By Shadrack Muyesu
Picking up from President Kibaki, the Uhuru government rode to power on a promise of spurring economic growth by concentrating their efforts on expanded infrastructure spending. Considering the expensive nature of such ventures, lack of capital was no less quite an impediment. That the average Kenyan was already heavily taxed only served to further dampen the dream of an infrastructure driven economy. Jubilee arrived at an alternative in the Eurobond.
The idea behind this was to raise cash while cushioning the Wanjiku from raising interest rates. Eurobond is long past yet spending on infrastructure continues, not to mention the curious fact that interest rates remain quite high. With any visions of developed status heavily dependent on these two decisions, the question we ought to ask ourselves is whether public spending was the right way to go in the first place.
One school of thought has it that the Eurobond proceeds, once received, ought to have been remitted to the Central Bank of Kenya (CBK) from where local banks could borrow. More cash with the CBK would mean less stringent issuance rules therefore enabling local lenders to borrow and lend at lower rates. Wanjiku would in return have more money to spend privately. Such a move would open the gates for government to perhaps increase VAT rates with no heavy-felt effects on Wanjiku. The end result would be increased government income allowing it to invest while reserving surplus for purposes of servicing the Eurobond debt.
As a downside, local lenders including the CBK would be less careful in their lending policy therefore running the risk of lost cash through defaulters. Simply put, a mismanaged Eurobond would lead to a massive domestic credit crunch that would not only significantly reduce Wanjiku’s spending power but also dampen any resolve we may have to paying back our loans.
An alternative route (which Kenya took) would be to invest the monies directly into public spending. Such public spending may be on welfare commodities or on infrastructure. Spending on welfare commodities has an effect more or less similar to that of investing directly into domestic lenders. With welfare spending, low-income earning citizens enjoy much more to spend. Tax cushions offer the average citizen a chance to grow while placing a larger burden of economic growth on high-income earners.
SGR and LAPPSET
Generally however, managed properly, infrastructure spending has positive cyclic effect on the economy. The measure of success however varies depending on a cost-benefit analysis of the individual project. The highlight of infrastructure spending for Kenya has been the improvement of the road network and the LAPSSET project (which has two pillars in the Standard Gauge Railway and the Lamu port expansion).
While there are many voices supporting the SGR, it is in our best interest to remind ourselves of a few facts. Foremost, the SGR was to be financed by the proceeds of the Eurobond to the tune of close to Sh3 billion. That a large chunk of the Eurobond proceeds have since disappeared simply means that government will have to raise money to complete the railway and repay the resultant loans from alternative sources. Regardless of whatever these other sources are, it is impossible to look beyond domestic borrowing, increased taxes and increased interest rates for Wanjiku.
Such an effect can only be minimized by an SGR that will be self-sustaining on completion. The SGR should at least be able to pay its establishment capital. In other words, the commercial undertakings of the SGR should be able to raise a surplus that would go towards paying for the monies used to create it and the resultant loans. This is highly unlikely considering that the railway will not only be considerably shorter than that from an equivalent project intended from Dar es Salaam to Kigali. More so, the supporting port in Lamu will be considerably smaller than its Tanga equivalent not to mention having competition from the port of Djibouti that has itself expressed expansion interests.
Most disturbingly however, the SGR won’t even enjoy domestic monopoly as there already exist other longer railways that will compete with it for cargo (unless the SGR is expanded to match their length and network). Renowned Political Economist David Ndii perhaps betrays this best when he curiously points out:
“…To generate this kind of surplus, the railway would have to have a turnover of at least Sh120 billion. Assuming that it charges the prevailing tariff of $1,000 per container, it would need to carry 1.4 million 20-foot containers a year, 4,000 a day. That would take about 48 very long trains every 24 hours. The busiest single line railway in the US, for instance, run 20 trains a day.”
Roads Perhaps?
Infrastructure investment presented the best way to a stable industrialized economy- that remains uncontested. What is questionable however is whether LAPPSET and more curiously, the Standard Gauge Railway was the correct place to invest. As already highlighted, the costs of these investments rather outweigh their benefits.
But what of roads? It is almost implausible to think of a redundant road. Simply, roads are not susceptible to competition as would say the railway. The use of roads is also much more extensive and that translates to a higher net multiplier effect. This means that roads are almost always profitable.
But even as we speak about infrastructure, there can be no development without food security and a secure environment. Uhuru’s government should therefore have considered these two as its economic drivers alongside infrastructure. Opening up the north would come with so much latent economic benefits not to mention pull over security agencies thus making it a safer place to invest.
Public Spending
Properly conceptualized, the net positive effects of increased public spending cannot be over emphasized. Kenya’s own module of public spending is, unfortunately, quite different from the standard module applied in Nordic countries, a factor which though contemplating our environment, significantly diminishes its effectiveness. In short, Jubilee’s development agenda is not properly thought out.
For starters, maximum benefit from public spending can only be achieved where the government is significantly smaller and more effective so as to ensure minimum wastage and taxes are to the absolute manageable maximum. In comparison to the Nordic countries where all these factors exist, well, have existed, Kenya not only has a significantly lower tax percentages at only 16% VAT but also sees much of these monies go to waste in corruption and duplicate recurrent expenditure.
Similarly so, while our welfare government may be way smaller compared to Nordic nations, any opportunity of growth that ought to be offered by such space is diminished by a large political and public government. A lot of money that should have gone towards infrastructure is spent on the running costs of the central and county governments as well as the provincial administration. While such operation costs may be classified as part of public expenditure, they are not as profitable as would say, infrastructure spending which has obvious quantifiable returns.
Most alarming for us, failure to properly and extensively explore taxation means that government has no choice but to rely on loans. The present situation with Kenya is that we are committing ourselves to projects that are too big and which need vast sums of money. Such projects are never completed in time so as to fall into use and start giving back in funding for consequent projects. To complete these later projects government borrows even more and at greater interest rates. Compounded by wanton wastage, such an action does nothing but ransom the nation’s future.
But even when perfectly run, public spending driven development structures are not fool proof. When the government grows too large, savings suffer and so does private expenditure. It is at this point that government produces so much against a shrunken domestic market. The only way to sustain government is to export and cheaply at that.
This is the present position of many public driven spenders in the North and indeed the destination of an expenditure spurred Kenya. However, unlike the North, wastage and lack of proper planning means that for us, the end shall surely arrive faster. Unlike these Nordic countries, which stagnate at developed status, our module guarantees that our economy shall come crushing under the weight of debt and recurrent expenditure. We may not even arrive at middle-income status in 2030.
While it is not entirely wrong to have ambitious budgets and rely on public spending, it is economic suicide to have a large portion of this budget cushioned by loans, whether borrowed externally or internally. Apportioning a larger section of this budget to welfare expenditure over development spending only worsens the problem. Spending debt on recurrent expenditure and social security is akin to taking a large loan and spending it furnishing your house or on a holiday – ventures that have no returns!
As opposed to the ambitious SGR, Jubilee’s economic planners should concentrate on increasing the road network and improving the existent port and railway facilities; for a start at least. The North ought to be of particular priority in this. Secondly, Jubilee ought to consider expanding the tax base as opposed to relying on expensive loans. Subsidies on consumer goods ought to be reduced while the tax regime is improved as well so as to minimize tax avoidance and improve collection. The later is of particular importance considering that KRA has consistently fallen short of its collection targets. In 2014 alone the tax collector fell short by over Sh150 billion. It’s time we rethink.
