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What Jubilee’s pre-election goodies mean for your pocket

By Dominic Omondi | June 13th 2017

Just a day before the official launch of the Standard Gauge Railway (SGR), operators of the new rail service put the passenger fare from Mombasa to Nairobi for the Economy Class at Sh900.

Reaching this price tag must have been a painstaking affair and probably, the authorities must have factored in a return on investment. The railway project is a huge investment whose cost must be recouped to enable the country repay the over Sh350 billion debt used in its construction.

But, as expected, some members of the public thought the fare was not a significant departure from that charged by buses plying the route. Buses charge an average of Sh1200 if not below.

Voices of discontent on this price started doing rounds on the social media. And the Government, fearing that it was just a matter of time before the Opposition latched on to this narrative, acted swiftly.

Madaraka Express

The next day when the President took the maiden ride in the Madaraka Express - a befitting name for a rail service that replaces a colonial relic that was the Lunatic Express- he told the public that the Economy Class would cost about Sh700.

It was a populist policy bordering on vote-hunting or a road-side declaration that has come to characterise most of the administration’s policy making process prior to the general elections on August 8.

It only added to the conundrum of whether or not the SGR would repay the Chinese in four years as had been projected.

But this is not the first of the Jubilee administration to make such radical shift. Other populist moves recently announced by the Jubilee admiration that equally poses serious threat to the economy include the free fertiliser offer, sugar, maize and milk subsidies, civil service salary increments, title deed offer, interest rate caps, promise of free secondary education and increment in the minimum wage among others - all meant to appease voters but poses a potential threat and may cost taxpayers dearly in the long-term.

An additional spending plan presented by these election goodies is estimated to cost the exchequer tens of billions of shilling and is likely to put a strain on government’s limited revenue base. Most of these pledges have not been factored in the current budget and they keep on coming every day as campaign for 2017 top seat hots up.

Last week, President Kenyatta handed over Sh828 million as compensation for Internally Displaced Persons (IDPs) in Kisii and Nyamira counties with Kisii County receiving Sh358 million while IDPs from Nyamira got Sh470 millions.

During his tour to Western Kenya, president Kenyatta who spoke on his administration’s commitment to support sugarcane farming – a key economic venture in the region said the Government will release Sh300 million to pay Nzoia cane farmers as it works to refurbish the Nzoia Sugarcane Company to ensure that the farmer reap maximum benefit from their toil.

The e Government also dispatched Sh74 million to pay salaries for those working at the Webuye Pan Paper Mills.

On Sunday, the Head of State ordered compensation of Kerio Valley residents Sh1 billion for their land that was acquired and used for mining.

Actual collections

The Government anticipates collecting Sh1.5 trillion in tax revenue, but the actual collections would be significantly smaller, considering the difficulty in raising additional funds from an already stretched tax base.
KRA has consistently fallen behind its collection targets owing to a tough business environment that has slowed creation of new jobs and depressed reported earnings by companies.

Unfortunately, in the clamour for re-election, President Uhuru Kenyatta- just like his predecessors - has crafted policies, or issued directives that while gratifying electorates in the short-run, will hurt Kenyans in the long-run.

Already, the International Monetary Fund (IMF), which has been a major critic of the Government’s decision to put a ceiling on interest rates charged by banks, has issued a warning in its latest regional outlook for Sub-Saharan Africa.

“Upcoming elections in Angola and Kenya could make it difficult for these countries to address weaknesses in the underlying fundamentals,” warned the IMF.

While the effect of the interest rate control is yet to be established, some analysts including the IMF itself have attributed the reduced credit extension to the private sector to the interest rate control. The economic argument against a surge in pre-election spending is that it could push the economy past the limit to fuel inflationary pressure.

The expected rise in oil prices already has global central bankers worried about the outlook for inflation in the coming months.
But even before oil prices became a factor, the country’s economic managers were already pondering publicly about how much room was left in the economy before the drought effects start pushing up against these capacity limits.

Popular policy

Capping of interest rate was going to be a popular policy given that most borrowers had for long been burdened by prohibitive interest rates from commercial banks. However, the decision was not really grounded on any fundamentals other than that banks were pocketing “abnormal profits” even as they “exploited” borrowers.

Having granted coffee farmers a debt waiver of Sh2.4 billion last and doled out Sh1 billion to Miraa farmers in Meru and Tharka Nithi region to resuscitate the crop which suffered after some countries banned the crop including Somalia, the Government has in recent times, gone on an overdrive to offer subsidies on three major foods - maize, milk and sugar.

Last month as the cost of unga skyrocketed, and with the elections fast approaching, the Government came up with maize flour subsidy that would see a two-kilogram of maize flour retail at Sh90.

Unfortunately, the programme that will cost taxpayers about Sh6.5 billion has already run into headwinds. There is an acute shortage of the cheap unga, a clear indication that the subsidy programme was hurriedly executed. And before the dust settles on the maize subsidy, the Government has introduced others — milk and sugar.

It has also injected billions into the economy in the form of tax cuts and spending programmes will no doubt have far-reaching implications on the economy in the long term. You don’t have to be an economist to realise that adding more fuel to the economy at this time just might have dire consequences.

But far from being restricted to the economic realm, the consequences of pre-election spending is purely political. It was always going to be difficult for the Jubilee administration to make the transition from fighting deficits to spending surpluses.

Life is so much easier for Treasury CS Henry Rotich when all he has to do is say no to everything. Once he is in a position to say yes, the pressure for him to spend becomes intense.

In normal times, that pressure comes from fellow ministers and powerful lobby groups that have the ear of the government. Once the possibility of an election enters the picture, campaign strategists add their short-term views to the mix.

It undermines Jubilee Government’s drive to eliminate the deficit as they will be unable to rise above pure politics, and instead give in to the sirens of political opportunism.

In a report to Parliament on food security, the Ministry of Agriculture noted that Sh90 for a two-kilogramme unga and Sh47 for a kilogramme “was the price attained during the normal maize supplies in the Country.”

Interestingly, these prices were last seen in 2009 when a kilogramme of maize flour went for Sh44, according to figures given by the Institute of Economic Affairs (IEA).

Tegemeo Institute, a policy think-tank affiliated to Egerton University was one of those who took exceptions with the subsidy. “Our suggestion on improving the maize flour subsidy, perhaps the best option would be to allow more imports and let the market forces adjust the price,” explained Dr Timothy Njagi, a research fellow at the institute in a statement. They noted that this would remove the shortages that have recently been witnessed.

“Subsidies sometimes work, but the best work is through the market,” said Dr Bitange Ndemo, an associate professor at the University of Nairobi’s Business School and a former permanent secretary in the Ministry of Information and Communications.

Ndemo noted that maize yields have “persistently dropped” and the long-term solution to this problem is not to subsidise the end-product but beginning a way of improving productivity particularly through land consolidation and a shift into large-scale production. “This year, the subsidy can work, but what about next year?” questioned Dr Ndemo.

Grow up, is what some readers are probably thinking at this point. At their core, politicians ultimately care about being re-elected. The argument can still be made that opening the purse strings now will certainly backfire. President Uhuru Kenyatta has always bragged that Jubilee are riding high in the polls precisely because of their fiscal discipline. To abandon this stance right before an election is a mistake. At best, it will confuse voters about what the party actually stands for in terms of economic policies.

A radical shift will make them appear both cynical and untrustworthy. In addition, Jubilee party will appear to be out of touch with modern reality. Voters know when they are being bought with their own money.

So that’s the political argument. By spending lavishly now, the Jubilee is turning its back on the very policy that could have made them popular.

Dr Scholastica Odhiambo, an Economics lecturer at Maseno University, reckons that Governments are sometimes forced to get into the market dynamics when the aggregate demand goes down. In such a case, the Government might decide to come up with a stimulus package to ignite the aggregate demand.
It is in light of this that the Government has consistently beenbailing out State corporations in a move protect employment.

Unfortunately, recent bail-outs of some sugar millers in Western Kenya have been nothing, but a gesture purely intended for vote-hunting. Embattled Mumias Sugar Company received about Sh1 billion in 2015 from the taxpayer’s coffers.

Two years later, machines at the Western-based miller have gone silent and the firm is demanding another Sh3.4 billion from the State which last week it promised to offer.

Bailed companies

Meanwhile, the country is reeling from an acute shortage of the sweetener, with the price of a two-kilogramme sugar going for Sh380. “The bailed companies continue to make losses even after the cash injection. On the other end, private millers close by are doing brisk business,” explained Dr Odhiambo.

And only last week, the Government, once again, bailed out Nzoia Sugar. But even worse, these inefficient millers, have consistently been shielded from competition through constant extension of sugar imports from COMESA region. Consumers have been left paying high prices for sugar even as they dig deeper into their pockets to prop up these struggling millers.

The State also decided to give civil servants a salary increment, throwing to the wind all caution of ballooning wage bill.

In addition to the Salaries and Remuneration Commission (SRC) recommending a pay rise of Sh80 billion for all the 600,000 civil servants, the Government also earmarked about Sh100 billion for the civil servants for the financial year in what some interpret it as Jubilee’s move to hoodwink State employees.
Also to benefit from the salary increments are teachers whose request for a 50 to 60 per cent wage increment in 2015 saw President Kenyatta dismiss it as “untenable.”

In a fiery televised speech, President Kenyatta told off the teachers, noting that if the Government acceded to their request then Kenya’s wage bill would balloon to 61 per cent of all the taxes collected in a year, up from 52 per cent which already was high above the recommended minimum of 35 per cent.

The president had warned such an increment would leave very little cash for development. Besides, while 1.5 per cent of the population gobbles up over half of the country’s ordinary taxes, 98.5 per cent share the remaining balance. The alternative, he said, would be for the country to raise Value Added Tax (VAT) from the current 16 per cent to 22 per cent, borrow or suspend critical development programmes to meet the teachers’ demand. “None of these options are tenable. Our country must live within its means,” declared Kenyatta.

Surprisingly, Kenyatta softened his hard-line stance weeks later as elections inched closer. By July, teachers will be smiling to the bank, cashing the money the Government had initially refused to offer them.

Moreover, during Labour Day, President went overboard and increased minimum wage by 18 per cent - a record increment in the country since independence.

Minimum wage

Dr Odhiambo recalls that customarily, the minimum wage increase has never gone beyond 15 per cent. “In fact it has mostly oscillated between seven and eight per cent,” explained Dr Odhiambo. The Government explained the increment was informed by the prevailing high cost of living as well as the fact that last year the minimum wage was never increased.

However, the net effect of all these monies being splurged is that, in the near term, inflation will go up as money supply increases. “In the long-run, Kenyans will have to pay more taxes to meet the high recurrent expenditure, or borrow more thus saddling Kenyans with more debts. “It is a political statement but at the end of the day, everybody will be affected,” said Dr Odhiambo.

Free secondary education if implemented as promised by President Kenyatta and his political nemesis Raila Odinga could cost the Government in excess of Sh120 billion according to estimates of the number of secondary students in the country.

In addition, the award of more than a million free title deeds which could attract a stamp duty of four per cent of the value of the land means the State lost huge revenue that could have accrued from the issuance.

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