Kenya Kwanza should wake up, face realities of its bad economic policies

National Treasury Cabinet Secretary Njuguna Ndung'u when he appeared before the Senate standing committee on Finance and Budget Chaired. [Elvis Ogina ,Standard]

Hubris is a term used in economics to refer to a dangerous behaviour that emboldens an investment professional to take risks that are beyond what is appropriate in their present circumstances.

From ancient Greece, Elisabeth Roudinesco in an article on the history of the concept ‘hubris’ published in Le monde des Livres on May 3, 2022, describes the term to refer to excessive attitudes that are opposed to temperance or reason. These attitudes could be of passion, pride, outrage, crime or transgressions.

In business, the Institute of Leadership describes executive hubris as a term associated with excessive self-confidence behaviour or pride that leads chief executives to make openly risky bets, ignore relevant warning signs or fail to invoke contingency plans.

Scanning through trending news items of the week, it is evident that the Kenya Kwanza administration needs to climb down from its hubris and respond to the economic realities of the day. For the avoidance of doubt, let us connect these random dots. In the week when the government’s top brass poignantly stood defiant to an Appellate Court’s ruling against a very unpopular housing levy, partly on matters of law and partly on public interest, the mainstream media was reporting that manufacturers are leaving Kenya in droves to neighbouring countries.

Further data associated with the Central Bank projects the manufacturing sector has beaten other sectors of the economy to top holders of non-performing loans estimated at Sh133 billion as of the last quarter of 2023. Bayer, the giant German pharmaceutical and biotechnology company, declared its intent to exit or re-organize its operations in the country by May this year. It joins her competitor, the British GSK company that adopted a similar model in December 2023. A casual Google search yields a list of several other multinationals that have vacated direct operations in the Kenyan market in the past decade.

Ugly reality

However, it is a clip of an interview by business reporter Julians Amboko with the Chief Finance Officer (CFO) of East African Breweries (EABL) company that must wake up National Treasury mandarins and the political elites of the day from their hubris to the realities of the devastating consequences of their policies. For argument's sake, EABL is the second largest taxpayer in the economy and was at the number one slot for several years before Safaricom came into town.

A tax policy that pushes the CFO and top executives of such a company to abandon their primary duty of strategy, production and selling to tax clerks of the revenue authorities and sojourners of banking halls in search of cash to feed the tax lords is at best myopic and at worst lunatic. Any good farmer understands that for a cow to produce quality and quantity milk, it must be fed and left free to produce the milk before it is milked.

A fortnight ago, I listened to chilling lamentations of a senior official of one of the local insurance companies on the nightmare of cashflows competing for daily tax returns, settling customer claims and raising salaries for employees. Basic common wisdom dictates that the burden of tax compliance cannot supersede production, strategy and marketing decisions for corporates.

At the household level, the masses celebrate the small victories against these oppressive taxes on the streets while the political elites appropriate nonexistent divinity unto themselves. The sovereignty of the people under Article 1 is not abrogated away from them when it is delegated to elected leaders under Article 2 of the Constitution.

Furthermore, how the impending social health insurance and social security deductions will complicate monthly budgets for households is open for debate, but the outcomes are fairly predictable. There would be latter-day monumental heists, no better services in public hospitals nor fat cheques for retirees when they exit active service to the nation. Painting a hyena black or white does not change it into a sheep; it remains a sheep eater. This I can bet for a billion-dollar loan at a global capital market.

The conversation must have been about changing the DNA composition of these agencies and rewiring their social-cultural and attitude orientations first, not loading billions in monthly contributions to them.

Cost of competitiveness

The consequences of losing our regional competitiveness will be felt for many years to come. A book chapter by the International Monetary Fund on Regional Economic Outlook in Sub-Saharan Africa describes Competition and Competitiveness as essential driving forces of market economies. They ensure resources are allocated to their best uses, and generate firm dynamics that boost innovation, productivity growth and external competitiveness. In the long-term, this translates into macro-economic gains.

Based on this prognosis, it must worry any patriotic and progressive citizen when multinationals exist our economic theatre like dominoes. Beyond the obvious loss of direct jobs and livelihoods, exiting multinationals go with their supporting value chains and logistical support structures, diminish industry competition that breeds mediocrity among domestic players and hurts medium and long-term revenues for the government that it seeks today. It is a classic zero-sum policy game.

The Kenya Revenue Authority’s data suggests a majority of the registered local businesses are empty shells. For instance, in October 2023, the media reported that of the 862,336 tax-registered businesses with KRA, only 129,313 paid actual corporate taxes. This translates to about 15 per cent. The rest filed nil returns, implying either they made losses or earned no income at all. This explains why losing one quality company to competition within the region on account of taxes and a toxic operating environment is such a costly miscalculation.

This reminds me of the rhetorical question I posed in this column in November last year when the little-known private school within Tena Estate, Eastend Junior Academy, abruptly closed its doors indefinitely, citing a very toxic business operating environment. It remains a valid question as to whether this was an early indicator of the things to come in the coming days.

History teaches us that signs of macroeconomic trouble in a country may originate from the most unlikely quarters. Take for instance the well-studied and documented 2007/2008 global financial crisis. The first incident that signalled the beginning of the crisis was an announcement by BNP Paribas, a European Bank, on August 9, 2007, that its mortgage exposures required it closure of three funds from the US market. A month later, a key bank in the UK, Northern Rock, would suffer a bank run necessitating a sovereign bailout after the collapse of the interbank market following the BNP Paribas announcement.

These incidents were far away from the theatre of action that was the US subprime mortgage market, yet they were the earliest signs of what is evidentially documented as the biggest financial crisis that almost destroyed the global economic order.

To sum it up, these seemingly isolated cases, yet consistently emerging across various sectors of the economy must awaken the policy wonks while the lady luck is still smiling at us!