviable or desirable. The devastation would be unbearable.
The lesser evil would be to institute deep spending cuts. These would be complemented by eradication/reduction of all subsidies, including in critical areas such as health and education. Most government services would have to be provided at market rates, turning every government agency and department into a financially autonomous entity. This can, however, provide room for friendlier taxation policies, which would have a stimulative impact on the economy.
There are no easy solutions to the economic malaise plaguing the country. Every corrective measure taken is bound to deliver a dose of pain to the chagrin of many. There are also no guarantees that the political class will elevate national interests above parochial interests.
Chances of making more economic blunders will increase as the 2027 electioneering season approaches. 2024 is, therefore, a critical year. By 2025, the fog of the approaching elections risks clouding sound judgment.
It is in the interest of every person in this country to take the unfolding economic crisis seriously. Banking on hope and empty positivism will be heavily penalised. Whatever measures one can take to insulate themselves and lessen the impact of the financial blows should be instituted without dithering. People should adopt austerity at the household level and avoid rushed lifestyle upgrades.
Winter is indeed coming, and it is coming fast!
The writer is a business and development consultant. He is also an experienced economic analyst with an MBA from the University of Nairobi.