On July 30, 2022, ahead of the August General Election, our analysis of the development manifestos presented by Kenya’s leading coalitions included a stern warning about the potential economic consequences of their implementation.
We especially questioned the Kenya Kwanza manifesto.
First, we questioned how the incoming government would raise funds for the manifestos’ implementation, noting that they would cost well over Sh5 trillion annually.
Secondly, we questioned the efficiency of its benefits targeting (the evidence used to decide what segment of the population would benefit from which government welfare programs).
It seemed to target small businesses near the middle of the income brackets at the expense of the extremely poor at the bottom. We noted that much of the hustler funds would not allay real poverty, but would shift benefits to wholesalers, importers, the banking system, foreign manufacturers and local entertainment spots.
Contrary to that, we stated that the sure and more sustainable way would be to return the two million extremely poor Kenyan families back to production and consumption by providing grants in exchange for community services.
Third, we questioned Kenya Kwanza’s planned implementation model, stating that it was based on experimental economic theory, particularly Milton Friedman’s “Permanent Income Hypothesis.”
The author successfully questioned as a basis for developing macroeconomic theory while at the World Bank Institute in 2004, and “Life Cycle Hypothesis” by Franco Modigliani and Albert Ando (1950s and 1960), which while hailed in some high-income economies, fail miserably in resource-poor settings since poor people in Kenya rarely have the luxury to save additional income.
We were concerned about the government and the financial system alone spending more on smaller businesses, due to the high failure rates of businesses at the entry-level, since between 60 per cent and 95 per cent of Kenyan businesses fail by the end of their first year in existence, and this varies by sector.
“Who would pay for this failure?” we asked - of course Kenyans would, through higher taxes, interest rates and lower ratings by agencies.
We questioned the engagement through which these policies were reached since they did not really respond to what the hawkers, counties, and general citizenry had seemed to ask for.
We then questioned how available funds would be cushioned from corruption and wastage, which drain not only Kenya but also Africa, of more than $1 trillion (Sh141.8 trillion) annually, according to the United Nations.
We warned that the Kenya Kwanza manifesto would lead to human suffering, high inflation, increased taxes, and heightened debt levels. To prevent the country from sliding further into a mini-recession, we offered macroeconomic policy recommendations for the coalitions. These probably never reached them, and if they did, were ignored.
Regrettably, our warnings have materialised, resulting in the current economic turmoil in Kenya.
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To address this situation, we propose the same four practical options based on sound development macroeconomic theory that has been tried and tested in many countries.
These recommendations include:
Sh144 billion grant to the poor
The government, civil society, development partners and the private sector should collaborate and distribute grants to support the poorest two million families (14 million individuals), including children, women, and men, aiming to increase their participation in the economy.
This initiative, which will cost an annual expenditure of Sh144 billion (much less than has been lost through recent Maandamanos, or the cost of policing), is expected to yield significant positive outcomes.
These include saving lives, instantly reducing Kenya’s poverty rate, increasing external credibility, benefiting the local middle class and wealthy businesses that provide retail services, lowering prices through economies of scale, restoring peace, boosting government revenue through taxes and increasing money velocity, and reducing marginal (additional) government spending in the long term.
Facilitate the release of funds through the financial system to address the credit deficit and enable onward lending to businesses at reduced commercial interest rates.
This approach involves a form of monetary intervention, like printing the equivalent of the credit deficit (the losses that the economy has suffered due to external and internal shocks), with the aim of stimulating economic activity and supporting businesses.
While we are fond of exaggerating as a country, it is important to estimate the correct credit deficit based on losses suffered since releasing more money into the system than has been lost will further destabilize the exchange rate and cause even worse inflation.
External debt restructuring
Initiate a restructuring of external debt, inspired by Zambia’s approach, to renegotiate and delay debt repayments.
This measure is projected to save the economy a substantial amount, approximately 2.5 trillion, over the next five years.
The funds saved from debt restructuring can then be redirected towards capital expenditure to stimulate growth in labour and technology-intensive sectors, fostering long-term economic expansion.
Channel resources to counties
Optimise government spending by channelling resources to the decentralised level, specifically to the Counties, to offer direct support, ensure wage stability, more affordable implementation, less wastage and timely wage payments.
At the national level, the focus should be on investing in infrastructure and promoting growth through capital investments in infrastructure and expansion in the multiplier sectors such as ICT.
By adopting these measures, Kenya will have employed sound development macroeconomics practice to navigate its current economic challenges and work towards a more stable and prosperous future.