Saving the Kenyan economy: Brace for leaner, mean State machine as taxes go up and spending is cut

NAIROBI: Kenya has been unable to repay foreign debts on time compounding fears about the State of the economy and has now asked the International Monetary Fund to spare it from sanctions, the Business Beat can report. A wide range of spending cuts have now been planned that are anticipated to save the already scarce resources, but are certain to have huge implications for the ordinary households.

A confidential memo to the IMF sent by the National Treasury Cabinet Secretary Henry Rotich reveals that there were 'temporary delays' in the repayment of some foreign loans. He has now proposed a raft of austerity measures the government is taking to avert future delays including new taxes, a freeze on public sector recruitment and wage reviews, and a fresh purge on ghost workers in the County Governments.

"We have met all quantitative performance criteria and indicative targets under the program through end March 2015 with the exception of temporary delays in the repayment of some external obligations resulting in the non-observance of the continuous performance criteria on external arrears," Rotich says in his memo to the IMF boss Christine Lagarde.

A new department for debt management within the Treasury has been set up, he adds, which will help in settling debts when they fall due. It is the first time that the country has a feel of the financial situation of the government whose top officials have viciously fought talk that all was not well, even though every sign indicates as much.

External and domestic shocks on the economy have been persistent, the memo co-signed by Central Bank of Kenya governor Patrick Njoroge further reads, which form the basis of exemption that the State was pleading for from the IMF.

"We therefore request modification of the end-September 2015 performance criteria and end-December 2015 indicative targets for net international reserves..." IMF, which offers the government billions in loans and technical budgetary support, had earlier directed the State to cut on non-essential expenditure to balance its books, following the steep rise on borrowing costs.

IMF Kenya representative Armando Morales said the spending cuts would be effective in the current financial year. Uhuru Kenyatta's government has taken on expansionary spending especially on huge capital intensive projects including the Standard Gauge railway, which have stretched available resources.

It could however be crunch time following the revelations that no new development commitments will be taken on among the various ministries and departments. A freeze on government spending has wide implications for the private sector, through jobs and supply of goods and services.

Coming midway through Kenyatta's term, there is little time to effect the painful measures before the next general elections scheduled for August 2017. Governments are unlikely to take tough steps in election years as they would easily lose confidence of voters.

Several government development projects will be shelved in the planned measures to cap expenditure and save further thinning of revenues. It is however unclear which departments would be affected in the proposed austerity measures.

Apart from essential social sector spending like education and healthcare, there will be no fresh recruitment to the public sector to compound problems for the over 500,000 college graduates entering the job market every year.

On the contrary, the State is urging its workers to take voluntary early retirement to hopefully reduce its wage bill, but would not go for the costlier way of retrenchment – which would typically cost billions for settlement of send-away packages. Rotich told Parliament last week that there were no resources to fund a retrenchment program, while responding to a question from Jimmy Angwenyi who had sought to know how much the State had set aside to compensate redundant employees.

What is also clear though is that public sector employees should not expect a pay rise, including nearly 300,000 teachers who are in a standoff with the State over a pay hike awarded by the Industrial Court but has remained unpaid. Mr Kenyatta has severally made clear his intention to cap the public sector wage bill, which he says takes up more than half of all government revenues.

In a rather symbolic gesture, he took a small pay cut earlier in the year together with his deputy and cabinet. It is however unclear if the pay cuts were actually effected. Kenyatta is remembered for austerity proposals he came up with while he was finance minister in the previous government, when he directed that top government officials ditch fuel guzzling vehicles, capping the engine capacity to 2-litre. While the Volkswagen Passat model of cars that were acquired for official use are still operational, most of his own cabinet have gone back to the top of the range vehicles – more specifically the four-litre Toyota VXs.

But now Rotich has proposed more than a dozen tightening measures that could mean more pain, including being ready to raise interest rates again should there be need to further check inflation. A new interest rate increase, after two hikes since June 2015, would send borrowing costs over the top, from the current range of between 25 and 30 per cent.

A dozen parastatals will be wound up and merged to only two, indicating that several top officials would in effect be rendered redundant. A task force appointed by President Kenyatta has already drafted a raft of changes to the mandate and composition of parastatal board of directors. Already, eight former agencies in the agriculture sector have been collapsed to form the Agriculture, Fisheries and Food Authority, (AFFA).

AFFA’s boss Alfred Busolo told the Business Beat in a recent interview that the merger of the Coffee Board of Kenya, Sugar Board of Kenya, Tea Board of Kenya, Coconut Development Authority, Cotton Development Authority, Sisal Board of Kenya, Pyrethrum Board of Kenya, and the Horticultural Crops Development Authority was anticipated to enhance efficiency and eliminate duplication of roles. The former parastatals now exist as directorates under the AFFA.

Similarly, the regulatory authorities in the financial services sector are bound to be folded under one agency, which could see the mandate of the CBK expanded. The Capital Markets Authority, for instance, has not had a substantive boss for more than years because it is a target for downgrade to a directorate under a bigger body.

Paul Muthaura has been acting chief executive of CMA since mid-2012, by which time the restructuring was already on the cards. Insurance Regulatory Authority and the Sacco Societies Regulatory Authority are the other agencies that would be merged.

Apart from cost savings, the Government is also seeking to raise an additional Sh64 billion through new taxes that came to effect last week, but should have been in place from July 1 when the financial year begins. The new taxation schedule will affect basic commodities. The targeted products include low-end cigarette brands, beer, fruit juices, soda, bottled drinking water, motorcycles and imported second-hand cars, whose prices are all set to rise.

"We have taken concrete steps to collect additional revenue through a wide range of revenue yielding corrective measures... that would yield about Sh63.64 billion or one per cent of the GDP," Rotich said in his letter to the IMF. From the new taxation measures, prices of low-end cigarettes could double, while those of cheap second-hand car imports will rise by more than Sh150,000 – after the implementation of a new schedule that slaps a uniform rate of Sh200,000 on all vehicle imports irrespective of size. Prices for motorcycles, whose use in the public transport sector across the country have swelled in the last three years, would rise by more than a tenth after the imposition of a flat Sh10,000 excise duty. Most motor cycles used in the boda boda business sell at between Sh85,000 and Sh100,000, before the new tax.

A fresh purge on ghost workers is also on the cards specifically in the County Governments who could have to be audited through the biometric registration. Counties are generally over-staffed following their establishment three years ago, but with workers inherited from the defunct local authorities. Most counties went on an aggressive recruitment soon after coming to office, with the result of duplication of roles.