By Sitati Wasilwa
It’s a herculean task to be a Kenyan, a situation exacerbated by the policy missteps and misgovernance of the Jubilee administration.
From the plundering of trillions of money, the implementation of cost-ineffective projects, the dominance of two ethnic communities in government, a dejected and highly unemployed youth, hoarding of maize, consumption of poisonous food products, wanton increase in taxes and many others, it requires the common Kenyan some world-class grit to go through all these necessary evils.
But considering the concerns raised by the Kenyan public in regards to the aforementioned issues, one should not forget the dishonesty that is conveniently sidestepped while debating on these policy matters.
A good example is the debate on the recent increase in prices of petroleum products which has to be revisited while drawing out the facts and fallacies, the faults and dishonesty about it.
A general understanding of the visible hand of the International Monetary Fund (IMF) in view of Kenya’s situation is elemental bearing in mind that this debate is full of misinformation.
To begin with, it would be important to look at the primary role (s) of the IMF for the benefit of the general public and the pseudo-economists.
IMF has three main functions: monitoring of economic and financial developments and offering policy advice to prevent economic/financial crises; offering loans to countries facing balance of payments difficulties; and provision of technical assistance and training in line with its scope of work.
As matter-of-factly, the institution’s Stand-By Arrangement (SBA) and Standby Credit Facility (SCF) are primarily lending frameworks that are intended to help countries facing the balance of payments difficulties.
Essentially, the balance of payments difficulties refer to a situation whereby a country is importing more goods, services and capital than what it is exporting. Thus, the SBA is a lending framework that allows the IMF to provide financial assistance mostly to the middle-income and advanced economies in the event of a financial crisis. On the other hand, the SCF is a framework that allows the IMF to provide financial assistance to low-income countries with the goal of correcting the short-term balance of payments problems.
Kenya’s agreement with IMF comprises of an SBA of $989.9 million and SCF of approximately $494.9 million.
Fundamentally, access to the SBA and SCF is based on the criteria determined by the IMF and at its minimum, the consenting countries are expected to implement conditionalities fronted by the Fund and pursue policies aimed at correcting the balance of payment problems.
Genesis of the Current Situation
In 2013, the Executive through The National Treasury and the Central Bank outlined a raft of policy measures meant to improve revenue collection and general economic performance of the country.
On 28th of March 2013, through a letter signed by the Treasury Cabinet Secretary Henry Rotich and then Central Bank Governor Njuguna Ndung’u, the Executive was committed to full implementation of the proposed changes to value-added tax (VAT).
Among the proposed changes to the country’s VAT structure was to do away with VAT exemption on petroleum. Parliament’s intervention saved face as the VAT proposals were put on hold for three years till 2016.
Amendments to the Finance Act 2016 on August 31st 2016 extended the exemption of the VAT on petroleum products for two years with the exemption coming to an end on September 1st 2018.
Subsequent extensions by Parliament to postpone the implementation of VAT on petroleum products among others can only be termed as symptomatic responses to the hazy economic policies pursued by the Jubilee administration.
Ascending to power following the highly divisive 2013 general elections, the Jubilee administration was out of favour with half of the Kenyan citizenry and the West. Therefore, it was out to mend fences by embarking on ambitious infrastructural projects which would ordinarily require to be highly financed either through borrowing or revenue collected.
Institutionalization of various infrastructural projects was intended to improve the administration’s political fortunes. With the desire to increase the collected revenue, the Executive engineered the move to restructure the VAT system.
Being in good books with the IMF would aid the Jubilee administration just in case Kenya’s economy was to be hit by a crisis. We should not forget that IMF and extensively the West have proved to be the chief lenders of last resort when economies of poor countries experience economic crises.
In any case, if the Kenyan economy was to be hit by an economic crisis under a Jubilee administration not in good terms with IMF, then regime change – a common foreign policy tool fashioned by the West – would possibly be sanctioned.
With the country’s public debt level running into headwinds, Kenyans are left with no choice but to pay high taxes to finance the costly mega-projects which make little economic sense, though politically sensible to the current administration.
Rationale of VAT on Petroleum Products
No rocket science is required to know whether the government is broke or not. Levying VAT on petroleum products is meant to raise more revenue for a Republic whose Executive and Legislature have failed in view of essentials of public finance.
Details captured in an IMF Country Report dated March 2018 indicate the commitment of the Kenyan government in implementing a number of policies.
Key among these policies include cutting expenditure, increasing revenue and the removal or significant modification of the interest rate caps. In regards to cutting expenditure, lower-priority capital projects are not to be financed.
Few weeks ago, Uhuru Kenyatta apparently issued an order stopping any new projects from being sanctioned with majority of Kenyans thinking it is a move meant to curb corruption. Essentially, the order is rooted in the administration’s commitment with the agreement reached by IMF.
Levying of the VAT on petroleum products is expected to generate Kshs.71 billion in revenue. Considering, however, the amount of finances lost through corruption, tax evasion and unnecessary tax holidays, then Treasury is clearly missing the boat.
Treasury expects that the revenue to be collected this financial year would amount to Kshs.1.92 trillion. At the beginning of the last financial year (2017/2018), Treasury targeted to collect Kshs.1.7 trillion in revenue before revising the estimates to Kshs.1.4 trillion. For the last five financial years, KRA has never been able to achieve its targets in regards to revenue and the current financial year won’t be an exception.
Rotich’s bravado not to concede to the public’s outcry on the increase in prices of petroleum products is an indication of how Treasury is desperate to raise funds bearing in mind that grave concerns have been raised on the administration’s zeal for borrowing.
Inherently, the current uproar on the fuel prices and the administration’s hell-bent nature to effect the VAT on petroleum products is a game of absolute dishonesty.
Firstly, the Executive is dishonest on this policy issue. Was it not aware about this policy that would occasion a rise in the cost of living? This is incompetency at its best.
Secondly, the Treasury chiefs are a bunch of dishonest bureaucrats. For the last five years, the country’s budgets have been characterized with massive deficits. Though revenue collected has significantly increased, it is the nature of KRA to continually miss targets, and this has raised concerns on Treasury’s fiscal approach and KRA’s inefficiency.
A 2015 joint report by the African Union and the Economic Commission for Africa pointed out that Kenya loses over Kshs.600 billion as a result of tax evasion. In six months leading to August 2018 tax evasion at the port of Mombasa, as reported, amounted to Kshs.100 billion. In a report published by Oxfam in January 2017, it is estimated that Kenya loses over Kshs.100 billion annually due to tax exemptions given to global corporations.
One should also consider that a third of the national budget is never accounted for then think about the billions of shillings lost. So, who is fooling who? The government should be busy sealing all these loopholes that lead to trillions of money being lost instead of pursuing policies that will ultimately generate unintended consequences. Treasury’s ineptness certainly means that looking at the bigger picture is a mirage.
Parliament as usual is full of dishonest individuals who are starkly corrupt and lack any intellectual capacity to prioritize weighty policy issues. Did Parliamentarians not foresee the impending rise in prices of petroleum products? Some have come out making claims on how the Treasury duped them to passing the VAT Act 2013 on the account that the country was expected to produce oil which would stabilize domestic petroleum prices.
Lack of Parliament’s independence is a factor that has incapacitated the institution from representing citizens in a dignified manner. Parliament operates under the wings of the Executive particularly for the ruling party, the Jubilee Party. Rigorous debates cannot take place under such conditions.
Voters are also to be blamed in regards to this game of dishonesty. It was pretty clear that the economic policies of the Jubilee administration were deeply flawed but this hardly convinced a significant number of voters to vote otherwise.
Elections need to be a matter of assessing policies aimed at improving the lives of the citizens. In the event that policies pursued by the ruling political formation lead to more misery than prosperity, then morally such an entity does not deserve to be voted in.
The IMF is dishonest about the austerity policies that it recommends for countries. Historically, IMF has fashioned this policy misstep which ignores the fortunes of residents of countries that they push to adopt policies that cut spending and raise taxes.
Spending may be reduced especially for the case of Kenya where public funds are largely wasted. Increasing taxes raises the cost of living but the IMF seems to be hell-bent in fronting this policy recommendation.
Implications & the Future
An increase in the prices of petroleum products is bound to trigger ripple effects across other sectors of the economy and social structure. Prices of other products will definitely go up as a result of the increase in the transportation costs. With the income earned by Kenya’s residents expected to be fairly stagnant then inflation will certainly occasion a rise in the cost of living, a diabolical economic and social outcome.
Furtherly, postponement of levying VAT on petroleum products would definitely lead to a catch-22 situation. In the event that Uhuru Kenyatta assents to the Finance Bill 2018, it would just be two years before we voice out our disappointment at the economically imprudent Jubilee administration.
Failure to implement the VAT on petroleum products, in CS Rotich’s words, will occasion difficulties in financing the country’s budget thus necessitating more borrowing or increasing the VAT rate on other products from 16% to 18%.
Either way, my hunch is that VAT will soon be levied on other non-VATable products as the Treasury desperately seeks to raise finances through taxation with the room for further borrowing fast contracting.
Politically, there will be no consequences going by the nature of majority of Kenyans who forget rather quickly. If a significant majority of the Republic’s voters would be voting on the basis of policy proposals and performance of the incumbents, perhaps the noises being made would only be grave wishes.
Voting is not enough. Constitutionally, citizens are empowered to air their concerns on issues affecting them. I long for the day when Kenyans will march on the streets en masse to demonstrate against nefarious policies pursued by government institutions.
On how not to manage the economy, CS Rotich and the Presidency offer crucial lessons for historical purposes. Running an economy depends on getting the fundamentals right. Trading-off an economy’s cost of living with poor, inefficient and punctured policies is a validation of getting it wrong on the fundamentals. The goose is cooked!
Sitati Wasilwa is an economist and partner at Savic Consultants and serves as a member of the Management Committee at Kenya YMCA, Nairobi Central Branch.