Households and businesses woke up on the first day of 2023 to an estimated 15 per cent increase in the cost of electricity.
This is due to the cessation of multi-billion shilling subsidies in the energy sector. The Treasury had clearly captured the intent of the Ruto administration to end the subsidies in the Budget Review and Outlook paper for 2022/23 fiscal year.
This is in addition to the reinstatement of electronic money transfer charges and transaction taxes within the financial sector. The Central Bank waived these charges in response to Covid-19. This should however come as no surprise to anybody. It is a continuation of the cessation of various subsidies that had been instituted by the Uhuru Kenyatta administration.
Since assuming office, the Kenya-Kwanza government has let go of every pre-existing subsidy without much ado. This has been coupled with the termination of various economic stimulus packages that were targeting vulnerable households.
The only subsidy so far from the new administration has been the fertiliser subsidy, besides opening the local market for the importation of basic commodities including maize, rice and sugar. Opting only for a fertiliser subsidy instead of a multi-faceted strategy to steer the economy towards stability is turning out to have been a risky gamble. All indications point towards a fourth consecutive failed rain season in most parts of the country.
The feedback from the various opinion polls published on Christmas eve is crystal clear this administration is yet to strike a chord with consumers and businesses. For any good and objective economic analyst, there have been evidential traces of blunt shots all over. Perhaps many analysts have only been hanging on the concept of the time factor that it is too early to predict or giving it a benefit of doubt given the high-profile economists within Kenya Kwanza administration.
But from where I sit, this administration did not have any leeway to gamble with the economy. Not after 10 wasted years of the previous regime and manipulation of official data to paint a rosy growth while everything else was rotting underneath.
The question now left is whether the top leadership in Kenya Kwanza can rise above political rhetoric, cronyism, and cleansing of economic saboteurs and speak to things that matter to households and businesses.
Stay informed. Subscribe to our newsletter
Recent empirical evidence, especially in the wake of the Covid-19 economic shocks indicates the speed of economic rebound is highly dependent on consumer confidence. Andrew Walker, a BBC World Service Economic Correspondent describes social consumption as critical to the recovery of economies in an article posted in July 2020. Social consumption includes consumer spending on things like eating out, live entertainment and travel among others.
Echoing similar sentiments, Patti Domm in an article for Market Insider on CNBC News argues that consumer confidence would ultimately determine the strength of economic rebound post-Covid. This is because, for most economies, consumer spending accounts for about two-thirds of the economy. Thus, individual psychology, overall consumer confidence and the ability of the government to plunge-in income gaps for workers who lose livelihoods during an economic slowdown are critical during recovery. Assuming this empirical evidence were statements of facts to recovery, how then has President Ruto subsidy stance and policy response violated consumer confidence and/or stroked fear?
To understand the potential impacts of the policy decisions on the subsidies, let us trail some of them. On December 24, 2022 at 1749 hours, I bought a prepaid token from Kenya Power worth Sh500. I received only 24.56 units valued at Sh189.13. VAT, Fuel energy charge, forex charge and inflation adjustment gobbled up a whopping Sh300.43. The rest went to EPRA, WRA and REP charges. Simply put, from the price money I paid, I only received 37.8 per cent worth of the product I was buying. An estimated two-thirds of the price money went into taxes and levies within the control of the government.
The fuel energy charge, the largest of the levies, was set to increase on January 1, 2023. In fair market practices, it is criminal for a consumer to receive only 37 per cent worth of a product or the service paid for. It thus borders on policy insanity for anyone to imagine the local economy can be competitive with such power tariffs. Energy cost is the single largest consumable in production and offers a strategic competitive edge to any country that can sustainably guarantee low-cost tariffs.
Second on the line is the cost of education and the uncertainty created by the flip-flopping on the future of the Competency-Based Curriculum (CBC). Besides the government spending on education, the cost of providing quality education for one’s children is a priority expenditure for households. In every single academic year, households spend billions directly on school fees, emoluments and educational materials. The resultant value chain is worth billions more.
The lack of policy decisiveness on the future of CBC and a seemingly roadside declaration on the fate of boarding facilities leave parents and investors on the edge. The uncertainty so created makes any rational consumer or investor tend to withhold spending on related products, services and ongoing and pending investment decisions. The chain effects are bound to go far and wide.
Third is the twin impact of inward-looking austerity measures and failure to conclusively solve the perennial problem of pending bills. I have opined that cutting government spending within the domestic economy was ill-advised. This is especially so by targeting products and services categorised within the preferences and reservation programmes under procurement laws.
Even then, the failure of the government to promptly pay for such services deprives businesses of working capital, exposes them to bankruptcy and removes money from circulation. The commitment to resolve the pending bills crisis was central to the hustler nation campaigns. There is yet to be a decisive directive to permanently put the matter to rest and renew confidence among business owners to do business with the government once more.
The resultant effects have been swift and furious with the mainstream media leading the pack in shedding jobs. While the case of media houses re-organising their businesses has received above-average publicity, the bitter truth is that this is not an isolated case. Several multinational corporations in manufacturing, banking and in the service sector have either shifted production to more cost-effective countries or exited the local market. The negative net impact on PAYE is reflected on the taxman returns in 2022.
Fourth is the premature ending of pre-existing economic stimulus packages and the uncertainty on the cash transfer programmes. Modern economic theory overwhelmingly supports enhanced government spending to counter consumer go-slows during economic downturns. The cluster of these classes of government spending has been re-classified as social protection investments.
Empirical evidence shows that social protection investments have huge beneficial impacts not only on the socio-economic welfare of the beneficiaries but also within the rural or localised geographic economic areas where the funds are spent. It is humane to continue to support the food distribution efforts to vulnerable households. However, it will be counterproductive for this intervention to be used to substitute long-term programmes that have proven to better preserve the dignity of the beneficiaries and are less subject to political abuse and manipulation. For instance, the last cash transfers for elderly persons were done in June 2022.
Finally is the issue of reinstatement of electronic money transfer charges and the never-ending taxes on financial transactions. In the past two decades, there have been huge investments and milestones towards expanding access and deepening of financial services. The Covid-19 complexities opened a new window to leverage electronic money transfers to enhance e-commerce.
The online businesses for cooked food and groceries, clothes and footwear and enhanced use of card and mobile money wallets for small businesses opened new frontiers within different value chains. While the country remains a leading star in mobile-based money technologies, the subsector is still very nascent at best. The local financial markets remain insignificant within the region.
The niche we have developed on mobile money offers the perfect opportunity to build a competitive advantage in the region and deepen our financial market. Tragically, policymakers interpret these small wins as leaps of progress to broaden their tax base. The negative effects of high excise duties on voice and data have actually been reflected in the recent data from Communication Authority.
A similar fate befell the commercialisation of millet and sorghum in making safe and affordable alcoholic drinks for the local domestic market in 2015/16. In a nutshell, while we all understand the tightrope the new administration must walk to find a fiscal balance, adopting ill-thought-out policies can only hurt the folks they purport to serve.
While it is not going to be easy, demonstrating a good understanding of the way out would buy them public goodwill to effect even the most painful prescriptions. But as things stand now, we are groping in a wilderness lacking clarity of economic thought.
Happy New Year!