By Ephraim Njega
Kenyans, irrespective of the political parties they support, waited for the Supreme Court ruling on the Presidential Petition delivered on September 5. As William Samoei Ruto takes the reigns after the judges upheld his win, it is in everyone’s interest that political environment is stable and that peace prevails.
Almost everyone who has ever done a business plan knows that significant effort is dedicated to analysis of the business environment. The success or failure of a business is deeply connected to the environment in which it operates. One of the dimensions to be analysed in any plan is the political environment – investors like to operate in a politically stable environment.
In an uncertain one, they adopt a wait and see attitude. Projects and plans are put on the ice till the political clouds turn clear. The result of prolonged political uncertainty is economic slowdown at best, and at worst, a meltdown. At the moment, Kenya is running on empty so much that it can’t afford the luxury of intensive politicking.
We need peaceful political transition to experience better days. The economy is under immense pressure. We are just recovering from the pandemic and Russia-Ukraine war shocks. The drought conditions persist putting more pressure on the economy. We can’t sustain further shocks without seriously undermining the economy.
Kenya Kwanza administration is inheriting an economy on the brink of collapse. And, it is going to be tough as the public debt currently stands at Sh 8.7 trillion. During the financial year ended June 30, 2022, government spent Sh578 billion on public debt interest expense. Since the interest portion of the debt can’t be refinanced, we have to pay for it using tax revenues. This is certainly not sustainable.
During the current financial year, the government plans to spend Sh1.4 trillion on public debt. Part of this will be on interest and the rest for principal repayments. The reality is that the ongoing depreciation of the shilling is having an adverse impact on the external debt, which reduced to $36.4 billion from $37.1 billion in 2021, as per financial year ended June 30, 2022.
However, in Kenya shilling terms, the external debt rose by Sh300 billion. So the country added a total of Sh300 billion on her external debt without borrowing a single shilling. That is how bad the depreciation of the shilling is impacting our external debt and the overall debt burden. Every time the shilling depreciates by one shilling to the dollar, our debt rises by Sh36 billion.
The new administration needs to rework the budget and lower its deficit. It should undertake serious risk assessment and mitigation. This will ensure that the estimated revenues are realistic. Thereafter, it should go through the spending items line by line and get rid of all unnecessary spending. We have to live within our means. To do anything else is to act irresponsibly and put the country at a great risk of economic catastrophe.
On the revenue side, the government needs to revert to organic tax revenue growth. This will involve growing the economy so that revenue comes from economic growth rather than from tax rate increments. This can be done by restoring the role of the private sector as the main engine of economic growth.
In recent years, the economy has been relying on the public sector – and this has been on the backdrop of heavy borrowing. Most of the revenue growth has been from tax increments rather than from positive economic performance. Tax increments have limits. Principally, the best way to sustainably grow tax revenues is by ensuring quality economic growth. With private sector led economic growth, the government will increase tax revenues without increasing tax rates.
Cost of doing business
The government also needs to lower the cost of doing business and stabilise the policy environment. In the past, there has been a lot of unnecessary disruption of the private sector through poor policies. Policies such as interest rate capping, haphazard tax increments, demonetisation, and chaotic rollout of the Competence Based Curriculum have been quite disruptive.
Most importantly, the new government must avoid any temptation to engage in populist economic policies. Such policies triggered the economic crisis in Sri Lanka, it is said. The then Sri Lankan government implemented populist pandemic response policies like lowering taxes which hit revenues hard at a time the government was operating in a tight fiscal space.
The government will be under pressure to deliver tangible results given the economic pain Kenyans are experiencing. This might make it rush into populist policies which could turn the situation from bad to worse. Any new policies need to be weighed against their impact on spending and revenues. There is no need of policies which will increase spending, or lower revenues at this point in time. What we need is to prudently manage the revenues, reduce borrowing and cut on unnecessary spending.
We need to go slow even on development spending. The new government shouldn’t continue with the construction addiction we have become used to. Only projects with the highest economic return should be prioritised. Projects should be implemented on the basis of economic viability rather than political visibility. This is not the time for optics, but substance.
Unsustainable public debt
It should be clear to everyone that no real economic recovery will happen until the issue of ballooning unsustainable public debt is addressed. One of the challenges we have been having in public discourses on debt is lack of reliable statistics. Before even discussing solutions, accurate data on the true levels of our indebtedness is needed. This is especially so when the issues of pending supplier bills and parastatal debts are concerned – data from Treasury show that pending bills at national level mainly by government agencies rose to Sh434 billion in March 2022 from Sh307.8 billion reported in 2021. Bills of such scale will likely strain the economy. Are there solutions?
When in a hole, the first step is to stop digging. So borrowing expensive external commercial loans should stop. Going forward, all external borrowing should be concessional. We also need to restructure our external debt by replacing commercial loans with those with more favourable terms. This will reduce the country’s external debt servicing burden and soften the blow from mounting forex risks. The government should engage the International Monetary Fund and World Bank in serious talks to get sufficient concessional loans to payoff Eurobonds and commercial syndicated loans as and when they mature.
We also must stop the illegal and financially imprudent habit of borrowing money for recurrent spending. This contravenes the Constitution of Kenya 2010 and the Public Finance Management Act which ensure that all assets, expenditure, liabilities and revenue are managed efficiently. Granted, those who have broken these laws in the past should be held to account.
In terms of reducing the debt burden, the government should consider liquidating some of its assets. In August last year, the share price of Safaricom hit Sh45 putting its value at Sh1.8 trillion based on its 40 billion issued shares. This means the 35% stake owned by the government was valued at Sh630 billion.
This is just one asset owned by the government. When you consider all the other shares it holds in other entities, you can see it is not an uphill task to raise up to Sh1 trillion in the short term. With such an amount we wouldn’t need to borrow from the domestic market for two years. Thus, giving the government breathing space.
Banks would be left with no option other than to lend to the private sector. This would spur the economy and grow tax revenues. It would also significantly reduce the country’s debt servicing burden in terms of interest expense.
Silver lining in a dark economic cloud
Despite all the doom and gloom about the economy there are still reasons to be hopeful. According to the Quarterly Economic and Budgetary Review for the fourth quarter of the 2021/22 financial year, “the total revenue inclusive of the ministerial A-I-A grew by 23.3%, an improvement from a contraction of 0.7% recorded in June 2021.”
The revenue growth is quite robust, and if sustained, will go a long way in relieving the public debt challenges.
Private sector credit growth remains healthy and is almost approaching the range needed to anchor strong economic growth. Banks continue to report historically high profits despite the challenge of non-performing loans. A healthy financial sector is crucial for the economy. The banks remain upbeat. Their assessment of the economy is positive. They are clear that there is a strong recovery from the mess left behind by the pandemic.
For example, KCB has proved to be resilient. The lender completed the acquisition of Bangue Populaire du Rwanda (BPR) to form BPR Bank Rwanda in July 2021. In mid-March 2022, the lender registered was still seen to be optimistic about the East African economy despite the geopolitical crisis in Europe, Covid-10 shocks as well as the recently concluded Kenyan elections.
“As the growth gains momentum, it will lead to many more opportunities for all sectors of the economy and, in turn, inclusive growth,” said Andrew Wambari Kairu, KCB Group chairman
Last year alone, the lender partnered with various counties with its overall lending to Micro, Small and Medium Enterprises under a “Credit Guarantee” growing by 23% from Sh60 billion to Sh74 billion.
Given that the operating environment remains uncertain, these gains should be jealously guarded and expanded. Hopefully, the new government will adopt new ways of managing the economy that are more people centric. There are many reasons to be cautiously optimistic despite all the doom and gloom.
Writer is a business and development consultant, and economic analyst. He holds an MBA Degree from the University of Nairobi.
