Why it’s a tall order to achieve Big Four targets

A section of Coca-cola manufacturing plant in Nairobi. [David Njaaga/Standard]

Kenya’s ability to achieve the Big Four Agenda has been cast in doubt as recent economic trends and data indicate achieving the ambitious targets will require nothing short of an economic miracle.

The Government hopes to double manufacturing output from the current nine per cent to 20 per cent of gross domestic product (GDP) by 2022.

This means creating Sh700 billion worth of additional output in the sector over the next three years.

At the same time, the plan anticipates Kenya achieving 100 per cent food security and universal healthcare as well as constructing half a million low-cost houses.

However, an analysis of several economic reports and industry data spanning the last five years indicates this might not be achievable in the near-to-medium term.

The latest Kenya Economic Update (KEU) released by the World Bank recently is one pointer of the distance the country has to cover in closing the fiscal gap and raise the money needed.

On one hand, the World Bank credits Kenya’s success in so far as broad-based economic growth is concerned. GDP growth has averaged 5.5 per cent cumulatively over the past five years and, barring internal or external shocks, growth will maintain a steady curve at 5.8 per cent next year and six per cent in 2020.

At the same time, fiscal consolidation appears to be bearing fruit with overall deficit decreasing by 2.2 per cent to 6.9 per cent of GDP in the last financial year, down from 9.1 per cent in 2016/2017.

“This represents the fastest pace of fiscal consolidation since 2010, surpassing the targeted budget deficit target of 7.2 per cent of GDP,” said the World Bank.

On the other hand, the consolidation has come through a reduction in development expenditure and additional borrowing from the costly commercial debt market.

This has put the economy’s growth prospects in jeopardy, undermining the very sectors targeted for transformation under the Big Four.

According to the World Bank, development expenditure as a share of GDP fell to 5.5 per cent in the 2016/2017 financial year, down from eight per cent the previous year.

The effect of this drop has been worsened by delayed disbursement of cash to counties due to last year’s economic slump during the General Election, leading to low absorption of funds and poor project implementation.

“With the overwhelming majority cuts to Government expenditure falling on development spending, the quality of fiscal consolidation over the past year is not growth-friendly,” says the global lender.

Kenya’s public debt crossed the Sh5 trillion mark this year from Sh4.7 trillion in December 2017, and recent data from the National Treasury points to this figure hitting Sh7 trillion by the end of Uhuru’s term in 2022.

Capital injection

This is bad news to the Government’s plan that pegs economic transformation on manufacturing and agriculture; sectors that have stagnated in growth over the past decade and that are in dire need of strategic capital injection.

Under the Big Four, the Government aims at growing manufacturing output to 20 per cent of GDP by 2022, targets that have raised eyebrows in the manufacturing sector.

“We need to grow the sector at 35 per cent each year if we are to see the manufacturing sector contribute 15 per cent to GDP by 2022, and we are not seeing this happen,” says Mucai Kunyiha, vice-chairman of the Kenya Association of Manufacturers (KAM), during a recent forum to discuss the Big Four.

The manufacturers lobby released a detailed report on the state of the country’s manufacturing sectors and sub-sectors and the extensive policy interventions required to achieve the goals.

Among them is the textile sector, one of the largest potential job creators that has shrunk considerably in the past decades. The number of small-scale farmers who produce the bulk of the raw material has fallen from over 200,000 three decades ago to 40,000 today.

Cotton ginneries, the nerve centres for the industry, have similarly disappeared with the few left scattered around the country struggling to stay operational.

“There are 24 ginneries in the country with an installed capacity of approximately 140,000 bales annually,” explains KAM in the report. “The utilised capacity is a meagre 20,000 bales (about 14 per cent). Out of the registered ginneries, there are only about 10 currently working.”

The Big Four targets 500,000 new cotton jobs and 100,000 new apparel jobs through the construction of five million square feet of industrial sheds, 200,000 hectares under cotton and 50,000 youth and women trained on production and value addition.

This is however predicated on the Government and private sector raising at least Sh200 billion in capital and deploying this through development expenditure and national government transfers to the counties.

Recent trends on the Government’s expenditure that point to reducing development spend and sluggish cash disbursement to counties indicate this is easier said than done.

Data released by Treasury recently shows up to 30 counties were yet to receive their share of exchequer releases almost a full quarter into the financial year.

This means cutting crucial resources needed to develop infrastructure projects such as roads and markets key to boosting agricultural and manufacturing productivity in counties.

This is notwithstanding the Sh99 billion in pending bills counties owe suppliers and commercial lenders.

At the same time, the Kenya Revenue Authority (KRA) is currently undergoing its greatest challenge yet in recent years in mobilising taxes.

 

Tax revenue as a share of GDP has fallen to its lowest in 10 years, standing at 15.4 per cent of GDP last financial year from 17.1 per cent in 2016.

The World Bank says this drop could be attributed to lower profitability in the corporate and banking sectors and inefficiencies in remitting income tax by struggling parastatals.

It could also mean compliance, especially in the formal sector that shoulders a disproportionate portion of the tax bill, is falling.

A report released by economic think tank National Bureau of Economic Research two weeks ago revealed that wealthy Kenyans and corporations have stashed more than Sh5 trillion in tax havens.

In fact, Kenya’s proportion of off-shore wealth as a percentage of GDP is the second highest among the world economies sampled, highlighting the prevalence of tax evasion.

According to Treasury’s latest medium debt strategy paper, Sh2.4 trillion of Kenya’s overall public debt stock is maturing in the next three years; the same period during which the Government hopes to execute the Big Four agenda.

This greatly constraints the country’s ability to marshal funds for both debt repayment and capital injection to development projects.

Treasury’s decision to target consumption taxes for new revenue instead of tackling evasion, and exemptions believed to cause more revenue leakages, has further exacerbated this dilemma.

Under the Finance Bill 2018, new value added tax (VAT), excise and customs duty were introduced that analysts caution will cause more harm to the economy relative to the additional revenue anticipated.

Following the doubling of the excise duty on bank charges from 10 per cent to 20 per cent and a further 10 per cent introduced on Internet data, banks and telecommunication firms have already revised the cost of the affected products upwards, transferring the tax burden to consumers.

An eight per cent VAT charged on petroleum products has similarly pushed up the cost of kerosene used by a majority of poor households for cooking and lighting, who are now turning back to firewood.

Anew levy on demurrage charges is partly to blame for longer-than-usual delays at the port of Mombasa.

For Kenyans whose wages and salaries have remained largely the same, the domino effect from the new levies is a tightening of household budgets and reduced non-discretionary expenditure.

This means less uptake of goods and services, less revenues for the private sector and consequently less tax revenue for the Government to meet its obligations.

Support

Nevertheless the private sector and development agencies seem to be warming up to the Big Four agenda and some have already put pen to paper in support.

Affordable housing seems to have taken a lead in terms of pledged support. Last month, the United Nations Office of Project Services signed a deal to help mobilise resources from funding partners to construct 100,000 affordable homes.

The Government also floated the first tenders inviting construction companies interested in setting up affordable houses in Nairobi.

However, stakeholders including the Architectural Association of Kenya, Federation of Kenya Employers and KAM have all called on the Government to review the administrative and legal foundation of the housing fund.

With the ongoing referendum debate set to stoke political temperatures over the next year, Kenya has little time left before the next election cycle.

In addition, events in the international market such as projected increase in oil prices due to mounting tensions in the Middle East and the US tightening monetary policy are threats to Kenya’s economy through the resultant fuel cost and higher interest on the country’s dollar debt.