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'It doesn't make sense': Experts fault Rutonomics as being off-track

By Wanyonyi Wambilyanga | 2mos ago | 6 min read

President William Ruto receives a wheelbarrow during campaigns in Mathira, Nyeri, October 31, 2020. [Kibata Kihu, Standard]

The balance between a high appetite for more revenue and fixing an ailing economy could be President William Ruto’s biggest hurdle.

On the one hand, the Head of State is desperate for money to service the country’s budget that is running a deficit and on the other, he has to bring down the cost of living to make life better for the populace.

The recent rise in fuel prices has been met with anger and a reciprocal rise in the cost of basic food items and transport.

The harsh reaction to the rise in the cost of fuel has seen senior government officials exchange harsh words with Kenyans with the Cabinet Secretary of Trade Moses Kuria coming out as insensitive and his words earning him a warning from Deputy President Rigathi Gachagua who said decorum is paramount when serving Kenyans.

Economist and former Mandera Senator Billow Kerrow says the explanation being given by the government does not make sense at all since global indicators point in a different direction.

The former Mandera Central MP says: “The price of oil, in the last two months, has only gone up, globally, by five per cent from 85 to 90 (dollars a barrel) and the outlook is from the remaining quarter it will stabilise at $87 (Sh12,702)… They should stop lying to Kenyans.”

Unnecessary travel

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According to Kerrow, there are misplaced priorities in government and he feels cutting down on expenditure, trimming taxes, wastage, and cutting down on unnecessary travel will enable the State to save and as a result, reduce taxes that are burdening Kenyans.

“The challenge we have on petroleum is what constitutes the pricing formula. When you look at that pricing formula after that increase of eight per cent VAT, nearly 55 per cent of the total cost of this fuel is government taxes and levies. If the government wants to really help Kenyans, it should reduce this appetite for revenue,” he said.

Dr Patrick Muinde, an economist concurs with Kerrow, noting that it could be counterproductive to increase taxes without giving Kenyans incentives to continue producing.

Already, all sectors of the economy are adjusting to not only the fuel price increase but also the introduction of new taxes, some as a condition for donor funding.

“We need to look at the basics of taxation and you will understand that it is a patriotic duty for every citizen to pay taxes since the government is providing social services like education, infrastructure and the like. However, if I feel I am being overtaxed, the most likely scenario is I will stop producing,” he said in an interview with The Standard.

“The responsibility of a government is to take enough and leave us with an incentive to continue producing. It becomes counterproductive when people feel they do not need to work or under-declare what they earn.”

Dr Muinde asserts that the government seems to be missing the fundamentals of economics given their recent approach. He says world over, when the economy is ailing, you let money circulate. This way, money will continue circulating and the effect will be noticed in government books.

“The basic rule of economics is that when the situation is dire you leave money in the hands of the citizens. You do not take the little and proceed abroad to spend it. It is like removing blood from an already bad patient,” he said. “In times like these, you come up with stimulus packages not new or higher taxes.”

According to Dr Muinde, the government ought to incentivise citizens to produce while at the same time checking its wastage and unnecessary spending. “What the government needs to do is to critically look at its budgeting process since budgeted corruption is bleeding the country. Check wastage and unnecessary spending and there will be money to fund most of what the government is taxing citizens to fund,” he noted.

His thoughts are shared by the University of Nairobi’s Prof XN Iraki. According to Prof Iraki, the government should explore other methods of funding the budget deficit including borrowing. He says the reduction of taxes can actually spur growth.

“The budget deficit has necessitated borrowing or raising tax rates or new taxes. Higher taxes raise the cost of living because new prices factor in the taxes. At times, traders and entrepreneurs add a markup. To reduce the impact of taxes, we should not abandon borrowing (though demonised),” Prof Iraki told The Standard.

“We can repay debts of loans later unlike taxes which are often instituted instantly or after the Bill is signed into law. High taxes also “dampen” the national spirit which could lead to slower economic growth and lower tax revenues. Globally, lowering tax rates is an economic stimulus, let’s try it.” And as much as the government has said it is in firm control of the financial institutions, agreeing to the International Monetary Fund’s push to increase taxes has come as a double-edged sword.

In the eyes of the IMF, their programme to assist the government “involves a multi-year fiscal consolidation centred on increasing tax revenue and carefully prioritising expenditures while safeguarding resources to protect vulnerable groups. The programme also advances the broader reform and governance agenda by addressing weaknesses in State-owned enterprises (SOEs) and strengthening the country’s anti-corruption framework. Finally, it strengthens the monetary policy framework and supports financial stability.”

The effects of these policies are stark. The Kenya Association of Manufacturers has asked Kenyans to brace for tough times as a result of the new taxes and cost and fuel.

“Pump prices have reached historically high levels of over Sh200 per litre. This will increase the cost of production for manufacturers, resulting in more pain for consumers who are already struggling to make ends meet. This is because, the price of fuel cascades across the value chain – production, distribution, and even retail,” said KAM in response to The Standard queries.

The Matau Owners Association announced its members will increase the fares after the government increased the prices of petrol. ‘‘We have reached out to all our members across the country and agreed that immediately from today, our fares will go up by 20 per cent,’’ said MOA Chairman Albert Karakacha.

The MOA chairman, on Friday last week, said just like EPRA blamed the fuel increase on inflation, they also had no option but to increase the fares. ‘‘We as businessmen, as inflation goes up, we also have to increase so that we do not operate at a loss,’’ said Karakacha. He said when the fuel goes up, everything including fuel, and tyres goes up and they can justify the 20 per cent increase.

Transport costs

Kenyans are opting for public transport as opposed to using private vehicles which means a drop in fuel consumption. With transport costs going through the roof, the cost of unga that was to come down as a result of the good harvest being experienced in the country becomes a mirage.

The manufacturers advise the government to lower taxes if the mwananchi is going to find a way out of the economic mire. “We urge the government to consider suspension of some of the taxes and levies on fuel as an alternative mechanism to shield the country from the high cost of fuel and boost the country’s global competitiveness,” said the manufacturers.

KAM pointed out that Kerosene is used as an input for paint manufacturing, and its increment to Sh202.61 will not only affect input costs but also the affordable housing agenda, and the car paint industry among others.

Electricity, it also noted, is an important input in the manufacturing processes. The industry has often expressed concerns over quality and reliable electricity supply for manufacturing. “Frequent power outages have always forced manufacturers to turn to generators, which are an added cost in terms of purchases and operations (fuel costs),” it said.

“Transport is also required in the production process, from transportation of raw materials to distribution of final products. We will soon see road transport costs adjusting upwards thus impacting on the overall cost of doing business in the country.”

Additional reporting by Brian Ngugi