How we can all brighten 2020 economic prospects

Will more Kenyans opt for golf in 2020 or settle for darts? [XN Iraki, Standard]

The doldrums of 2019 are over, but economic issues are easily transmitted from one year to another.

The echoes of 2019 will be heard in 2020 – after all, the difference between the two years is just a second.

We all hope this year will be better than the previous one.

The change in digits from 19 to 20 will not change economic conditions. It’s the collective actions of individuals, institutions and the government that will determine the direction of Kenya’s economy.

Individuals are the weakest point in the economic chain. They can raise prospects by making rational decisions. Will they consume more and invest more and create demand?

Will they stop after January school purchases? Will they borrow to create even more demand and jobs?

The latter action depends on monetary policy. The Central Bank recently reduced the base lending rate from nine per cent to 8.5 per cent.

That was meant to stimulate lending and more economic activities. The government can stimulate the economy even more by following the Chinese example by reducing the reserve ratio say to five per cent from 5.25 per cent so that more money is available for lending.

That could ensure interest rates fall as banks compete to lend. It could also counterbalance the interest rate rise expected from the repeal of the interest rate cap.

What of tax reforms? One often-overlooked means to raising more taxes is reducing the tax rate.

A tax rate of 12 per cent could raise more revenue than 16 per cent; we focus on volumes, not units. Laffer’s curve shows that.

A reduction in tax rates will also stimulate the economy by putting more money into our pockets, which might be more efficiently spent than being in public coffers.

Burden of compliance

The latest three per cent tax on the informal sector is a double-edged sword.

The government could raise some tax revenues, but the growth of this sector is driven by tax incentives. Its slowdown could reduce taxes even further.

What of continuing the relentless war on corruption to give investors confidence? What of the government paying suppliers and reducing bureaucracy? Have you tried getting a tax compliance certificate lately? Once you set up a business, the burden of compliance becomes another cost. Can that be reduced?

Check the number of licences needed to run a business. Make it easier to run businesses and more tax revenues will come.

The government must make us feel good about ourselves. Remember the early days of the Kibaki government and our unbridled optimism? What will happen to the drums of 2022? Will they get louder and set adrift our economic boat?

What of business and firms? Some have reduced the workforce or outsourced.

The turnaround this year will depend on government action. What is chasing firms away? Power and corruption are the key culprits. Will they be reduced? 

Once firms are convinced government actions are credible, they will invest and bring smiles to their workers.

Firms are here to make money not impress us. We must always remember they have options; they can invest elsewhere, where terms are better.

A majority of Kenyans are here to stay. Of interest to 2020 is the external environment.

How shall we benefit from the conclusion of Brexit? Will China’s muted growth affect us? How shall our neighbours perform economically? Will they create demand for our goods and services? Will oil prices keep rising?

What does the triple alliance of Iran, Russia and China mean for the world economy? Shall we benefit from the US-China trade deal? What of the Africa Free Trade Area? Even elections in the US will matter.

Weather will always be important. I have never seen the country so wet and beautiful. Apart from oil, food is another economic factor.

Good rains cheer our economy up by reducing inflation and allowing us to shift money to other economic activities.

And when shall oil start greasing our economy?

Some like the year because of its ease of pronunciation and symmetry. There could be surprises, but the economic prospects will depend on you and me, businesses, governments and their policies, and the external environment.

Economic potential

We should leverage on what we can control. Economics is not an exact science but we can play around with the scientific part of it.

Of interest is how we can make Kenyans feel ‘good’ and unleash their economic potential, something like the end of the Kanu era.

The holiday season decorations and fireworks of 2019 were subdued. We can reverse that this year.

At the macro level, growth of 6.1 per cent is possible, according to an African Development Bank forecast. It is way below the eight per cent during the Kibaki era.

Our envisaged growth will depend on the collective action of millions of economic players, our institutions, our dreams, our aspirations and even fear. But 2020 is likely to be better than 2019, ceteris paribas. 

 

The writer is an associate professor at the University of Nairobi. [email protected]