President Uhuru’s tough balancing act as Kenya’s economy slumps

Kenyans will on Tuesday hang on each and every word pronounced by President Uhuru Kenyatta as he takes oath for his second and final term as the Head of State and Government of Kenya.

In the next few months, every step he takes, pronouncement he makes, and Bill he signs into law will tell whether the son of the country’s first President will unite a sharply divided nation.

In the short-run there is a lot to be done politically to heal the wounds of a bleeding nation.And in the long-run certain critical economic decisions will have to be instituted to ensure prosperity and stability of the country.

With spiraling debt, slowing Gross Domestic Product (GDP) and a private sector that is starved of credit, President Kenyatta’s economic legacy is at peril.

The president has held four meetings at Treasury including literally walking from Harambee House to Treasury building as he tries to salvage the situation and deliver a turnaround of the economy. But what does the President need to do?

1. Formation of a strong, competent and professional team

Perhaps, President Kenyatta’s first call to action, after reaching out to the members of the Opposition, is to form a strong, competent and professional team that will inspire confidence.

Kenyatta might need to go back to his promise when he first came to power five years ago. Back then, the President and his deputy William Ruto, promised to have a Cabinet that would be short on politics and long on administrative skills.

His Cabinet should be filled with people who are ready to work for Kenyans, and not sycophants whose work is to sing praise songs for their bosses. President Kenyatta’s new-look cabinet should be, at best apolitical.

While it is true that this proved difficult to sustain, with some private sector appointees, green on matters of Government, struggling to navigate the treacherous civil service, it is the conviction of the Weekend Business that if given time, separation of the civil service from day-to-day politics is the country’s best bet to prosperity.

2. Pending bills that have driven some firms into bankruptcy

The national Government, for one reason or the other has been a poor payer. Not only has it delayed to disburse funds to county governments, it has also delayed to pay suppliers, driving some of them into bankruptcy.

Nearly Sh400 billion was owed to suppliers by the government and the private sector as of June 2017, according to the Association of Kenya Suppliers.

So serious is the problem that at some point private sector players mooted the idea of charging the government interest on pending bills, some running over into subsequent financial years.

An expanded public expenditure has played a critical role in propping up the private sector, with companies from SMEs to corporations supplying Government projects with goods and services. Unfortunately, in some instances, the Government has stayed for long without paying the bills leaving companies with cash flow problems.

3. Stimulus package

If some economic indicators, including Stanbic’s Purchasing Manager’s Index (PMI), are anything to go by, the private sector is not doing well. The latest PMI, an important barometer for the health of the country’s private sector, fell to a record 34.4 in October compared to 40.9 in September with output and new orders contracting. Readings above 50 signal an improvement in business conditions on the previous month, while readings below 50 show deterioration.

That spending by the private sector has gone down has also been evident from the sluggish credit growth which has gone down dramatically, though the latest numbers from the Central Bank of Kenya shows that credit growth inched a bit by 2.1 per cent.

As paradoxical and difficult as it sounds, the Government needs to pump some cash into the economy to stimulate growth. The other player that can jolt the private sector into action, CBK, has for some reasons, elected not to loosen the monetary policy, retaining its lending rate at 10 per cent for over 10 months.

However, the Government expenditure needs to be tapered by the fact that our debt conditions is careening towards unsustainable levels.

4. Reign in corruption and wastage

Perhaps President Uhuru Kenyatta’s best bet in ensuring that there is enough cash to stimulate the economy is combating corruption and sealing loopholes of wastage.

Corruption is perhaps the most stubborn stain on Kenya’s conscious. It has been likened to cancer. In the last five years, the Jubilee Government has been rocked by corruption scandals.

From the National Youth Service scandal in which taxpayers lost close to Sh1 billion in dubious projects, to Afya House where close to Sh5 billion was said to be lost through dodgy deals. Corruption has haunted Uhuru’s administration, just like Mwai Kibaki’s administration before him.

The Auditor General’s reports showed that expenditure worth billions of shillings could not be accounted for by both the county and national governments. Rather than throw up his hands in the air like he did during the Corruption Summit at State House Nairobi, Kenyans will expect the President to be more clinical in his fight against graft.

There should be no sacred cows in the fight against corruption now that he is not seeking re-election. Uhuru blamed institutions such as the office of Director of Public Prosecutions and courts for frustrating his efforts to combat corruption. He said his hands were tied and there was not much his office could do other than just sack government officials implicated in graft. But now, the President needs to do better. He needs to back Ethics and Anti-Corruption Commission boss Eliud Wabukala in hunting down corrupt individuals. He might need to borrow a leaf from Tanzania’s John Magufuli to personally crack down on government functionaries that have escaped the anti-corruption body’s net.

5. Stop the spiraling of debt

While he was busy campaigning for his second term in the repeat elections, the country learnt that Treasury could not pay Sh77.3 billion ($750 million) syndicated loan issued in 2015.

Weekend Business learned that Treasury mandarins were pleading with investors to roll over the whole debt and some flatly refused.

Treasury Cabinet Secretary Henry Rotich had to pay this group off and negotiate an extension to April, just five months away.

President Kenyatta will be forced to borrow more money to repay the debt while convincing Kenyans that this dysfunctional approach is necessary.

This will be even harder to do since the President has lost key backing of the International Monetary Fund (IMF) on Kenya’s debt sustainability.

IMF warned that for every Sh100 the Kenyan Government collects in revenue, Sh25 will soon go towards servicing debt.

The country’s public debt stock has surged to a whooping Sh4.5 trillion as of September this year, up from Sh1.8 trillion in March 2013 when President Uhuru Kenyatta’s Jubilee Government first came to power.

“The president has to consolidate spending and ensure debt servicing is sustainable if he is to leave a lasting economic legacy,” Stanbic regional economist Jibran Qureishi said.

Director General, Budget, Fiscal & Economic Affairs at Treasury Dr Geoffrey Mwau said since most expensive infrastructure projects are nearing completion, it will be easier for the government to cut erratic spending and as a result the high levels of debt.

“Most of the projects are nearing completion or are complete and the investment is bearing fruit so even GDP figures will increase,” he said.

6. Prudent Spending

Mr Qureishi said that spending should be targeted to sectors that generate jobs so that Kenya’s GDP growth can be inclusive.

“The challenge for economic transformation should be that we should stop seeing GDP growth as just numbers. We have to look beyond on whether the high growth is leading to higher productivity and jobs,” he said.

Qureishi added that government needs to prioritise on its spending to focus on priority projects like agriculture and energy to boost manufacturing the has slowed down.

“2017 has taught us a huge lesson especially with the drought, we need to prioritise on irrigation. Manufacturing has slowed down, so we need to spend on energy but not just increasing capacity, we should look at transmission and distribution that have been neglected,” he said.

IMF Resident Representative for Kenya Jan Mikkelsen said that development spending is up 10 per cent of GDP. “That is a good thing, but it needs to be done more efficiently,” he said.

7. Increase revenue

While the President chose to give campaign goodies such as duty free maize, milk and sugar imports to cushion Kenyans from rising food prices, the consequence has been that the tax man could not meet revenue targets.

Treasury has had to cut back tax revenue projections by Sh60 billion to Sh1.439 trillion, down from Sh1.499 trillion spelled out in the budget.

The Government insists that it will maintain the gap between what it can raise from taxes and the expected budget at Sh535 billion to achieve a budget deficit of 6.4 per cent of GDP, down from 8.5 per cent in the last financial year.

However, according to the latest Treasury projections, the fiscal gap is expected to be bigger at Sh691 billion which would put it at 7.9 per cent of the GDP.

To add on top of that, the President has had to approve salary increases and implement free secondary school education which will make it difficult to reduce the budget gap.

8. Restore confidence in the capital markets

President Kenyatta can do very little to boost the capital market. However, the end of political uncertainties will in itself return the stocks and bonds market to profitability.

This is especially so after reports that portfolio investment was fleeing the country, as investors got jittery with the heightened political activities. Of course, with the Opposition still insisting that Uhuru Kenyatta was an illegitimate process, the political quandary is far from over.

Qureishi said the government can continue to reform the market to deepen product portfolio and how they are traded.

Central Bank Governor Patrick Njoroge has urged investors to take a longer term view.

“The outlook of the economy is certainly bullish. I have told investors that this is the time to really invest long term in the Kenyan economy,” Dr Njoroge said.