Grand promises: The high cost of financing Cord, Jubilee manifestos

Saturday February 9 2013

If promises were to be fulfilled to the letter by either Raila’s Cord or Uhuru’s  Jubilee, the country’s  budget would increase by $2.3 billion. Photos/FILE/TEA Graphic

If promises were to be fulfilled to the letter by either Raila’s Cord or Uhuru’s Jubilee, the country’s budget would increase by $2.3 billion. Photos/FILE/TEA Graphic Nation Media Group

By Mwaura Kimani and Steve Mbogo

The trickle-down economics favoured by two of Kenya’s leading presidential candidates — Uhuru Kenyatta and Raila Odinga — in their manifestos has come under sharp scrutiny, with analysts questioning their financing models and their ability to significantly cut Kenya’s high levels of poverty.

The manifestos released over the past two weeks by the Coalition for Reforms and Democracy (Cord) headed by Prime Minister Odinga and the Kenyatta-led Jubilee Alliance are loaded with welfare promises, but short on innovative ways of financing the programmes.

Opinion polls have consistently put Mr Odinga and Mr Kenyatta ahead of the other six presidential contenders. Musalia Mudavadi, who is seeking the presidency on an Amani coalition ticket, is expected to launch his party manifesto this week.

Independent economists, the Institute of Economic Affairs, a Nairobi based think-tank, and The EastAfrican estimate that if the promises were to be fulfilled to the letter by either team, the country’s annual budget could increase by at least Ksh200 billion ($2.3 billion).

Economists and business executives say that, while the proposals by the two candidates would improve the living conditions of millions of Kenyans, their implementation would raise public spending, triggering a sharp rise in borrowing.

“The manifestos show maturity of democracy and appreciation of economics as an election issue. We have seen discussions on some very serious policy issues like land that have not been widely spoken about before,” said Prof Joseph Kieyah, an economist at the quasi-government Kenya Institute of Public Policy Research and Analysis (KIPPRA).

“But there is a need for the candidates to explain how they will raise the financing and what options they have in case the projected revenue is not adequate. This should be done in appreciation of the fact it will be expensive to run the next government because of devolution structures,” said Prof Kieyah.

Kenya’s next president must come up with a policy mix that will accelerate growth, pull back the high cost of living, spur the economy’s ability to create jobs and put more money in the pockets of households by supporting key sectors.

The winner will also be expected to extend the trickle-down economics that the incumbent Mwai Kibaki has pursued in the decade he has been in power.

President Kibaki has rolled out free primary and partially free secondary school education, touted as the most tool for effective social equalisation, opening the doors for children from poor backgrounds to attain basic education and giving them a chance to scale the career ladder.

But President Kibaki’s policies have done little to lift the majority of Kenyans out of poverty.

A May 2012 report by the World Bank showed that Kenya’s poverty levels have oscillated between 44 and 46 per cent for the past six years. However, this represents an improvement from 12 years ago when the poverty level stood at 56 per cent before falling to 46 per cent in 2005.

Kenya is currently grappling with increased budgetary needs amid revenue shortfalls. Any rise in borrowing could trigger higher interest rates and reduced demand for borrowing from the private sector, stunting growth.

And while the two coalitions’ manifestos have focused on spending, the next government will inherit a Kenya Revenue Authority that has missed its revenue targets in addition to having the task of financing new administrative units in the 47 county governments and several public-funded institutions created under the new Constitution.

“Both manifestos contain huge spending promises but no source of financing. There is minor talk of closing loopholes or streamlining certain services, but nothing comparable to the spending side,” said Jason Lakin, senior programme officer and research fellow at International Budget Partnership (IBP), a policy think tank.

Raising finances

“There are many more proposals requiring finance than there is discussion of how those finances will be raised. Jubilee is even talking about reducing business taxes as their main tax proposal, and their manifesto would shred the tax system with tax incentives provided in every conceivable area: Sports, tourism, agriculture, manufacturing etc. Given that KRA cannot raise enough money under the current structure, how will they pay for all of these incentives?” he asked.

On the other hand, the Cord team promises to provide the youth with business start-up grants and subsidised business loans, without giving details of the financial commitments. It will also introduce crop and livestock insurance and a free national health insurance scheme.

Assuming that the current spending is doubled, a Cord administration would budget about Ksh48 billion ($560 million) for the national health insurance scheme. Kenya’s entire public health budget for the financial year 2012/13 was Ksh86 billion ($1 billion).

Jubilee also promises to allocate 2.5 per cent of national revenue annually towards establishing a Youth Enterprise Fund that will be designed like the Constituency Development Fund, providing direct state funding for social projects. The fund would give interest-free loans to the youth.

Kenya already has a Youth Fund and a Women’s Enterprise Fund, revolving funds that provide subsidised loans.

A proposal by Jubilee to provide free milk for every primary school going child would cost at least Ksh6.4 billion ($74.4 million) per year assuming a litre is going for $1 dollar and the milk is distributed once a week.

Jubilee also plans to increase education funding by 1 per cent each year so that by 2018 it reaches 32 per cent of government spending. Based on the budget for the current fiscal year, the 32 per cent would come to Ksh448 billion ($5.2 billion).

Allocating 2.5 per cent of national revenue annually towards the Youth Fund would require Ksh24 billion ($279 million) annually. This amount is larger than the budget for about 15 ministries for this year.

On agriculture, Jubilee promises to, within five years, put a million acres of land under modern irrigation and further expand agricultural production by employing modern technology on currently cultivated land and on the 2.5 million acres presently not in use. Taking a cue from Tanzania, which has similar projects, this would cost at least Ksh100 billion ($1.2 billion) over five years.

Its policy to provide a laptop loaded with relevant content to each of Kenya’s estimated 7.8 million school going children in primary and secondary school would cost $1.1 billion, at $200 per laptop.

Cord proposes to invest at least 2.5 per cent of annual GDP in research and development, which would translate to between Ksh80 billion to Ksh100 billion ($1.2 billion). The proposal to invest at least 10 per cent of GDP in infrastructure development over the next five years would require at least Ksh400 billion ($4.6 billion) annually.

Cord has also proposed to control exchange rates to ensure that imported consumer goods, energy (especially petroleum products) and manufacturing inputs do not lead to high prices.

But the Institute of Economic Affairs describes this as a bad idea, “because exchange rates reflect the government’s debt position today, among other factors. The mere control of exchange rates does not solve the problem but simply redistributes income from exporters who would earn less than they would if the shilling were weaker, towards importers,” said IEA in costing estimates sent to The EastAfrican.

Estimates by IEA show the Cord proposal to extend cash transfers to the elderly, orphans and vulnerable children would require not less than Ksh38.5 billion ($447.6 million) annually, assuming each is given Ksh2,000 ($23.3) a month.

The figure would be higher with the promise to extend grants to the urban poor. The IEA reckons it would require Cord to put a very high threshold to ensure that only a very small and manageable number of Kenyans benefit from these transfers.

A University of Nairobi economics lecturer, Samuel Nyademo, says the coalitions’ proposals are “utopian because the financial implication of their implementation is unachievable. They are exaggerated and do not appreciate the resource constraint that the government already faces. For instance, a promise to give interest-free loans is not practical and is unethical. The manifestos are generally meant to hoodwink the voter because most Kenyan voters are semi-literate.”

Both manifestos take little cognisance of the current state of public finances, as none has addressed the issue directly, or identified new opportunities that will generate additional revenue and strategies to seal existing tax loopholes.

Patrick Obath, the chairman of the Kenya Private Sector Alliance (Kepsa), a business lobby, observed that “while they are essentially grand ideas, it would be good to know and understand how they hope to finance those proposals on a day to day basis”.

“The manifestos are comprehensive but they are less satisfactory in terms of policy innovation. They display monotonous aspects of governance like providing pensions for the aged and free national health insurance, without identifying sources of those funds,” said Kwame Owino, chief executive officer at the Institute of Economic Affairs.

“It is clear from the manifestos that the leading presidential candidates are fighting to redistribute public wealth rather than create more wealth,” he added.

Treasury is currently running a deficit of Ksh130 billion ($1.5 billion) for the current financial year or about 10 per cent of the Ksh1.2 trillion ($13.9) billion budget — forcing it to turn to the debt market for funding.

Last week, the Treasury announced it was raising the country’s debt ceiling, allowing it to borrow an extra Ksh31.6 billion ($367.4 million).

The government had planned to borrow Ksh105.6 billion ($1.2 billion) from the local market, but by November 2012 (five months into the current fiscal year), it had already borrowed Ksh88 billion ($1.1 billion).

KRA said it collected Ksh380 billion ($4.4 billion) by December last year, which was Ksh34 billion ($395.3 million) short of its target for the first six months of the fiscal year and less than 50 per cent of the Ksh881.2 billion ($10.2 billion) that the taxman was hoping to net this year.

But the next administration may be helped by expected stronger economic growth of 4.3 per cent in 2013, up from 4.0 per cent in 2012, with lower interest rates likely to spur a recovery in credit growth that will support a pick-up in economic activity, said Yvonne Mhango, an analyst with investment firm Renaissance Capital.