Experts warn of economic slump over Ruto's freeze on new projects

Members of the parliamentary committee on finance visit the stalled Data Recovery Center (DRC) in Naivasha. [Antony Gitonga, Standard]

Economists have raised a red flag after it emerged that the Kenya Kwanza government has imposed a freeze on all new capital spending commitments.

The government has also issued fresh austerity measures, which top National Treasury officials describe as necessary, as the administration struggles to find a way out of a deepening revenue crisis.

Experts who spoke to The Standard yesterday said the freeze by President William Ruto’s government on capital-intensive projects underlines a sign of how seriously it is taking to save its thinning resources.

They, however, warned that the spending cuts could affect critical essential programmes such as health and education and further constrain the economy.

Several studies show that government expenditure has a significant effect on economic growth in Kenya and the latest move has raised fresh economic fears since any planned spending cuts could lead to the loss of jobs and fresh agony for thousands of Kenyans.

“When we speak of austerity measures, there has to be a balance,” said development economist Patrick Muinde.

“One, you need money to circulate within the economy.  If these measures are not well thought out, it means you could starve the economy of circulation of cash.

“The government is probably the largest spender in any economy. In as much as you want to tame government spending, we still have to ensure we do not starve or choke the economy of cash flow. That is one side of it,” said Muinde

“In an economy that is highly dependent on the public sector, austerity measures have to be taken with a high degree of caution,” said Ken Gichinga, chief economist at Mentoria Economics.

Better approach

“A much better approach would have been to boost private sector activity. As we speak right now, nine companies listed on the Stock Exchange have issued profit warnings,” he said.

One excellent way, argued Gichinga, the government should reduce spending in terms of foreign travel and the savings be directed into reducing pending bills.

Treasury officials admitted that the government’s spending plans for the medium term have been thrown into disarray after its anticipated tax revenues lagged against targets, potentially starving the ruling administration with the massive resources it requires to implement its rosy campaign pledges.

National Treasury Cabinet Secretary Njuguna Ndungu and his Principal Secretary Chris Kiptoo said last week that the lagging revenues require the government to be prudent in its expenditures by eliminating wastage and reviewing non-priority projects.

The Ruto government was recently put in a spot by Controller of Budget Margaret Nyakang’o over runaway wastage in government and the haemorrhage of State resources through luxury expenditure.

“Ideally, the issue of government waste is much broader and I think when you see these austerity measures, sometimes they are just reactionary.

“The government is spending a lot of money on supplies; you buy supplies of Sh10 million at Sh100 million. I mean, that is what the problem is. And that is quite widespread across the government, both national and the county,” said Muinde.

“In the Financial Year 2024/25 and the Medium-Term Budget, the government will continue to emphasise on the implementation of policy measures such as the zero-based budgeting process and adoption of the “no new projects” policy, a review of the portfolio of externally funded projects to restructure, re-alignment with Bottom-up Economic Transformation Agenda priorities and reducing non-priority spending,” said CS Ndung’u at the Kenya School of Monetary Studies in Nairobi.

Prof Ndung’u spoke when the Treasury launched its budget-making process for the next financial year.

“An economy is like a plane,” says Gichinga, adding “It has two engines – the private and the public sector. The private sector is on its death bed so the public sector is the one driving the economy so if you cut it, the plane can actually crash.”

He argues that it is important those savings do not go to some amorphous things.

“You can imagine if those savings were to go to like new position like the CAS, that will not be very effective,” says Gichinga.

The Kenya Kwanza government’s revenue plan has not yet gained traction as tax collection in both the previous and current fiscal years has fallen short of the target by billions of shillings. 

Eexperts have warned the taxman faces the gruelling task of raising massive revenues in the face of a slowing economy.

“As of 31st October 2023, the total cumulative revenue was below target by Sh47.6 billion mainly due to the underperformance in ordinary revenues,” Ndung’u revealed. “Equally expenditures, both recurrent and development, and county disbursement were below target due to low absorption and cash flow constraint.”

President Ruto is banking on a host of new systems and radical changes at KRA to bring more Kenyans into the tax bracket.

KRA has faced significant pressure from the Ruto administration to address revenue leakage.

This comes at a time when the Kenya Kwanza government has shown a strong interest in implementing new tax increases, rattling its support base.  

Successive governments under the Kibaki and Uhuru Kenyatta administrations spent massively on infrastructure projects, which transformed the country into a big construction site for two decades.

The latest Ruto turnaround would mean an end to the construction boom of the 2000s which created new millionaires from government infrastructural tenders, say analysts. 

The State spending also propped up the economy into the fastest growing in the region but fuelled controversial debt increase.

According to the Treasury PS Dr Kiptoo, a review of the stock of projects in all ministries, departments and agencies established that projects which had stopped being implemented for various reasons or have been receiving token budget allocations that cannot facilitate meaningful implementation and therefore stalled amounted to over Sh1.3 trillion. 

He, therefore, said the Ruto government is going to reappraise all stalled Kibaki and Uhuru-era projects to establish whether they are aligned with the development agenda. 

Development agenda

He added those projects which will not be aligned with the development agenda will be cancelled or suspended until such a time when resources are available for their implementation. 

“Challenges in revenue generation have contributed to delays in Exchequer releases, settlement of expenditure carryovers from Financial Year 2022/23 and clearing of pending bills,” said Dr Kiptoo.

“Because of these challenges, it has become necessary to scale down on non-strategic spending to ensure sustainable management of the available resources.”

Dr Kiptoo said the government has instituted austerity measures to contain spending on non-strategic areas, including 50 per cent cutbacks on foreign and domestic travelling, training, hospitality, supplies and services, purchase of motor vehicles, refurbishment of buildings and purchase of furniture and general equipment.

“The National Treasury will work with the spending units as recently directed by Cabinet to further review these expenditures to eliminate wastage,” he said.

There have been concerns that rising debt servicing costs are squeezing funding for economic development, hindering the Kenya Kwanza administration from implementing its development programmes.

This deals a major blow to President Ruto’s efforts to fund his costly campaign promises at a time when his administration’s additional taxes are stoking tensions due to the high cost of living.

Austerity measures being implemented by the government as part of Kenya’s loan conditions by the International Monetary Fund will further worsen poverty and inequality in the country, the global aid agency Oxfam warned earlier.