MPs fault Kenyan government plans to cut spending and raise levies
Monday February 20 2023
Kenyan economic strategists are walking a tightrope to craft a recovery plan for an ailing economy after a parliamentary team faulted the proposal to raise taxes and cut costs.
Pressure has been mounting on the Kenyan government to reduce the high cost of living triggered by rising food and fuel prices.
“The conventional approach has been to limit expenditure growth and/or increase revenue collection efforts,” noted the Parliamentary Budget Office (PBO) through their Budget Options report for 2023/2024.
“However, this may carry economic and political costs. Economic costs include an adverse impact to economic growth while political costs primarily stem from the perception of a higher tax burden due to increased revenue collection efforts,” it warned.
This is largely because increasing taxes would overburden tax payers whose disposable incomes have been hit by the high cost of living while on the other hand expenditure cuts could choke further growth in output.
“Despite the perceived gains of fiscal consolidation on debt accumulation, conventional wisdom indicates that this is likely to have a contractionary effect on economic activity, at least in the short run.”
This comes as the country’s risk of debt distress worsened from ‘high’ to ‘significant’ after breaching four of the six key debt sustainability indicators.
These are debt-to-GDP ratio, debt-to-revenue and grants ratio, external debt-to-exports ratio and the debt service-to-exports ratio.
Hitting a brick wall
On the other hand, the National Treasury’s attempts to borrow from the domestic market at rates below 10 percent appear to be hitting a brick wall as investors snub treasury bonds in favour of short-term treasury bills to avoid duration risks linked to the uncertainties in the economy.
President William Ruto’s administration is pursuing a fiscal consolidation process, including putting a lid to fresh borrowing as part of measures to kickstart the recovery of an economy reeling from rising inflation, shortage of the US dollar and shrinking forex reserves.
The economy is estimated to have contracted to 5.5 percent in 2022 from 7.5 per cent in 2021.
Below statutory threshold
Forex reserves have sunk to below the statutory threshold of four months of import cover while the local currency has depreciated to a low of Ksh125 against the dollar.
According to the report titled Fiscal Consolidation in the Midst of a Global Recession; What is the Magic? Kenya’s fiscal consolidation efforts over the past years have not been successful.
This is because expenditure pressures emanating from wage demands, welfare spending and implementation of huge infrastructure projects have contributed to a widening fiscal deficit despite presumed commitments to reduce the same.
On the other hand, expenditure cuts undertaken without review of merits have disrupted service delivery in ministries and agencies.
“In order to spur economic production in times such as what Kenya is currently facing, the economy requires injections into the financial system. The strategy adopted by the new administration of fiscal consolidation is in contrast (to that),” says PBO.
“Reducing government expenditure will invariably lead to lower output. Thus, the challenge of the national government is to strike the right balance that will be able to undertake fiscal consolidation without harming economic growth.”
The lawmakers recommend the sale of state-owned corporations to help pay off part of maturing debts, reduce fiscal deficit and jumpstart economic recovery.
According to PBO the National Treasury could raise about Ksh30 billion ($240 million) annually from the privatisation process.
Kenya has 248 state corporations and it is estimated that the privatisation programme will primarily target commercial enterprises that account for 19 percent of these.
According to the report the government should also prioritise transforming agriculture and revitalising manufacturing.
The agriculture sector accounts for more than 45 percent of real GDP, is responsible for more than 65 percent of the country’s merchandise exports and accounts for about 90 percent of the country’s food supply. It also employs over 40 percent of the total population.
On the other hand contribution of the manufacturing sector to Kenya's GDP growth has been steadily declining, from 11 percent in 2010 to 7.2 percent in 2021 and 7.6 percent currently.