LACK OF MONEY

Economy in shambles because we're living way beyond our means

We are like the proverbial ostrich that buries its head in the sand to hide from the looming danger.

In Summary

• We currently have literally a zero budget for development expenditure.

• It means that any road, water, electricity, school, or market project that you see being put up is financed by borrowed money.

Development economist Anzetse Were with Eduardo and Associates Managing Consultant Patrick Obath during launch of The World Bank Kenya Economic update in Nairobi on April 9, 2019.
Development economist Anzetse Were with Eduardo and Associates Managing Consultant Patrick Obath during launch of The World Bank Kenya Economic update in Nairobi on April 9, 2019.
Image: ENOS TECHE

There has been a torrent of complaints of late about the appalling state of the Kenyan economy.

Indeed, many businesses have closed shop and a lot of people are out of work as a result. It is, therefore, important to delve into this issue, especially because politics and the economy are nearly inseparable.

While the 2017 prolonged elections hit the economy hard, 2018 benefited from the pent up activity prior to the polls. This was coupled with a stable political environment occasioned by the March 9, 2018, handshake between President Uhuru Kenyatta and ODM leader Raila Odinga.

Last year was, however, very difficult economically due to the slowdown effect of the 2017 elections. This was coupled with scarce liquidity in the market due to the crowding out of local investors because of the heavy borrowing by the government and reduced bank lending to local investors as a result of interest rate capping.

During this medium-term period (three-year budgeting cycle), Treasury exhausted and surpassed the debt ceiling as increased in 2014, without factoring in the total sovereign debt that includes private sector and domestic debt.

Another dynamic is the borrowing by county governments and pending bills that have held up monies meant for medium, small and micro enterprises (MSMEs) across the country. In fact, many businesses have been auctioned as a result and one needs to look at the newspaper pages to see the increase in the number of auctioneer adverts. Further, many malls across the cities and towns such as Two Rivers, Garden City, and Juja Mall are half empty.  

The Budget Policy Statement provides a broad view of the state of the economy while at the same time estimating ceilings for the three arms of government at the national level, independent offices and the counties.

It is quite telling that our economy is in shambles because we are living way beyond our means. In fact, to be precise, we are mortgaged as a country as any increase in revenue will go directly to debt servicing currently at over Sh600 billion. This means that for every Sh100 that we collect, we pay Sh46 as loans directly.

We currently have a literally zero budget for development expenditure. It means that any road, water, electricity, school, or market project that you see being put up is from borrowed money.

At the county level, the situation is even worse since local revenue collection has been on the decline for the last five years. Further, the return on investment on the huge infrastructure projects is yet to translate into real economic growth. This is partly due to the time factor but also the effects of inflated project costs due to corruption that compromises supervisory powers, hence durability.

The reduced purchasing power by Kenyans compared to other African countries is demonstrated by the GDP per capita of $1,200 compared to Zambia's at $1,700, Ghana'a $1,800 and Nigeria'a at $2,400.

This means that the country is not as attractive to foreign direct investment (FDI), despite the availability of cheap labour. Our economy is growing at 6.2 per cent, which is slower than our EAC partners, for the last 15 years. In fact, the actual growth is 5.7 per cent, according to our projections as Parliament.

In addition, our exports of commodities such as tea and coffee have dipped and been overtaken by remittances as foreign exchange-earners to stabilise the shilling. This is a precarious situation as it means jobs have taken flight to other countries and  Kenyans are flying there as well due to scarcity at home.

The other foreign currency earners are inflows from NGOs and the UN agencies. Interestingly, an increase in jobs is largely within the informal economy that is yet to be effectively brought in to the tax bracket. Further, there is very little happening under the Big Four agenda, with only 228 housing units completed against an annual target of 500,000.

Manufacturing is nothing near being 15 per cent of our GDP with most containers bringing imports in-country returning empty. While food security has been recently compromised by the recent locust invasion pandemic that the government has failed to control, the health sector reforms at the National Health Insurance Fund haven’t been implemented.

The duplication of the health functions at the national and county levels has only led to wastage of limited and much-needed resources. There is, therefore, need for fiscal consolidation through serious budget cuts and audits for us to live within our means. Further, the principle of subsidiarity needs to be applied effectively to reduce inflated government projects.

We are like the proverbial ostrich that buries its head in the sand to hide from the looming danger. Samsung is a city in Korea that makes just one good phone that is currently ranked amongst the best globally. Most Kenyans have Samsung for a smartphone.

As a country, we shouldn’t, therefore, be trying to do extraordinary things exorbitantly but rather doing ordinary things in an extraordinary manner.

The writer is Vice Chairman of Finance and Budget of the Senate