Civil servants face the axe as Ruto plays to the tunes of IMF

President William Ruto held a meeting with the IMF Managing Director, Kristalina Georgieva on the sidelines of COP27 in Sharma El-Sheikh, Egypt. [Hiram Omondi, PPS]

At the behest of the International Monetary Fund, the Kenya Kwanza government has been undertaking economic reforms. Hard-hitting was the withdrawal of subsidies on fuel that were effected immediately the regime came into office in September 2022 and further doubling the Value Added Tax (VAT) on petroleum products. 

While the subsidies have been on and off since then as the government tried to calm Kenyans and also save the economy from grinding to a halt, the government had been clear from day one that it was not interested in retaining the subsidies.

The higher taxes are not just on fuel but also seen in other areas such as the contested 1.5 per cent housing levy, the increased turnover tax to three per cent from one per cent for small businesses, taxation of digital assets as well as digital content monetisation and high income earners are also paying higher tax on their salaries.

And last Tuesday, President William Ruto announced that the government planned to close down and merge loss-making and overlapping parastatals. He further directed the profit-making ones to remit 80 per cent of their profit to the National Treasury and that they should also reduce their recurrent expenditure by 30 percent.

Analysts note this could be a cash-strapped government riding cash-rich parastatals for additional billions from levies and fees to fund its second full-year budget and also attempting to conserve cash by reducing the billions its sinks in loss-making entities. They also say it could also be the government deepening IMF’s backed reforms this time restructuring government entities.

The move could lead to a fresh round of job losses. 

The International Monetary Fund (IMF) has been piling pressure on Kenya to reduce the wage bill of some struggling state-owned agencies, maintaining they are draining and harming the economy. 

“In 2022/23 financial year, 242 SAGAs/SCs (Semi Autonomous Government Agencies and State Corporations) incurred losses amounting to 0.7 percent of GDP, marking an increase from the previous fiscal year when 183 entities faced losses equivalent to 0.5 percent of GDP in 2021/22 financial year,” said Treasury in a report to IMF in January this year.

“While pension funds, belonging to contributors and not remitting dividends to the budget, and Central Bank of Kenya (CBK) profits have shown improvement, a substantial portion of the CBK profit is attributed to unrealized gains from exchange rate depreciations. As a result, the dividends remitted by CBK and profitable SCs, totaling 0.29 percent of GDP, fall short of covering the losses incurred by the remaining SAGAs/SCs. This implies that SAGAs/SCs either require support from the budget or will accumulate payables, reduce their equity, and increase non-equity liabilities.”

At 242 state corporations making losses means that about half of the 510 in the red over the financial year to June 2023. Among the big losses were reported by agencies that are critical to government operations and are unlikely to be disbanded including Kenya Railways that reported a deficit of Sh33 billion over the financial year. The Cabinet has however recently approved a plan to unbundle the corporation and split it into three entities in a bid to revive railway transport.

Other entities deep in losses are the Roads Annuity Fund with a deficit of Sh12.3 billion and the Kenyatta National Hospital that reported a loss of Sh3.5 billion in the year to June 2023.

In the category of super rich state agencies the Central Bank of Kenya that reported a surplus of Sh145 billion, National Social Security Fund (NSSF) (Sh25.5 billion), Kenya Ports Authority (KPA) (11.9 billion), Kengen (Sh5.2 billion), Kenya Civil Aviation Authority (Sh5 billion) and the Kenya Pipeline Company (Sh4.2 billion).

IMF noted that Kenya is banking on the new Privatisation Act, which gives the CS Treasury immense powers whenever the state is offloading shares in state owned enterprises (SOEs), to kickback the sale of some of the enterprises that maybe loss making but could turnaround easily in privavte hands.

“Structural reforms aimed at strengthening the governance, and oversight of state-owned enterprises (SOEs) and state corporations (SCs) continue to rank high on the authorities’ reform priorities,” said IMF following its review in January.

“Following the publication of the new privatisation Act in October 2023, the authorities are working on a five-year privatisation program under this law. Meanwhile, they have continued to remain within the programmed envelope for extra-ordinary budget support to SOEs and government-linked companies.”

The government has in the past considered selling to the private sector the companies that are underperforming. It has recently embarked on a process to privatise some of the government entities, most of which are loss making. In a list of 11 companies that the government published last year, more than half have been reporting deficits for years. These are National Oil Company (NOCK), Kenya Vehicle Manufacturers (KVM), Rivatex and Numerical Machining Complex (NMC), Mwea Rice Mills and Western Kenya Rice Mills, which it noted are loss making. The profitable firms are KPC, KICC, New KCC, Kenya Literature Bureau (KLB) and Kenya Seed Company.

President Ruto also said his administration would undertake a consolidation of state entities with duplicating and overlapping roles as well as wind-up loss-making institutions.

“It is illogical. We have to shut down some of these loss-making parastatals. We must end excess capacity,” said Ruto, adding that the government entities would also have to learn to within their means and stop running huge budget deficits. “In three years’ time, we must run a balanced budget. It won’t be easy but we must do it.”

The government has been in plans to merge some of the entities that have been undertaking similar or near similar roles. Among the entities that have been earmarked for mergers include the affirmative action funds Uwezo Fund, Women Enterprise Fund and the Youth Enterprise Development Fund. The funds were to form a new Biashara Kenya Fund.

The government had also planned to merge the state owned banks, including Consolidated Bank and the Development Bank of Kenya, into one.

In adopting the IMF prescriptions, analysts note that the Kenya Kwanza administration is venturing into an area that has been tried, tested and found wanting.

“If the Kenya Kwanza government is adopting economic principles from the failed SAPs, it risks repeating historical mistakes,” said Elias Mokua Executive Director Loyola Centre for Media and Communication.

“A notable area that international partners tend to overlook is the rampant mega corruption plaguing the countries they support. Kenya, in particular, grapples with staggering corruption cases.”

Economist Patrick Muinde says the SAPs introduced in the 1990s had far reaching impacts across different sectors and affected nearly everyone in the country directly, including school going children. 

“(Many studies on SAPs introduced in the 1980s and 1990s)... conclude that SAPs were detrimental to children and maternal healthcare. Other studies point to increased unemployment, income inequalities, inflation and exclusion of poverty alleviation under SAPs,” he said.

“On education… these studies adduce evidence that the cost-sharing programmes introduced in the sector in the 1980s led to exclusion and reduced access to basic education for children from poor households. At the university level, students’ involvement in income generating activities to supplement their subsistence costs consumed much of their time to the detriment of their class performance.”