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Kenya’s spending puts a drag on economic growth

NEWS
By Dominic Omondi | August 16th 2020

Kenya may fail to hit its target of becoming a middle-income country by 2030 given the rate at which spending is outpacing revenue.

According to the World Bank’s latest Country Policy and Institutional Assessment (CPIA), 2019, while the quality of the country’s policies and institutions remain impressive compared to those of its sub-Saharan Africa peers, it has dropped a few crucial points in the last six years.

The assessment shows that in the six years to 2019, the Jubilee government wavered in its general ranking in governance, but particularly on the management of the economy. 

However, President Uhuru Kenyatta has done well in ensuring that there is equity in resource distribution, especially across the gender and age divides, with women and the youth having access to critical public resources, says the World Bank. 

Strong index

Economic management was also a strong index, with the Monetary and Exchange Rate Policy the star performer in this cluster.

It is a nod to Central Bank of Kenya Governor Patrick Njoroge who has been at the helm of the financial regulator for the last six years. 

The CPIA looks at the quality of policies and institutions in International Development Association (IDA)-eligible countries. 

IDA, a World Bank affiliate, offers concessional loans and grants to the world’s poorest developing countries, and relies on a country’s CPIA score.  

Some of the policies that are used to compute a country’s score include economic management - a cluster where the president scores highly but in which, paradoxically, Kenya has dropped the most points since Uhuru received the leadership button from President Mwai Kibaki in 2013. 

It has a score of four points, having dropped by 0.5 from 4.5 points in 2013.

As a result, the country’s overall CPIA score during this period declined from 3.9 to 3.7 points, though it remains above the sub-Saharan average.  

Kenya should be much further ahead in its quest to becoming a “newly industrialising, middle-income country providing a high quality of life to all its citizens by 2030 in a clean and secure environment”, according to Vision 2030.

However, debt remains a thorn in the flesh of the current administration, bringing down Uhuru’s performance. 

A recent report by the African Development Bank found that Kenya was among the countries where there was “already weakening debt-affordability metrics (measures looking at the ratio of interest paid on debt to revenue) from falling revenue”.

David Owiro, an economist, says the debt policy has worsened in terms of repayment and even debt composition as the country has dipped more into expensive market-based credit such as Eurobonds and syndicated loans. 

Indeed, in the 2018-19 financial year, for every Sh100 that the government paid out from its coffers, Sh76 went to servicing expensive loans.

This compares to only Sh2 it spent to service commercial loans seven years ago, an analysis of official data shows. 

Treasury Cabinet Secretary Ukur Yatani, who replaced Henry Rotich last year, has vowed to tame the country’s appetite for debt, promising to institute a painful belt-tightening process.

Owiro says the implementation of the current administration’s own policies, such as the Big Four Agenda, has also been wanting, citing the promise of creating a million jobs, which has not happened.

Instead, the country has been creating around 800,000 jobs, most of which have been informal jobs that, according to Owiro, cannot be easily measured. 

Further, the currency exchange rate, according to the economist, is neither a pegged floating exchange rate nor free-floating, with the International Monetary Fund (IMF) being forced to re-classify it. 

Njoroge has, however, previously said Kenya maintains a free-floating exchange rate and that CBK only intervenes in times of volatility. 

Indeed, the country’s monetary and exchange rate is the best performing in the World Bank ranking, with a score of 4.5. 

Uhuru further scores highly in policies aimed at achieving gender equality and ensuring resources reach everyone, including the marginalised. 

This includes policies that have given youth and women access to government tenders after the directive that all State corporations set aside 30 per cent for the special groups. 

The business regulatory environment is the other area where the Jubilee administration scores highly, with the country moving up the rankings in the World Bank’s ease of doing business. This was after the government put in place policies to ensure that small businesses can easily access electricity, credit, pay taxes, enforce a contract or wind up a business, among other policies. 

But according to Owiro, a great chunk of the growth that the country has achieved was significantly informed by the rebasing of the economy in 2015, a “statistical way of achieving growth”.

“The tax burden on the final consumer is very high,” says the economist, noting that tax administration in Kenya is much higher when compared to its peers. 

Achieved a lot

However, Gerrishon Ikiara, a retired economics lecturer from the University of Nairobi and a former Transport Permanent Secretary, says the government has achieved a lot and has only taxed only where it had leeway.

Ikiara reckons that Rotich’s team managed the economy fairly well.

“They helped raise money through taxes, avoiding areas that were sensitive to people,” he says. 

On the high accumulation of debt, Ikiara notes that there is no country in the world that has developed without borrowing, arguing that there was need for people to divorce corruption and wastage from debt. 

“It is worth borrowing, whether it is expensive or not,” he says, noting that the economic and social benefits that will accrue in years to come will be greater that the cost of borrowing. 

He, however, insists that there was need to deal with graft, “which could negatively affect some of our donors.”

In his opinion, the liberal Constitution Kenya promulgated in 2010 has negatively impacted the fight against corruption by creating long legal processes.

Others clusters in which Kenya has performed dismally during the period under review include the financial sector, perhaps due to the interest rate cap, a law that was repealed towards the end of 2019.

The law had put a ceiling on rates that financial institutions charged on loans.

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