Why economists think Ruto's address was way off the mark

President William Ruto. [PCS]

On Sunday evening, President William Ruto painted the picture of an economy that had been on the verge of collapse but is now starting to turn the corner. 

While acknowledging he had made unpopular decisions that made life worse for Kenyans last year, the President in his New Year’s address, noted that these were painful in the short term but would bring about gains in the long term. He said the painful decisions had rescued Kenya from economic paralysis and propelled the country towards a bright future. 

The president projected a bullish image noting that the pressing issue of the high cost of living is being handled. 

Analysts, however, note that the President fell short of giving a tangible way of how he will lead Kenyans out of the difficult situation they faced in 2023 and that he cut the image of a leader who is not in touch with reality.

This is especially regarding high taxation, which they note is likely to continue making life harder for Kenyans while slowing down businesses that planned to expand or set up shop in Kenya. 

“We collectively summoned the courage to make bold, decisive, far-reaching and long-term decisions to once and for all put our country on the path to attaining its full socioeconomic potential,” said President Ruto. 

“The choices we’ve made over the last year were neither easy, populist, nor convenient: they were however meaningful, appropriate and necessary. On the short-term painful, but on the long-term gainful.”

Among the numbers that the president prides on is reducing inflation to 6.6 per cent in December from a high of 9.2 per cent in February last year. 

The economic growth, he said, had risen to 5.4 per cent last year, which he noted placed “Kenya as the 29th fastest-growing economy globally”. 

Interventions that the government put in place to increase agricultural production, the president noted, had helped increase food production by 40 per cent, which was “at a fraction of the previous cost”.

The lower inflation rate, higher GDP growth and increased food production might however mean little for the man on the street, who still has to contend with the high cost of essentials.

According to KNBS, the 6.6 per cent inflation rate in December was despite the prices of such essential food items as sukuma wiki, carrots and meat having gone up between November and December. 

Also up was the cost of transport, which was despite a slight reduction in fuel prices in December. Power prices also went up. In its quest to tame inflation, the Central Bank of Kenya raised the Central Bank Rate which might mean costlier loans for Kenyans. 

Ken Gichinga, the Chief Economist at Mentoria Economics, noted that while certain factors give credence to President Ruto’s bullishness for 2024, especially on the global front, the government would need to do a lot of work on the domestic front to make life bearable for Kenyans. Such includes improving the local tax policy. 

Gichinga noted that factors such as the expected lowering of interest rates in the United States could see a return of foreign investors who had deserted markets like Kenya as they sought higher returns from the US. Lowering the interest rates by the US Federal Reserve Bank could also help in slowing down the depreciation of the shilling against the US dollar. 

“There is some place for optimism particularly in the second half of the year when global interest rates especially in the US are expected to come down. Already we have seen inflation is easing in the west, and there are expectations that the US Federal Reserve may start cutting interest rates in the second half of the year which could provide some stability towards our currency exchange rate, which is one of the things that has triggered high cost of living. It could also help. The capital flight that we saw in 2023 might start being reversed,” said Gichinga, adding there are however several issues that Kenya needs to tackle internally to ease the cost of living but also attract investors. 

“There is still much work to be done locally because inasmuch as the global trends might provide good winds but still there is a need to relook our tax policy.”

Dr Patrick Muinde an economist noted that while the recent rains might help in reducing the cost of living in the short term, other factors that had made life in Kenya unbearable in 2023 such as the high cost of fuel would continue troubling Kenyans in 2024. The President, Muinde noted, failed to show how the government was addressing them. 

“There are a number of factors that we should be alive to. One of these factors is that the short rains have been very good and we might get good production including in non-traditional areas such as the lower eastern,” he said, adding that other than maize, there has been good yields of other crops that could help reduce cost of living. 

“This should lessen the cost of living, especially over the first quarter. The big challenge we have is post-harvest management of produce. We might produce the food but the government does not have policy and there are no structures… a lot of food goes to waste. Unless there are policies to support farmers.”

Central Bank of Kenya has raised the Central Bank Rate. [File, Standard]

He, however, noted that the good news might end there. The President, Dr Muinde noted, failed to demonstrate how the government is going about tackling other factors that made life unbearable for Kenyans such as fuel and the weak shilling.

“There are other fundamental factors that are driving the cost of living such as fuel prices and the weak shilling, these remain as they were last year. The President did not talk about anything tangible to address these challenges. So the status quo from 2023 remains, this might offset the gains that we will get from the rainfall,” he said. 

He also noted that the government’s aggressiveness in taxing Kenyans would leave many worse off. In his address, President Ruto said the government would be enhancing tax collections, with plans to increase collections by the Kenya Revenue Authority (KRA) by Sh600 billion and reach Sh3 trillion. The plan has been criticised as failing to expand the tax net and only relies on the same people who have paid taxes in the past. 

Other than taxes, which Kenyans generally feel have been on the rise, there are levies such as the recently introduced Housing Levy as well as increased contributions to the National  Social Security Fund (NSSF). There are also plans to increase the National Health Insurance Fund (NHIF) contribution to 2.75 per cent.

Dr Muinde noted that the higher taxes and levies have had the impact of reducing household incomes and life worse for Kenyans. 

“The levies are targeting household incomes. We are expecting the NHIF and that will be a big factor. The 2.75 per cent is a big hike. This is in addition to the recent levies such as the housing levy,” he said.

Dr Muinde cited a recent International Labour Organisation report that noted that 80 per cent of employed Kenyans are poor. The report on working poverty, published in late December, showed that eight out of 10 people who are in formal employment in Kenya are living in poverty and cannot afford to meet their basic needs. 

“The taxes are targeting these people and the data is telling us that these people are working poor. It is a huge contradiction. I do not understand why the administration is not looking at this data,” he said. 

“If the people are saying they are hard pressed, the data says they are poor and you continue to push for more taxes, that might not be consistent with reality. I think there is too much talking that is not supported by data.”

“For some reason, it feels that the President is completely out of touch with reality. The fundamentals are not aligned with what he is talking about. He is still in denial.”

The ILO report, which shows Kenya is unable to generate not just enough jobs but also quality employment for its people is despite the President being bullish about job creation. The Kenya Kwanza’s Bottom Up Transformation Agenda (Beta), the President explained in his  speech, is “deliberately expanding opportunities and creating jobs. Millions of jobs. All type of jobs, construction jobs, technical jobs, and digital jobs, as well as entrepreneurial opportunities, both locally and abroad”.

A key plank to this is the administration’s housing agenda, which Dr Ruto said has so far created 120,000 jobs with plans to employ an even larger number this year. 

“Nobody has been able to verify these jobs. The only person who has been talking about these numbers is the president… we do not know who the contractors (of the housing projects) are. There is a lot of mystery around the housing levy and the programme and the talk of number of jobs is perhaps aimed at getting public buy-in that is however not supported by anything,” said Muinde.