By Jevans Nyabiage

As President Kibaki readies for retirement, the focus now shifts to the kind of leadership that will put the economic fundamentals right. The kind of leadership that will put the economy back on the growth momentum and shorten the gap between rich and poor.

Although the country has seen increased investment in infrastructure, the stark reality is that Kenya is facing a huge budget deficit, unstable macro-economic environment, and a large current account deficit.

Simply put, the country is living beyond its means as its imports far outweigh exports. It is challenging to finance current account costs, as Kenya devotes disproportionate amount of budgetary allocation to paying salaries to civil servants and servicing public debt.

Borrowing
Of the Sh1.45 trillion 20012/2013 Budget presented by the Finance Minister, Robinson Githae, recurrent expenditure will take a massive Sh1.003 trillion, and the rest will be used for development expenditure.

However, the total revenue estimate for the fiscal year 2012/13 is Sh956.9 billion, which means the Government will have to resort to borrowing to finance its operations.
“The Kibaki administration has accelerated infrastructure spend but has failed to cut recurrent expenditure. In fact, this year for the first time, the total projected revenue is less than the recurrent spend,” Aly Khan Satchu, Nairobi-based Investment Analyst, says.
The allocation to development especially to roads and energy has grown steadily over years, setting the pace for future growth.

This year, the Government has allocated 20 per cent of the total budget to roads and energy from a mere 6.5 per cent of the total budget allocation in the previous government. The allocation to roads and energy is five percentage points more than the previous government allocated overall in development expenditure.

Between 2003 and 2007, Kenya experienced unprecedented economic growth that was characterised by low interest rates and generally pro-business policies.

The economy that had sunk to 0.8 per cent by 2002 picked and rose to 7.1 per cent in 2007 only to be pummelled by post-election violence in a disputed presidential election in December 2007. It has not been promising since then. Most sectors of the economy were hit.

The economy is projected to grow by 5.2 per cent this year, but the fundamentals don’t support the rosy projections.

The rise of headline inflation to nearly 20 per cent October last year and the unprecedented weakening of the shilling in recent months have, no doubt, caused panic over the prevailing imbalances in Kenya’s economy.

Private sector
To return Kenya to the growth momentum, economists argue that Kenya’s future lies in the private sector, and hence the need for the Government to push for policies that encourage investment.

The shift towards great emphasis on the private sector was at the heart of Reaganomics by the late US president Ronald Reagan. The concept was based on the so-called supply side economics or trickle-down economics.

The basics of supply side economics is that reducing tax rates stimulates savings and investment leading to economic growth and job creation.

University of Nairobi lecturer, Dr XN Iraki, says Kenya needs someone who understands economics but not necessarily an economist and has a sound economic philosophy.
“Reagan and Thatcher were not economists but had sound economic policies. Kibaki had his kibakinomics, greatly influenced by Keynes. What are the economic ideologies of the presidential aspirants?” Poses Iraki.

“We need a government that has a lighter footprint. This is a political decision. We need a leader who is brave and strong and can tackle the bloated administration like a surgeon with a sharp Scalpel,” Aly Khan Satchu, an investment analyst says.

Dr Dickson Khainga, the head of macroeconomics at Kenya Institute for Public Policy Research and Analysis says Kenya needs the kind of leadership that will consolidate the private sector (small, large, domestic and foreign) to create wealth by producing goods and services, on Kenyan soil for the local, regional and international market.

Economic bridges
“We need a leader who can build economic bridges with other nations both far and near. Someone who will leverage on East African integration and globalisation and rise over the forces inward looking that might be the epicenter of devolution,” Iraki says.

“Someone who can see 100 years into the future and plan for it, when all our feeble bodies will have turned into dust. Someone who can balance with politics, and balance idealism with pragmatism.”

FIVE YEARS
He says Kenya needs to live within its means, diversify economy, grow the economy so that it’s more resilient to shocks and inoculate against politics so that general elections do not destabilise the economy every five years.

Kibaki’s era, which borrowed heavily from the Keynesian ideology, has seen large public spending spree — on the conviction that government expansion – on borrowed money lead to economic growth.

“Kenya’s debt is still sustainable when looked at relative the size of the economy. In my opinion, the administration focused on setting the foundations for future growth,” Khainga, says.

Although it is through this borrowing that has kept Kenya going in the past decade in its development bid, heavy spending has also driven up imports in terms of inputs to fuel infrastructure.

The huge gaps in the external current account, analysts say will likely affect Kenya’s growth prospects going forward.

A World Bank report released a week ago says Kenya’s current account deficit is approaching dangerous levels.

Kenya reported a current account deficit of 13.1 percent of Gross Domestic Product, one of the highest in world, leaving the country vulnerable to volatile inflation and external shocks as witnessed in shilling slump due to high oil prices import bill.

Historically, from 1980 until last year, Kenya current account to GDP averaged (-3.18 per cent) reaching an all time high of 2.2 per cent in December of 2002.

“Structural weaknesses, including widening of current account deficit, pose a significant risk to Kenya’s economic stability. Another oil price shock, poor harvest, or contagion in the Eurozone could easily create renewed economic turbulence and reverse the recent gains,” said Jane Kiringai, the bank’s senior economist for Kenya.

“The large current account deficit is indicative of the structural weaknesses of the economy in many aspects. For instance, the capacity of the private sector to produce capital goods is weak, as a result most investment expenditure ‘leaks’ to the rest of the world,” Khainga says.

 

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