What government can do to wriggle out of economic woes

President William Ruto. [File, Standard]

One could say that the search for an appropriate policy solution to Kenya’s short-term problems of high cost of living (inflation) and unemployment has become another “hunt for the Heffalump”, to borrow the expression famously used by Peter Kilby in his book Entrepreneurship and economic development to describe any whimsical and elusive pursuit of economic answers. Ditto the medium-term problems of current account deficit and high foreign debt.

He writes, tongue-in-cheek, that “the Heffalump is a large and rather important animal hunted by many individuals using various ingenious trapping devices, but no one so far has succeeded in capturing him. All who claim to have caught sight of him report that he is enormous, but they disagree on his particularities”.  

As long as budgeted expenditure exceeds the tax revenue stream, Kenya, understandably, has nary choice but to finance her development agenda by taxes and debt, at least in the short and medium terms. This is of course a consequence of natural resource scarcity which necessitates dependence on the exportation of primary agricultural goods that, unfortunately, fetch very little in the highly competitive international market. (Hopefully, this clarity will make the increasingly impatient Kenyans to baulk less at the mention of taxes and borrowing!) What is contestable, however, is the extent to which this should be done, and the timing.

To their credit, Kenya’s policymakers – those metaphorical Heffalump hunters - have generally made the correct diagnoses of the country’s challenges. We however argue that their policy prescriptions have been erroneous and ill-timed sometimes. Ultimately, instead of resolving the short-term internal imbalances of unemployment and inflation, they have exacerbated the situation, seemed worse than the disease they are ostensibly curing and made the prospect of solving the medium-term external imbalances of current account deficit and high external debt bleak. Indeed, the Heffalump is still at large; he has escaped the government’s policy trap nets, and the hunt continues.

For many years, the failure of the government to address macroeconomic problems was likened to the performance of Shakespeare’s tragedy Hamlet with the Danish prince missing. Now, with turbo-charged economists of the mettle of David Ndii (Oxford University and UoN) and Prof Njuguna Ndung’u (University of Gothenburg and UoN) in Kenya Kwanza’s line-up, the legitimate question becomes why the audience is not getting value for their money despite the play debuting in a state-of-the-art theatre, so to say.

Indeed, one year down the line, Kenya’s population is even more precariously besieged by the four horsemen of the apocalypse: High cost of living, unemployment, current account deficit and high foreign debt.

Rather than blaming the policymakers, disciples of one John Greene love attributing the high cost of living to ‘acts of God’ - unpredictable weather patterns, Covid-19, the Russia-Ukraine war, the Israel-Palestine war, ad infinitum. They insist that most fiscal and monetary policies can only hit their targets over a longer horizon, and that policymakers need more time to adopt strategies to the current geopolitical dynamics.

Meanwhile, inhabitants of William Shakespeare’s world where happenstance is often exonerated have already passed a charlatan verdict against Kenyan policymakers. They argue that best economic policy practice would have required that when households and firms are threatened by liquidity squeezes (bankruptcy), income-based direct taxes such as pay-as-you-earn and taxation of business profits should be minimised. The reflexive route of hiking consumption-based taxes such as VAT should also be resisted or avoided altogether.

We choose to subscribe to neither John Greene’s thesis nor William Shakespeare’s antithesis. Instead, in this watershed moment for our country, we recommend the following realistic policy measures for consideration by the government.

Firstly, the tax burden on households and firms should be eased through debt financing in the short and medium terms. Debt servicing challenges should be addressed through rescheduling, buybacks, debt–equity swaps, debt exchanges, and exit bonds among other possible measures.

Secondly, foreign debt financing will obviously not be sustainable in the long run in light of the hefty depreciation of the shilling against major international currencies caused by weak macroeconomic fundamentals. Therefore, the government should actively seek to increase funding for technology and innovation-based research, push the production function to a higher frontier to raise real wages, create employment, generate real income and ease inflation pressure.

Third, structural transformation should be explored to enable the manufacturing sector to play a greater role in Kenya’s development. This is because the manufacturing sector has a higher ability to neuter unemployment than the agriculture sector. Moreover, the former creates value addition to agricultural exports thus correcting the country’s perennial current account deficit.

Fourth, the investment incentive structure should be configured to enhance soft credit terms and tax holidays for private investors in the manufacturing sector. Yet this must not be done to the exclusion of the agriculture sector, given its critical role in lowering the cost of living and guaranteeing food security.

Equally importantly, to ensure that government policies reflect citizens’ aspirations and curtail rampant misunderstanding of official actions, public participation is imperative in any policymaking process.

The writers are lecturers at Laikipia University.