By Dominic Atika & Sitati Wasilwa
It’s been an unbridled 2017 for Kenya, and the vagaries of the economic scene could never be more prevalent. As the year draws to a close, we figured it would be prudent to sit back and conduct a diagnosis of Kenya’s economic health, stacking our arguments against assertions and reassurances by The National Treasury bureaucrats and the Jubilee administration that our economy remains as resilient as ever.
Quite unforgettably, on the 8th of November this year, the Cabinet Secretary in charge of The National Treasury, Henry Rotich, pompously remarked that “Kenya’s economy remains strong and stable, all economic fundamentals are solid. Kenya is moving forward.” But how true is that? To try and find out, we delve into a detailed analysis of six economic determinants: the national debt, interest rates, corruption, food security, unemployment and elections.
One might want to forgive CS Rotich for having made such an unfortunate statement, especially bearing in mind he has an almost religious obligation to defend the economic agenda of the Jubilee administration, but the numerous economic missteps and mistakes so far made by the Jubilee regime only serve to make that impossible.
One of Kenya’s economic fundamentals that is not only running out of control, but that also seems to be out of place is the country’s level of national debt. According to data by the Central Bank of Kenya last updated September 2017, the total national debt now stands at KSh4.482T ($44.82B).
After the end of the first financial year 2013/2014 presided over by the Jubilee administration, the total national debt amounted to KSh2.422T/$24.22B (47.9 percent of GDP) in comparison with KSh1.894T/$18.94B (42 percent of GDP) for the previous financial year 2012/2013 under the Kibaki- and Raila-led Grand Coalition Government. These figures and data are highlighted in the Annual Public Debt Report 2013-2014 prepared by The National Treasury.
Since its inception, the Jubilee Administration has borrowed a record KSh2.588T ($25.88B), an amount far exceeding the country’s level of total national debt from 1963 to 2013. That’s right! Those are fifty good years. Well, the economic fundamentals really are solid!
The sustainability of Kenya’s national debt is now highly doubtful. As documented in the 2017 Budget Review and Outlook Paper published by The National Treasury, the public debt to GDP ratio will be in the region of 59 percent by the end of the 2017/2018 financial year, contrary to the 51.8 percent figure projected in the 2017/2018 Budget Policy Statement.
Even as The National Treasury bureaucrats and the Jubilee administration choose to remain defiant over the country’s national debt situation, the controversial and contradictory statements made by CS Rotich point to an administration living in denial.
For instance, in January 2017, during the release of the Annual Public Debt Management Report 2016/2017, Mr. Rotich stated that the public debt to GDP ratio was projected to stand at 50.7 percent by June 2017. However, the Kenya Economic Report 2017 prepared and published by the Kenya Institute of Public Policy Research & Analysis (KIPPRA) towards the end of May 2017 reveals that by mid-2017, the public debt to GDP ratio stood at 52 percent.
An expected economic growth rate of 4.9 percent for the year 2017, coupled with a total debt of about KSh4.5 trillion ($45B), would ordinarily mean that on an approximate scale, Kenya’s debt to GDP ratio by the end of the year will be slightly above 60 percent.
With available information indicating an increasing level of public debt to GDP ratio, it should be taken into account that there are two fundamentally important fiscal benchmarks that stipulate the ideal level of public debt to GDP ratio.
Apparently, both fiscal frameworks highlight the need to maintain the public debt to GDP ratio at 50 percent or lower. One of these frameworks is the Protocol on the Establishment of the East African Community Monetary Union under the macroeconomic convergence criteria, and Kenya’s Public Finance Management Act.
Possible consequential effects of the high level of public debt that Kenyans must be prepared to face include an increase in the level of taxation informed by the need to shore up revenue for purposes of debt repayment, and the crowding out of private investment as lenders opt to advance credit/loans to the government at relatively higher interest rates, as opposed to lending to private entities at lower rates.
The second economic fundamental that defies and negates Mr. Rotich’s cosmetic sentimental remarks of “solid economic fundamentals” is the nuanced effect of the interest rate cap. With the procedural approval of the Banking Amendment Act of 2016, there have been two schools of thought whose arguments on the cap teeter on the two extreme ends of the continuum.
One argues that for a long time, interest rates in Kenya have been exorbitantly high, while the other premises its argument on the negative effects of the usury laws.
There’s a general consensus among members of the public, perhaps with the exception of the owners of commercial banks, on the need to have lower interest rates that are affordable to the Small- and Medium-Scale Enterprises (SMEs) which play a crucial role in Kenya’s economy, as well as for the low-end borrowers whose financial inclusion in the economy is absolutely important.
From the outset, following the drafting of the Banking Amendment Bill 2016 by Juja MP Jude Njomo (an ‘evangelical’ propagator of warped economic thought), CS Henry Rotich and the Governor of the Central Bank of Kenya (CBK), Dr. Patrick Njoroge opposed the proposed amendments.
According to the Kenya Economic Update Report by the World Bank released in December 2017, the interest rate cap has had a largely negative impact on the country’s economy. Among the consequences highlighted by the World Bank include:
- A shift in lending by banks from small borrowers and SMEs to corporate clients.
- A decrease in the proportion of new borrowers from 13 percent in March 2016 to around 6 percent after the operationalization of the Banking Amendment Act of 2016.
- Re-allocation of credit from the private sector to the public sector – in 2017, the amount of credit advanced to the government has expanded by 15 percent, compared to 3 percent for the private sector.
Having realized the deleterious effects of the interest rate cap, Dr. Njoroge recently made clear the CBK’s intentions to repeal the cap. Meanwhile, CS Rotich continues to maintain a taciturn approach.
Although he was opposed to the same law in its formative stages, he is on record stating it would only be a short-term measure, even as The National Treasury mulled plans to organize a forum to deliberate on the aftermath of the interest rate cap.
In addition, Mr. Uhuru Kenyatta, in his State of the Nation address in March 2017, acknowledged the “unintended effects” of the cap and promised to review the skewed policy.
In light of these arguments, the sanctioning and enactment of the legislation to cap interest rates makes for a campaign tool meant to win the hearts of the uninformed Kenyan citizenry. It qualifies as a populist economic policy that bears no resonance with Kenya’s economic realities.
The predatory behavior of commercial banks has always been blamed for the perniciously high interest rates in Kenya. But who really needs to take responsibility for the high rates?
Blame it all on the government. It has consistently chosen to run massive budgetary deficits that have now sparked a borrowing spree. And of course the laxity and complacency of the CBK in promoting fiscal discipline among banks, especially before the appointment of Dr. Patrick Njoroge as Governor, is a major factor.
Going into 2018, the interest rate cap must be repealed. Failure to do so will see banks continuing to react to the law and extending as much credit as possible only to the government and other well established entities. SMEs account for the largest proportion of employment opportunities in Kenya, and their limited access to credit due to the rate cap will only exacerbate the unemployment problem.
And of course an analysis of Kenya’s economic well-being would never be complete without an in-depth examination of the venomous effects of corruption. Now, corruption really is the bane of Kenya’s existence. From an exasperated Uhuru Kenyatta bellowing “What do you want me to do?” at a 2016 State House Summit, to a straight-shooting Barack Obama reiterating that “… the fact is, too often, here in Kenya … corruption is tolerated because that’s how things have always been done.”, Kenyans have seen and heard it all.
The statistics paint an even grimmer picture. According to the PwC 2016 Global Economic Crime Survey, Kenya reported a 47 percent incidence of bribery and corruption, the third highest incidence globally. Stack that against a global average of 24 percent, and you have what it makes for an alarming statistic.
In 2016, the Ethics and Anti-Corruption Commission (EACC) reported that Kenya loses KSh600M ($6B) – a third of its state budget – to corruption every year. While CS Rotich disputed that estimate, Mr. Kenyatta went so far as to declare corruption a threat to national security.
Here’s some perspective: The average Kenyan forks out a bribe at least twice in every three encounters with a public official. Corruption in Kenya takes many forms, with asset misappropriation, procurement fraud, accounting fraud, bribery, tax fraud, recruitment and payroll fraud, money laundering, intellectual property infringement, insider dealing, mortgage fraud, espionage and anti-trust law infringement being the most common.
As we wade into 2018, corruption will continue toasting to the most notorious of scandals to rock the Jubilee Administration – the National Youth Service (NYS) scandal of November 2015 – which cost taxpayers KSh1.9B ($19M).
But it’s not the only one. There’s the KSh215B ($2.15B) Eurobond Scandal of 2016. And the Mafia-style heist at the Ministry of Health towards the end of the same year that robbed Kenyans of another KSh5.5B ($55M). And the KSh53B ($530,000) Laptop Tendering scandal. And the KSh50M ($500,000) Chickengate Scandal. Indeed, 2016 was, by every measure, the greatest year for corruption in Kenya.
The fact that Kenya is still grappling with runaway corruption 54 years after independence is perhaps the biggest indictment of every administration since. Now, you might think how to curb corruption in Kenya is the proverbial $64,000 question, but it really isn’t. The doctor’s prescription has always been, and will always be, the same: We’ve got to find the will to demand accountability and integrity amongst ourselves, both as leaders and as a people.
Fast forward to yet another macroeconomic fundamental – food security, or the lack thereof. In 2010, Kenya set out to eliminate food poverty by the year 2020. And yet today, just three years shy of that deadline, at least 40 percent of the country’s population remains food-insecure.
On the 16th of May this year, the government announced a Ksh6B ($60M) subsidy on maize imports to help lower the cost of maize flour. Authorities blamed the shortfall on drought, but evidence suggests it was yet another stark reminder of our government’s endemic failure to plan.
Since independence, we’ve consistently blamed our food insecurity glitches on the same culprits: frequent droughts, exorbitant costs of food production (especially due to high costs of inputs such as fertilizers), steep global food prices and low purchasing power due to poverty.
Following the termination of the maize-subsidy program at the end of October, the government has done well to increase its budgetary allocation toward the purchase of maize from farmers. Its decision to increase fertilizer subsidies to farmers is also laudable, especially given it will most likely help raise maize yields on the back of lower input prices.
However, these are only short-term fixes. The government needs to stare further down the hallway and plan with foresight. We’ve got to start with land reform and redistribution in order to ensure efficacy in food supply and distribution throughout the country.
There’s also a veritable need to embrace policies aimed at bolstering rural investment, promote innovation and invention in the agricultural sector through technology transfer and advisory services, improve food storage facilities and augment irrigation and rainwater management endeavors.
Kenya’s irrigation potential is estimated at around 540,000 hectares, of which only about 105,000 hectares is exploited. It should be emphasized that major crop and livestock production can be tripled by using modern technologies. By developing the Tana and Athi basins and the Lake Victoria shoreline, Kenya can extend the area of land under irrigation by 1 million hectares.
The government’s decision to develop the Galana-Kulalu Food Security Project (touted the largest irrigation project in the country) in Kilifi and Tana River counties to supplement food production from the traditional food basket regions of the North Rift is a good place to start. But until we implement all these strategies, food security will remain a mirage for many Kenyans.
Time to look at unemployment. According to the United Nations Human Development Index (HDI) 2017 report, Kenya’s unemployment rate stands at an ominous 39.1 percent. To put that into perspective, four in every ten Kenyans of working age can’t find meaningful economic engagements.
As our ability to create new jobs tends to lag behind population growth, the shadows of income inequality, dependency, crime and violence continue to loom large, and this on a pro rata basis. As a matter of fact, at 33.1 percent, Kenya’s income inequality rate remains among the highest in the world.
So, what needs to be done to address the unemployment menace in Kenya? Well, our approach has to be multidimensional. As a country, we need to invest in high-quality education, laying particular emphasis on the need to nurture an entrepreneurial culture among the youth.
Sure, we’ve made strides making it easier to do business in Kenya, rising 12 places in the World Bank’s 2017 Ease of Doing Business Index, but we still have more to do. The government needs to take further steps towards lowering the cost of doing business, especially considering 80 percent of jobs created over the past decade have been in the informal sector.
We will now sign out with a cursory look at the effect of elections on Kenya’s economy. Kenya’s election cycle has always been synonymous with political and economic uncertainty. And uncertainty is never good for business, especially for a country whose tourism sector accounts for about 10 percent of her GDP, employing well over 1 million people.
Following election violence in 2007 and 2008, Kenya’s visitor numbers dropped by a third. Most recently, in anticipation of uncertainty following the Supreme Court’s nullification of the August 8, 2017 presidential election, Capital Economics predicted Kenya’s tourism sector would suffer a three percent growth slump. The wait-and-see attitude adopted by investors only serves to make things worse.
These recurring distractions inform the need for electoral justice, full-fledged democracy, adoption of a Parliamentary system of government and an end to the culture of impunity in Kenya.
So, here’s the $64,000 question: Are Kenya’s economic fundamentals as solid as CS Rotich would have us believe? You be the judge.
Dominic Atika is an economist and holds a B. A. in Economics & Sociology. He serves as a Program Officer at the Centre for Enterprise Development & Innovation (CEDI) in Nairobi, Kenya. He also blogs at atikadominic.com and his Twitter handle is @Atika_Dominic .
Sitati Wasilwa holds a B. A. in Economics & Sociology and he is currently pursuing a Master of Arts in Economic Policy Management at the School of Economics, the University of Nairobi. His Twitter handle is @SitatiWasilwa and he also blogs at sitatiwasilwa.blogspot.com .