Three Options for Fiscal Policy

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This article first appeared in my weekly column with the Business Daily on March 4, 2018

The Cabinet Secretary of Treasury, Henry Rotich, it putting together the budget for 2018/19, the first in the second era of devolution, being developed in a context where a second Eurobond has been issued and there is growing concern about the sustainability of Kenya’s debt. This is also the first budget in the second and last term for President Kenyatta and thus can give an insight into the type of fiscal legacy the president intends to leave. Fiscal policy over Kenyatta’s first term has been defined by three main features. The first is subpar revenue generation; while revenue generation has been growing, revenue targets are often not met, and revenue is not growing at a rate that can effectively fund expenditure. The second feature is aggressive growth in expenditure where the 2018/19 budget looks to be about KES 2.5 trillion, up from KES 1.6 trillion in 2013/14. This has led to the final feature of fiscal policy which is an expanding appetite for debt. Rotich has three main options for fiscal policy the 2018/19 financial year.

Treasury CS Henry Rotich can change tack and truly implement aggressive austerity measures. file photo | nmg


Firstly, the budget can be more or less what has been done in the past. And if one looks at the February 2018 Budget Policy Statement (BPS), it seems as though this year’s budget will be more of the same. Allocations to dockets are within similar ranges as in the past, expenditure has grown aggressively and the aggressive appetite for debt continues. Should Rotich choose to stick to this fiscal path, concerns over the country debt growth will continue to be voiced as it is precisely this fiscal path that has gotten Kenya to the stage at which we are now.

Secondly however, Rotich can change tact and truly implement aggressive austerity measures in the context of fiscal consolidation where concrete policies are created to reduce government deficits and debt accumulation and results tracked. Several bodies have called for fiscal consolidation and thus it would be prudent for the Treasury to heed that call. The concern with previous budgets is that Treasury asserts that austerity measures will be implemented and spending cut, but budget implementation indicates that this does not actually happen. Rotich has a chance to make significant cuts in unnecessary spending, enforce fiscal discipline, allocate more money to development spending and implement measures to ensure development funds are absorbed.

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The final path is one where Rotich puts significant funds into President Kenyatta’s Big Four and uses expenditure to finance the sectors of health, industrialisation, housing and agriculture in order to catalyse economic growth, create jobs and reduce poverty. Rotich can present the argument that prudent and disciplined spending targeting the four dockets will put Kenya on a growth path where the country hits the Vision 2030 growth rate of 10 percent. Sadly, however, there is no indication of notable fiscal support to the Big Four in the February BPS. There is a section dedicated to the Big Four in the BPS but if one takes a close look at allocations, one finds no difference in allocation patterns that would indicate that the fiscal process is focused on the Big Four.

In short, the budget for 2018/19 will set the tone of fiscal policy making for the next four years and let Kenyans and the world know, the extent to which government will leverage fiscal policy to put the country on a dynamic growth path that is fiscally sustainable and catalytic.

Anzetse Were is a development economist;



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.


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?


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:

The risks of foreign denominated debt for Kenya

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Anyone keeping an eye on the economy will have noted the level of public debt being accrued, particularly foreign denominated debt. Total debt stood at KES 2.37 trillion (USD 26.78 billion) after Kenya’s sovereign bond issue in June. The concern with the debt being accrued is that we are getting into larger foreign denominated debt than previously was the case. Kenya is an import economy so by default, in order to service foreign debt, government has to buy dollars. The assumption being made is that the foreign debt will boost the economy primarily through investment in infrastructure which is expected to generate the capital required to service the debt. It is important to note that although there is support for this hypothesis there are also those who question the logic that infrastructure equals growth. In fact, the London School of Economics states that, ‘empirical estimates of the magnitude of infrastructure’s contribution (to growth) display considerable variation across studies. Overall, however, the most recent literature tends to find smaller effects than those reported in the earlier studies’. This article will not debate this point but instead highlight the challenges Kenya will face should this almighty investment in infrastructure not generate the growth expected. How does payment in shillings affect the economy should the foreign denominated debt fail to yield the returns expected of it? How then, will government raise shillings to service this substantial debt?

Debt The first and most obvious option is for government to raise taxes in order to raise shillings that can then be used to service the debt. But Kenya is already a heavily taxed country and one wonders if we have reached a point on the Laffer Curve where raising taxes further will harm profitability and actually lower revenues. Tax rates that are too high effectively penalize people for engaging in economically productive activities; so government risks harming its own revenue if increasing taxation becomes the main strategy used to raise shillings.

The second option is to borrow shillings locally and use this capital to buy dollars and service the debt. The argument has been made that Kenya entered into foreign debt to ease pressure on local credit and interest rates. But if that investment doesn’t yield what is expected then government may have to borrow locally to service the debt anyway. This borrowing obviously crowds out the private sector and reduces private sector access to credit. One consequence of this it that private sector may not be able to implement activity and developments that were to be debt financed. Further, but borrowing locally, government will put pressure on interest rates possibly pushing them up which again, will make credit less available to private sector borrowers. The economic growth of the country may then be muted because private sector and SMEs would not been able to access the credit they needed to become more productive. Further, borrowing locally does not solve the debt problem but merely rolls it over to be dealt with at a later date.


The third option for government is to implement austerity measures and reduce recurrent expenditure so that more shillings are made available for debt servicing. But in Kenya, this option does not seem feasible. The prevailing climate in the country is one where those being paid by Kenyans always seem to want to increase their salaries not reduce them. This makes it very difficult for government to reduce recurrent expenditure.

The fourth option through which government can ‘raise’ shillings is by printing shillings. Government has done this in the past and this phenomenon is certainly not unique to Kenya. The problem with printing money is that it expands money supply which often drives inflation up. The excess supply of KES can also lead to a further depreciation of the currency making it even more expensive for government to buy dollars and service foreign denominated debt. Therefore if the government prints KES, it will be effectively making the debt more expensive.


Clearly, none of these four options are attractive and each has consequences that could have economic and perhaps even socio-political implications. These options present the risks Kenya faces as it enters into an era of acquiring and servicing foreign denominated debt on a scale far larger than ever before.