State of economy: Is Ruto living in denial or just optimistic?


President William Ruto during an Interdenominational Prayer Service at the Approved School Grounds, Kakamega County. [PCS]

President William Ruto's remarks about Kenya's finances being in "good working order", sounded like countless other statements he has made in recent months.

To him, his government's strategies are working to pull the country out of the economic mess he says he found it in when he assumed the presidency in September 2022.

Dr Ruto's statement on Wednesday, through which he announced a $1.5 billion (Sh219 billion by current exchange rates) buyback of the $2 billion (Sh292 billion) Eurobond scheduled to mature in June, came amid warnings that all was not as rosy as the president suggests.

State watchdogs and economy experts have warned that Ruto's policies, leaning towards heavy taxation, threaten production and could potentially shrink the debt-laden economy.

The signs, too, have not offered much encouragement and risk painting a different picture.
These signs are manifest in the sustained efforts to press mwananchi for more, such as the recent tripling of the petroleum regulatory levy, and the expensive choices Ruto has had to make to avoid defaulting on the Eurobond.

Other signs include missed revenue targets, with the State only raising a third during the first six months of the financial year, and the debt-servicing burden that consumed nearly all the country's tax revenue last month.

And there is the lingering fact that despite promising to cut borrowing, the Kenya Kwanza administration has racked up more than Sh3 trillion in under two years in office, coupled with questionable expenditures that mock the government's commitment to austerity.

"As a result of robust measures to enforce fiscal discipline and implement prudent debt management, the successful turnaround has pulled Kenya away from the brink of debt distress, put our finances in good working order, and established the necessary conditions to execute the bottom-up economic transformation agenda on a sound footing," the Head of State said Wednesday.

"Consequently, our economy is on a trajectory that will create more jobs and more wealth, finance investment in public goods and services, and usher this nation into an era of inclusive growth."

Ruto also said that investor confidence in Kenya had been enhanced by his government's "sound debt management policies", citing the latest Eurobond uptake.

But economist Timothy Njagi terms such an assertion a "half-truth".

"We would struggle to get the Eurobond if investors did not have confidence in us but what the president is not saying is that we are getting the Eurobond at a very high interest rate, showing our risk profile," says Dr Njagi.

"What the president has done is kick the can down the road. The reckoning will come," he adds.

Similarly, Chief Economist at Mentoria Economics Ken Gichinga thinks the oversubscription of the Eurobond is not a "good barometer" for measuring investor confidence.

"The Eurobond is an imperfect way of measuring confidence. What it measures is the ability to mobilise resources, which could be done in a healthy business environment, with businesses paying taxes, or through draconian tax measures," says Gichinga, who likens such a measurement to a doctor who lacks a stethoscope.

"We lack the necessary tools and have to come up with very awkward methods such as the Eurobond." Gichinga notes that Eurobonds are generally popular as they attract the first charge on the exchequer, terming the high coupon rate for the new Eurobond "concerning".

"Benin and the Ivory Coast had similar over-subscriptions but they got much lower interest rates than Kenya. Benin is seven times smaller than Kenya. As a bigger economy, we should enjoy lower risks. The government has focused on the narrative that the Eurobonds are very popular and has not compared it with other countries, which are less diversified and exposed to more risks, such as conflict. Investors are placing a higher risk premium on Kenya, which calls for reflection," he adds.

Gichinga proposes better tools for assessing confidence, such as the consumer confidence index in use in the United States, unemployment rates and Foreign Direct Investment, among others.

"Consumption is the engine of the economy. When consumers are confident, they make more purchases and when they are not, they tend to hold back. FDI is also a very good measure because it shows how many companies are coming in and how many are leaving," he states.

Where the Commander-in-Chief sees positive signs of investor confidence in Kenya, others read worsening distress. As Ruto issued the statement, Auditor General Nancy Gathungu warned of the unsustainability of Kenya's debt, even as she questioned the prudence of Kenya's debt expenditure.

"The Government of Kenya has now issued four Eurobonds each with a higher coupon rate reflecting the likely unsustainability of the current debt portfolio. The cost of these Eurobonds goes beyond the interest rate. Issuing and servicing these debts involves additional fees and commissions. Additionally, fluctuations in foreign exchange rates impact the actual cost of repayment," Gathungu told a parliamentary committee, adding that the newest $1.5 billion bond, with a double-digit coupon rate, pointed to Kenya's risk profile.

A day later, Controller of Budget Margaret Nyakang'o would hammer the same message home when she also appeared before the National Assembly Public Debt and Privatisation Committee, although she termed Kenya's buyback of the Eurobond at a 10.4 per cent coupon rate "a careful but calculated risk."

President William Ruto, Deputy President Rigathi Gachagua, National Assembly Majority Leader Kimani Ichungwah, and his Senate counterpart Aaron Cheruiyot arrive for the joint National Executive Retreat and Parliamentary Group Consultative Meeting in Naivasha, Nakuru County on February 19, 2024. [PCS, Standard]

"While interest rates have shot up everywhere over the last couple of years, a double-digit borrowing cost remains one of the most obvious warning signs that all is not well in our country. Kenya was compelled to refinance at a higher interest rate to offset the $2bn bond payment looming in June 2024," said Dr Nyakang'o.

She also warned that high-interest rates on domestic and foreign loans, as well as the shilling's depreciation, risked increasing the debt burden to "unmanageable levels."

Even amid such questions, the president has justified his bullish outlook on the economy. For starters, he has pointed out the shilling's recent gain against the dollar, from a highest-ever exchange rate of Sh164 against the greenback to the Sh139 recorded last week. Kenya's currency has in the last few days stabilised in the mid-Sh140s to the dollar but the dangers of another free-fall loom large.

Then there is the matter of the unga prices that have stayed lower than those witnessed during the tail end of former President Uhuru Kenyatta's tenure and Ruto's first months in office.

Kenya Kwanza's fertiliser subsidy, Ruto has said, had seen an increase in production and subsequent drop in unga prices.

But other commodity prices have soared, propelled by record-setting fuel costs that are just now easing a bit. This is coupled with job losses in the formal sector that the Federation of Kenya Employers (FKE) estimated at 70,000 last November, amid increased operating costs.

"Ruto lives in a separate reality. Even when the FKE told us the economy lost jobs last year he was claiming he created jobs," says Nairobi Senator Edwin Sifuna. "All these things only exist in his head.

The ordinary Kenyan cannot relate to anything Ruto says because the reality they live in is totally different from the rosy one he paints."

Dr Njagi believes that the data, such as depressed economic activities and reduced consumer power, tell a different story from the president's.

"The data will always tell you the truth and in terms of debt, it shows we will be in distress for the near future. Maybe the president is just trying to be optimistic. As a leader he has to give people hope but I believe it's always best to tell the people the true situation as it is," adds the economist.

Gichinga also foresees a "challenging" outlook, courtesy of heavy taxation and high interest rates on borrowing and the fact that the government is increasing spending more of its tax revenue to service debt, which Treasury's data shows was 98 per cent in January.

"There are real risks to our growth. High taxes and interest rates make it tougher for businesses to operate. Banks are pricing interests at 27 per cent and the government is proposing to introduce VAT on educational services, which means that the disposable income of households will dwindle," says Gichinga on the broad outlook of the economy. "But some sectors might perform better and others will struggle.

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