Kenya’s Fiscal policy: Challenges and Recommendations

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This article first appeared in my weekly column with the Business Daily on November 8, 2015


Over the past few weeks Kenya’s fiscal management has been under domestic and international scrutiny particularly with regards to the Eurobond. However, what has been lacking in the conversation is a look at Kenya’s overall fiscal policy and how it has informed the articulation of the economy. There are three core anchors that can be useful when analyzing Kenyan fiscal policy: planned expenditure, fiscal deficits and revenue generation. These will allow an elucidation of the prudence of Kenyan fiscal strategy.

In terms of planned expenditure, annual fiscal budgets have been consistently increasing year on year. In 2012/13 the budget stood at KES 1,459.9 billion, in 2013/14 it was KES 1,640.9 billion, 2014/15 the budget presented was KES 1,773.3 trillion and for 2015/16 it was a massive KES 2.2 trillion. Noting these consistent increases in annual budgets are important as it puts pressure on government to increase revenue generation.

(source: https://www2.illinoisworknet.com/SYEP2014/PublishingImages/reports_color.png)

Secondly, yearly increases in planned spending have been correlated by growing fiscal deficits: 6.5 percent in 2012/13, 7.9 percent in 2013/14, 7.4 percent in 2014/15 and 8.7 percent in 2015/16. The first point to note is that Treasury has been consistently flouting its 5 percent fiscal deficit target. Secondly, as of October 2015 according to Standard and Poor’s the fiscal deficit has already exceeded what government intended and stands at a much higher estimate of 9.4 percent. Finally, these hikes in fiscal deficits are occurring in a context of decelerating GDP growth: 2012 GDP growth was 6.9 percent, 5.7 percent in 2013, 5.3 percent in 2014 and this year we’re hoping to hit 5.4 percent. This anaemic performance fuels anxiety around growing fiscal deficits. Increases in fiscal deficits buttressing increased expenditure in the context of decelerating growth puts pronounced pressure on government to ensure sufficient revenue is generated to meet these costs. How will government sustainably finance growing fiscal deficits in the context of a slowing economy?

Further, this year Treasury aimed to finance the deficit through external financing worth KES 340.5 billion and domestic financing worth KES 229.7 billion (~ 60/40 divide). Though understandable, debt heavily weighted towards foreign currency is bound to be strenuous to service because as an import economy a scarcity of FX preponderates in Kenya. However, although government stated most funds would be sourced externally, government has since signalled it will borrow heavily in domestic markets as well, partly to service the fiscal deficit one presumes. Therefore, not only are Kenyans being pushed out of domestic borrowing markets by government, there is added pressure to raise foreign currency to service the fiscal deficit portion sourced externally. Thus, the Kenyan economy will be hit both by hikes in interest rate due to aggressive domestic borrowing by government, as well as experiencing pressure in servicing foreign debt in the context of poor FX earnings (especially tourism) and a depreciating shilling.

(source: http://www.forextradeoracle.com/images/ForexTradeOracle.jpg)

Finally, although government budgets have been increasing each year revenue generation has not been growing at par. In 2012/13 KRA collected KES 800 billion, in 2013/14 KES 963.7 billion, in 2014/15 KRA collected 1.001 trillion. This year the KRA target stands at KES 1,358.0 billion, juxtapose that with the 2015/16 budget of KES 2.2 trillion. Already there are signs this year’s targets will not be met; it emerged that the Kenya Revenue Authority missed its revenue target by KES 10 billion shillings for the first quarter ending September. Ergo it can be surmised that government may experience difficulty in not only financing future ballooning budgets, but meeting the debt service obligations of both domestic and foreign denominated debt including that linked to the fiscal deficit.

In short, there is an extent to which current fiscal strategy has informed the squeeze the economy is facing currently. There is clear room for improvement and this can be done by lowering planned expenditure and controlling spending, lowering fiscal deficits and ensuring that revenue generation is more at par with (lower) planned expenditure.

Anzetse Were is a development economist: anzetsew@gmail.com

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My panel interview with NTV on the serious problems facing the Kenyan Economy, November 2, 2015

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I was part of a panel that looked at media coverage on Kenya’s economic problems on Press Pass on NTV.

The Importance of the Eurobond Mystery

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This article first appeared in my weekly column with the Business Daily on November 1, 2015

In June 2014 Kenyans were given the impression that the issuance of the USD 2.75 billion (KES 269.5 billion) ‘Eurobond’ would be of great use to the country and economy. Not only did government state that it would be used to fund infrastructure, it would also allow them to pay off onerous debt. Government linked the bond to lower domestic interest rates stating they would not borrow domestically because of liquidity offered by the bond. Then last month the government announced that they were going to borrow heavily domestically and acquired a two-year, KES 77.43 billion syndicated domestic loan. Some banks responded by raising their interest rates rubbishing the ‘low interest rate’ Eurobond promise. This is when questions around what happened to the proceeds of the bond intensified and hard questions asked.

(source: http://apolloassetmanagement.co.ke/wp-content/uploads/2014/07/euro-bonds.jpg)

The National Treasury Cabinet Secretary Henry Rotich argued that KES 196 billion from the bond went into infrastructure and another KES 53 billion deposited in a foreign account intended to pay off external debts. Yet the Controller of Budget told Parliament that an estimated KES 176 billion could not be accounted for; and although KES 53 billion had been withdrawn to ‘pay off loans’, this was done un-procedurally. Many Kenyans know most of this but what many Kenyans do not know is that the bond is costing them KES 16.4 billion in interest payments as of July 2015. Kenyans are hemorrhaging money to service a debt for which there is no clarity as to how precisely it is being used. How is this acceptable?

The mystery of where the Eurobond billions went is important for three reasons; firstly if the money is not being used as planned, will the ‘alternative use’ generate sufficient returns to service the bond particularly when it matures? The bottom line is that if the bond does not generate the economic activity required to raise revenue such that government meets its obligations, then that money is likely to come out of revenue intended for other purposes. Global financial markets are not patient development financial institutions that entertain ideas of ‘forgiving’ debt. The Eurobond must be paid and will be paid and if government has to dip into national budgets to do so, then so be it. This factor alone should cause sufficient concern in the minds of Kenyans.

(source: http://orientalreview.org/wp-content/uploads/2014/09/debt.jpg)

Secondly, given the uncertainty surrounding the Eurobond, how can it be ensured that the country will reap the economic and development dividends that apparently motivated the bond issuance in the first place? Kenya needs infrastructure; that was not a hard argument to make and perhaps informed the bond’s oversubscription. But for a government that seems to believe in the ‘multiplier effect’ of infrastructure and promised as much, this expectation is yet to be met by reality. Where is the multiplier effect? GDP growth is insipid; and what precisely is the progress on infrastructure projects? If Kenya does not execute progress on what was essentially an infrastructure catch up plan devised by government that informed the bond issuance, then any potential catalytic effects of the bond will obviously not be felt in the economy.

Finally, this Eurobond debacle is going to inform the Kenya government’s reputation globally- a reputation that has already being hammered in recent times. It was absolutely crucial that the Eurobond be handled meticulously–particularly given that it was the country’s debut sovereign bond. Meticulous management is not the sense one gets when looking at this issue. The other concern is that potential fiscal mismanagement may fall out into the rest of the economy and raise questions as to whether Kenya is a credible investment destination, period.

There is a need for clarity to be brought to the Eurobond mystery not only because doing so will make many of us sleep better, but because Kenyans are owed an explanation as to how their money, which is servicing the bond, is actually being used.

Anzetse Were is a development economist; email: anzetsew@gmail.com

Interest rates present a tricky challenge for the CBK

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This article first appeared in my weekly column with the Business Daily on October 25, 2015


After the government announced that it had acquired a two-year, Sh77.43 billion ($750 million) syndicated loan, some banks raised their interest rates. This raised questions about what happened to the billions raised via the Eurobond and the implications of rate hikes on the economy. However, the truth of the matter is that there are several compounding variables with which CBK has to contend; variables that put pressure to keep rates high as well as pressure to lower rates.

In terms of the pressure to keep rates high one need only remember that the CBK raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent and then raised it again to 11.5 percent in July 2015. These hikes were done in an attempt to stem the depreciation of the shilling and control upward inflationary pressure. This act was arguably warranted given that Kenya is an import economy and has to service foreign denominated debt which currently stands at about 50% of total debt. Therefore, if the KES depreciation is not managed, import bills will become more costly and foreign denominated more expensive to service. These are real short to medium term pressures that the government has to manage.

(source: http://i.telegraph.co.uk/multimedia/archive/01811/inflation_1811026c.jpg)

Of course the problem with raising interest rates is that it often has a dampening effect on economic growth due to reduced investments and consumption. Therefore in keeping rates high further strain will be put on economic production and GDP growth. This will happen in the context of economic performance that has been so anemic that both the World Bank and the government revised GDP growth figures downwards. High interest rates will likely exacerbate the subpar performance of the economy and government will fail to generate the revenue required to pay import bills and service debt. Therefore in this scenario, CBK has to tussle with keeping rates high to stem KES depreciation and control inflation while contending with the negative consequences of doing so.

At the same time, there is pressure to lower rates. As mentioned, high interest rates tend to dampen economic growth and Kenya cannot afford this. So there is good reason for rates to be lowered, clearly the economy needs it. Lower rates will enable economic productivity, support economic growth and allow government to generate much needed revenue. However, if interest rates are lowered it risks prompting the devaluation of the shilling and enabling upward inflationary pressure. A weak shilling will mean import bills are more expensive and may make servicing foreign debt unaffordable. High inflation will raise the cost of living which will mean that basic goods such as food become more expensive for Kenyans. This is when the politics of economics comes in; no government wants to be in power when basic goods become unaffordable as social unrest usually ensues. Therefore, although there is pressure to lower interest rates, the potential negative consequences of doing so are not phenomena with which any government would want to contend.

(source: http://blog.amnestyusa.org/wp-content/uploads/2013/03/163414855.jpg)

In short, there are dangers in keeping rates high and dangers in lowering rates; so what should the CBK do? In my view, given the fact that there is extra incentive to raise rates due to heavy domestic borrowing by government, the CBK should lower rates. This is because government borrowing has prompted rate hikes beyond what CBK had orchestrated. Therefore, a lowering of the CBR will buffer the economy and Kenyans from the recent hike in rates.

However, the situation the economy is in right now has made one thing clear; Kenya’s economy cannot continue to be structured as it is. There must be concerted and deliberate action by government to plan a fundamental reorientation of the economy in which more forex is earned. This can be done through increasing exports and diversifying our export profile, as well as supporting forex earners such as tourism.

Anzetse Were is a development economist; email: anzetsew@gmail.com

TV Interview on Kenya’s debt- October 18, 2015

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Clips from an interview with KTN Kenya on Kenya’s Debt

Africa needs austerity plans for government

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This article first appeared in my weekly column with the Business Daily on October 18, 2015

Analysts watching Kenya are anxious, and with reason. Last week the government announced that it will borrow a confounding Sh78.8 billion from local banks to plug a 600 billion hole in the budget. As a result, many of us are asking ‘what happened to the Eurobond billions’? Didn’t we float the bond to avoid this precise type of problem? My contention is the problem lies in the type of leaders Kenya, and indeed much of Africa, is electing.

The basic problem with our current leadership culture, at least in Kenya, is that the wrong types of people aspire to and therefore get into elected office. Let us look at some facts; two years ago a study by the IMF showed that in Kenya the MPs’ basic pay, which excludes allowances, is 76 times Kenya’s GDP per capita of Sh84,624. 76 times. The study further found that four out of five of the highest paid MPs in the world are African: Nigeria, Kenya, Ghana and South Africa. They get more than their peers in the developed economies of US, Britain and Japan. Another study by The Economist indicated that Kenyans pay political leaders the most in the world when taken as a ratio of GDP per person. This is clearly lunacy. The consequences of this lunacy is what is biting Kenya and much of Africa financially right now, and is one of the reasons government seems to be unable to manage finances and is on an endless borrowing spree. Austerity is needed.

(source: http://afritorial.com/infographic-how-kenyan-politicians-pay-compares-globally/)

As is stands, one can confidently surmise that those who run for office in Kenya (and Africa) are interested in two things: firstly, their core interest is to use elected office to enter a plush lifestyle through ridiculous and unjustified salaries and benefit packages. Secondly, elected office provides ample opportunity to engage in corruption, and those elected seem do so with the sense of entitlement that comes with the ‘it’s my turn to eat’ mantra apparently so enthusiastically adhered to by them. As a result, Kenyan elected office attracts a certain type of person; a person driven by avarice. This person views political office as a means of enrichment rather than as an opportunity to serve and build the country. Through outrageous wages and benefits, Kenya has created criteria where those with self-seeking interests rather than those with altruistic interests self-select to run for office. It’s an open secret in Africa that getting into elected office is probably the quickest way to get rich. Is it then a wonder that the culture of servant leadership hasn’t taken root in Kenya or across much of the continent?

https://i1.wp.com/econintersect.com/wordpress/wp-content/uploads/2011/10/fat-cat-politician.jpg

(source: http://econintersect.com/wordpress/wp-content/uploads/2011/10/fat-cat-politician.jpg)

To fix this problem austerity plans targeting government are desperately needed that target the wages and perks of elected office. We should create such trim and lean governments where those in elected office get so little, that two things happen.

Firstly, those with voracious self-seeking appetites will no longer be attracted to run for office because the modest salaries and benefit packages will not fit into their plans for quick self-enrichment. As a result, an environment will be created those whose priority is building the nation and continent will self-select to vie for office. Secondly, the sincerely ludicrous government recurrent bills will come down substantially. No longer will being in elected be synonymous with going to five star hotels for ‘seminars’ and ‘conferences’ or taking expensive trips to foreign metropolises for ‘learning trips’. Being in government will mean you have to take public transport or buy a humble car to take you to and from the office.

So yes, Kenya needs austerity plans– for government. These plans will not only change the type of person who seeks to run for office, it will create a spending pattern where public funds are more likely to go to development rather than into recurrent expenditure or the pockets of elected officials.

Anzetse Were is a development economist; email: anzetsew@gmail.com

The State of Kenya’s Economy- TV Interview October 15, 2015

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In this interview I talk with TeryyAnne Chebet of Citizen TV Kenya on the State of Kenya’s Economy.