Rotich’s love for big project spending chokes economy

Treasury Cabinet Secretary Henry Rotich. [Standard]

It is 10 am at the Nairobi City Stadium bus stop, east of the city centre. About a dozen motorcycle taxi riders are engaged in chitchat. The banter is about Fuliza, Hela, Tala or Branch—some of Kenya’s popular mobile loan apps.

They talk about how they got this or that loan or how they have been blacklisted by others for failing to repay.

They would then shift their concersation to betting, minly on how they had won or lost in the previous night’s gambles.

“The economy is bad,” one would interject as 25 minutes had already passed without anyone of them securing a client. This is where Kenyans and the Government converge. It is the insatiable appetite for loans. At the individual level, there is evidence in the digital or mobile loan apps.

Uptake is unprecedented—at times carelessly—such that more than half a million borrowers have been blacklisted by the credit reference bureaus for failing to repay their loans.

The borrowers are sinking deeper and deeper into debt, as they greedily take up loans for personal consumption.

The problem has something to do with spending habits. Indeed, most of them are borrowing from one platform to pay another, a situation that has consigned some of them into a debt trap. It is understandable.

A lot of them are either do menial jobs, their earnings not enough to see them through the day. You can’t blame them. They are representative of their Government. At the national level, the Treasury is even in a bigger mess. The Government is spending more than half of your tax revenues to service debt.

However, the good thing for Treasury is that unlike individuals who have to shoulder the burden in servicing their loans themselves, all Kenyans, including future generations, have to help the Government in repaying its debt through taxes.

Just like the boda-boda riders, whose income is not enough to see them through with their monthly expenses and have to borrow from mobile apps, the Government has to borrow to fill a widening budget gap.

On Thursday, Treasury Cabinet Secretary Henry Rotich is expected to unveil the 2019/2020 fiscal proposals that have put expenditure estimates at Sh3 trillion.

That’s massive. Our tax revenue is not even half that, meaning Rotich has to get the other half from non-tax revenue. This is just part of the problem. Revenue is not growing as fast to cover our huge expenditure. Add corruption and wastage, the economy suffers.

For instance, over the last six years, the Government has spent Sh10.5 trillion but managed to raise Sh6.49 trillion through taxes. The other difference has been filled through debt, appropriations-in-aid and grants.

Theoretically, the fiscal policy is what the Government uses to adjust its spending levels and tax rates to monitor and influence the economy.

An increase in government spending is supposed to spur aggregate demand which would lead to an increase in output if an economy is not operating at full employment.

Also, a decrease in taxation would be expected to spur aggregate demand by increasing disposable income for companies and individuals alike.

However, this has not worked as would be expected. Businesses are hurting. Joblessness remains alarmingly high in the country. It is no longer fashionable to do business with the Government.

 Both the national and county governments are yet to settle pending bills estimated at between Sh200 billion and Sh400 billion, some dating back as far as 2014. Unless you’re powerful or can oil the hands of officials to have your cheque processed faster, many businesses have been forced to close shop.

Analysts say the problem lies with the Government’s budgeting habits. By being ambitious, Rotich has kept the spending estimates perennially high.

In the past six years, Rotich has played a game of numbers with the budget. When reading the budget, Treasury presents huge spending proposals—in what has come to be known as expansionist budgets.

Treasury sets ambitious revenue targets, so that the deficit, or the gap between revenues and expenses, is smaller. In reality, the gap has been widening since 2012.

Treasury has been known to later lower targets so that when it comes to taking stock of the KRA collections, not too much fuss is raised on their underperformance.

For instance, in December, Treasury cut revenue targets for this fiscal year by five per cent to Sh1.61 trillion. KRA had initially sought to raise Sh1.69 trillion in the year to June 2019.

The previous year, the Treasury had said the taxman would collect Sh1.499 trillion. However, Rotich later cut targets to Sh1.439 trillion. And then for a second time, the target was reduced to Sh1.415 trillion. Yet, the taxman only managed to collect Sh1.37 trillion.

This has seen a parliamentary oversight committee raise concerns over the revision of numbers through the supplementary budget.

“The committee’s concern is that the actual budget implementation may adjust expenditure upwards. History has shown a tendency for the government to fail to adhere to its expenditure plans in the course of the year with upward adjustments during the supplementary budget particularly for the recurrent estimates,” the Budget and Appropriations Committee of Parliament noted of the proposed estimates for the financial year 2019/2020.

Adjusted expenditure

The MPs noted this is compounded by revenue underperformance. For instance, in the current financial year, Rotich has adjusted expenditure upwards by approximately Sh65 billion mostly for the recurrent budget despite an estimated revenue shortfall of Sh100 billion to Sh122 billion.

“A low fiscal deficit has been a moving target of the National Government for many years,” warned the Kimani Ichung’wah-led committee.

Even the 2019/2020 budget is higher than the Budget Policy Statement (BPS) approved ceiling by Sh78 billion “indicating the government’s propensity to spend despite the need for austerity.” Rotich has accommodated this by raising the revenue targets by Sh35 billion, even when it is clear that the taxman has failed to meet previous tax targets.

As of April 30, 2019, the taxman had raised Sh1.16 trillion. Assuming that KRA collects on average Sh116 billion per month, it may achieve Sh1.39 trillion by the end of June, failing to meet the revenue target, again.

Treasury estimates total revenue in 2019/2020 at Sh2.12 trillion from the BPS projection of Sh2.08 trillion. “This means should the country miss the revenue target, there will need to adjust the expenditure downwards. This undermines the credibility of the budget and is the main reason behind pending bills and stalling of projects,” the committee warned.

Amana Capital Ltd Chief Executive Officer Reginald Kadzutu explains that in the past six years, Government expenditure has been growing by an average of 16 per cent from 2012 to 2018.

It might seem Kenya is following an expansionary fiscal policy. However, the impact has not been felt in the growth of aggregate demand or the total demand for final goods and services in the economy.

With government spending having a multiplier effect in the economy, larger output growth would be expected in the same period.

This has not been the case, the economy has grown on average by 5.4 per cent in the same period.

One reason is the low development expenditure, which has only grown on average by a mere three per cent year-on-year in the same period and represents 22 per cent of total expenditure. This may mean the growth in the budget is not going towards the productive side of the economy to boost current or future output.

“One would argue that government spending has been more on the sides that affect consumption. However, this is negated by the annual increases in consumption taxes and the silent gradual increase in the prices of basic commodities that have wiped out the purchasing power of the Kenya shilling by half,” Kadzutu said.

“What affects the general populace now is how much can your Sh100 buy in the market and what will it buy next year and five years from now.” To finance the expenditure, revenue has grown on average by 13 per cent year-on-year before any deflation. This means revenue has not been sufficient to cover the expenditure.

The government has been spending 1.5 times (150 per cent) more than they collect in revenue, Kadzutu explains, adding that on a pure revenue to expenditure ratio, the deficit has been an average of 50 per cent, meaning the State has to borrow to finance half of its budget.

“In government circles, they will tell you that the budget deficit to GDP is less than 10 per cent. This is a fallacy for us to use GDP figures as a denominator as this will just hide the true dire state of our economy,” Kadzutu said.

The worrying trend here is that development expenditure is only a fifth of total spending, meaning the government is borrowing to finance recurrent expenditure, which is majorly salaries and debt servicing.

“If the economy is not generating enough to pay for debt service and wages then our fiscal risk management and analysis is wanting,” he warns.

Since 2012, debt service has been growing on average by about a quarter year-on-year and is currently 15 per cent of total expenditure, leaving recurrent at 63 per cent.

Debt to revenue has also grown to around 30 per cent from 16 per cent in 2012 meaning that we have doubled how much revenue we dedicate to servicing debt and not development.

It can be safe to say Kenya’s budget is more of payroll than a tool to boost economic growth, Kadzutu added.

Dr Samuel Nyandemo, an economist and lecturer at the University of Nairobi says Rotich is too ambitious and Parliament is to blame. “Why should they allow such a budget to be read which is not realistic in terms of the figures. They should insist that Rotich at a bare minimum give realistic figures in line with what we are expected to collect from the tax revenue,” Dr Nyandemo said. “

This is making the country live beyond its means. We are borrowing to service our debt. That’s not economics. Why do you borrow to service loans which you never used appropriately? We need to scale down our expenditure.”

Nikhil Hira, director at Bowman’s Coulson Harney LLP says it is unlikely that KRA will meet tax revenue targets in the current environment. He said KRA has not met the target for a number of years now and doesn’t see that the economic situation in the next 12 months will be much different.

“While the GDP growth rate seems impressive (the government says 6.3 per cent and World Bank 5.7 per cent) a big part of this is from infrastructure spend which isn’t giving much trickle down into the domestic economy. When you add delayed rains and a general liquidity crunch, it is going to be difficult for KRA to meet targets,” Hira said.

Residential rental tax

To increase collections, he said, the essential thing is to widen the tax net, and this is an area the taxman has not been able to sort out over the years.

There has been a measure of success in things like residential rental tax but overall the numbers are not encouraging.

“I think KRA is likely to benefit from non-tax policies that are introduced this week. An increase in tax would mean extremely bad move – witness what happened when we put VAT on fuel – and I hope the government doesn’t go in that direction.”

Secondly, Hira said the use of technology and data analytics should help to direct them towards the problem areas and hopefully collect more revenue. TheNairobi-based economist Robert Shaw says the change of guard at KRA may in the long-term help grow revenue collection.

“But that will be in the long-term. The current target would be unrealistic as we are going through a very difficult time. Inflation has been relatively high, purchasing power has been down, business activity is low, and most indicators are going in the opposite way for anyone to project an increase in revenue collection,” Mr Shaw said in an interview.

The question one asks every year is how much the Government has done to make expenditure more efficient and cost-effective.

At the moment, Mr Shaw says there is a lot of wastage. “Go to any government department and see.  Some places should operate with half of the people. I was in one of the offices the other day, I watched on one floor, half of the people were not doing anything. We must rein in on the expenditure,” Shaw said.