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Broke, entitled and extravagant: An odd trinity that may sink the nation

CS Treasury Njuguna Ndungu in parliament on November 7, 2023. [Elvis Ogina, Standard]

What a week of contradictions? Exactly how many nations exist in the territory called Kenya? It is practically impossible for a person of sound mind not to wonder what sin we committed as a nation to deserve the calibre of political leaders that we have.

How on earth can a declaration that the country is broke by the Cabinet Secretary in charge of the National Treasury compete for frontline news with proposals to create wasteful State offices that the courts have on various occasions declared unconstitutional? It gets more bizarre when an elected Member of Parliament reasons that such positions will create a taxable income that can salvage the country’s cash crunch.

This in a week when MPs crippled business of the House demanding the immediate release of the National Government Constituency Development Fund (NG-CDF) money that the apex court found to be unconstitutional. One would be forgiven to believe the ‘Waheshimas’ really care for the welfare of their electorates to stage such a drastic measure. You can only be from Mars to believe it is all about bursaries for children of the poor voters.

The delay in the release of the NG-CDF offers one such rare moment for MPs to bury their political hatchets to coalesce around an issue. The only other moments we have seen such unanimity of purpose is when matters that line their pockets directly are brought to the House for debate.

If there is any doubt on this, why haven’t we seen any iota of effort to unify on the cost of living that is ravaging folks across the country? Is their any single constituency where ordinary people are not crying over the pain of lack and deprivation, some caused by taxes passed by their very elected leaders?

This column has consistently been critical of policies of the Kenya Kwanza administration that seem to defy basic fundamentals of well-established economic theories and practice.

Chilling facts

A good case in point has been the disruptive tax craze that has seen the administration’s economic advisor and bureaucrats seem to challenge the existence of the Laffer curve. For them, the Kenyan taxpayer is either completely ignorant of her socio-economic reality or perpetually wired to endure suffering, even when instigated by the leaders she has elected.

Some of us have been vocal about the impacts of such policies on consumer purchase decisions and business investment choices. We are barely into the second quarter of the 2023/24 fiscal year with evidence of the negative impacts of the Finance Act streaming in pretty fast. Despite credible advisory from experts and sustained protest from the electorates and businesses alike, the political elite ignored them all.

In addition to the taxes, there have been legitimate questions on the administration’s handling of the foreign exchange, especially the shilling against the dollar. The argument that the shilling was manipulated to achieve certain political ends of the previous administration is not only hollow but strange given the men in charge were part of that system for the most part.

The President was the regime’s deputy president. Does it mean they weren’t party or aware of the Jubilee economic policies? Did they advise to the contrary and is there evidence their advisory was ignored or rejected?

More fundamentally, this argument flies against the well-established theory in international economics and international political economy of the impossible trinity, commonly referred to as the Trilemma. According to this theory, no government can simultaneously maintain an independent monetary policy, national fiscal sovereignty and a no bail-out clause. Simply put, no government can have control over the macroeconomic variables of monetary policy, balance of payments and exchange rates at the same time. Any attempts to preserve the three will result in a definite failure.

Take, for instance, our present predicament, how can the policymakers purport exchange rates are market-determined when the country imports literary everything and has lost on export markets, tourist flows and Foreign Direct Investments? Our saving grace has been the benevolence of the Kenyan diaspora remittances.

In as far as I understand this trinity, Kenya has never had a fully market-determined exchange rate regime, instead, we have had a managed float system. The only country that has been able to achieve monetary policy autonomy is the USA. This is because the dollar operates on a free float and has left balance of payment to the markets.

In any case, the greenback still dominates in international trade transactions with international trade volumes to Gross Domestic Product growing consistently from about 10.7 per cent in 1970 to 20.45 per cent in 2021. How do our statistics compare to this, even within the region?

It came as a sweet surprise for some of us when the Governor of the Central Bank provided an elaborate lecture as to the reasons that necessitated the highest spike in history on the benchmark interest rate. This effectively set the base rates to levels only last witnessed over a decade ago. While it would be an extra pain to consumers in the credit market, it may stabilise the macro-environment and redeem the regulator of this guilty trip of failing the economy.

It is my sincere prayer that the Treasury mandarins will read the signs on the wall and take the requisite corrective actions before it is too late. It beats any basic common sense for the Treasury Cabinet Secretary to admit to the nation that he is struggling to raise taxes to meet salary obligations and continue to argue for more taxing.

More strangely, Parliament seems to be on a rush to regularise one of the most toxic levies that the courts have not only declared unconstitutional, but that is exacerbating the woes on the revenue side of the government. How can policy choices ignore tax revenue falls in strategic baskets like VAT, PAYE, fuel levies and sin taxes? Do they imagine this is a passing cloud and not major re-adjustments in consumption decisions by consumers and capital re-allocations by business owners on account of their tax policies?

Timely lesson

While the President and his men continue to receive bashing for their globe-trotting, perhaps we should this time recommend one more trip, as a matter of public demand, for him and his entire economic team. The destination would be to meet Jeremy Hunt, the Chancellor of the Exchequer of the United Kingdom, for practical lessons on how to turn around an economy.

Richard Partington and Kiran Stacey, in an article in The Guardian dated 23rd November 2023, quote Hunt as saying that ‘if the government wants people to work hard, work at night, and an economy where people go the extra mile and work hard, then the government needs to recognise that their hard work benefits us all’. This was said when the Chancellor delivered the Autumn Statement cutting taxes for households and businesses.

Chancellor Hunt made it unambiguously clear that their economic policy at the moment was not a big government, high spending and high tax because they know that this leads to less growth not more. On the contrary, their priority was to reduce debt, cut taxes and reward work. Thus last week, the UK cut taxes for the average worker by about Sterling Pounds £450 and the self-employed by £350 per year that benefits about two million people. This is in addition to a tax cut for businesses to increase their investment.

This personifies practical economics and policy choices that set confidence in the economy. It distastes economic leeches and political lords of poverty.    

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