Economic burden next Kenyan president faces

Boda boda operators line up to buy fuel

Boda boda operators line up to buy fuel at a Nyeri petrol station on April 7, 2022. The winner of the August 9 presidential elections will have a hard time implementing his manifesto due to the biting cash shortage at the Treasury.

Photo credit: File | Nation Media Group

The winner of the August 9 presidential election will have limited legroom to implement their manifesto due to the current state of the economy and a biting cash shortage at the Treasury. This year’s basket of promises is largely dictated by the prevailing high cost of living and joblessness among the youth.

Azimio leader Raila Odinga and Deputy President William Ruto, who are the frontrunners, have been forced to dwell on the economy in their campaigns in a way not seen since the 2002 elections, when focus was on getting a solution for the economic collapse due to years of the Kanu regime misrule.

Therefore, the hard reality facing whoever wins the presidential election is that there is little wiggle room in as far the economy is concerned, and that the delicate balancing act of funding the budget will continue well beyond August.

The winner of August poll will inherit Sh862.5 billion hole in the budget for the 2022/2023 fiscal year, which will need to be filled through borrowing at a time when the international debt market is proving difficult to crack for smaller economies like Kenya’s.

Already, the government has had to cancel plans to issue a new Eurobond, turned off by the potential of having to pay in excess of 12 to 13 per cent in interest on this kind of loan. “Making promises and fulfilling them are two different things.

How will they fund these promises when we have a budget deficit? Let’s look at the sources of funding: borrow more… Raising taxes is politically unpopular,” said Prof XN Iraki, an economist at the University of Nairobi.

“They need to be realistic. Beyond voting, not much will change after August. The population will not go down, no factories will crop up overnight, and markets for our goods and services will not open overnight.”

Then there is the International Monetary Fund (IMF) that is vetoing and proposing policy in a way that was seen in the 90s. It has called for cuts in wastages, raising of taxes and other measures that any incoming regime will have to grapple with.

As a lender of last resort, the presence of the Bretton Woods institution often signals that all is not well with the economy—hence the three year, $2.34 billion (Sh282 billion) credit facility extended to Kenya a year ago to ease debt-related risks and fund the post-Covid recovery.

In Kenya’s case, the focus of the IMF’s interventions has been the inability to finance the budget, which has led to the ballooning of the public debt, and reforms in the tax regime to help fund this deficit.

Dr Ruto, who is vying under the Kenya Kwanza Alliance, is yet to launch his manifesto — he is expected to do so at the end of this month — but has already spelt out plans to pump billions into the real economy should he be elected president.

Mr Odinga has already released his manifesto, laying down a 10-point agenda addressing unemployment, manufacturing, youth and women empowerment, devolution and healthcare among others.

While there are policy measures that would not cost much to implement, the document also details some significant expenditure plans which have not been catered for under the upcoming fiscal year’s budget.

Both candidates’ plans would inevitably call for massive expansion of government expenditure, but are curiously shallow on details of how the funds will be raised, bar references to expansion of the tax base.

Mr Odinga’s manifesto, for instance, promises vulnerable families a cash transfer of Sh6,000, a month under his social transformation programme dubbed Inua Jamii.

He also promised to pay up compensation claims awarded by courts to victims of state injustice. More than 400 Kenyans, including lawyers, politicians, journalists, former university lecturers, former student leaders, police officers and military officers, have gone to court and successfully argued that they were tortured by state officials during the Daniel Moi presidency.

Awards against the government by the courts currently total more than Sh150 billion, covering various claims such as human rights violations, unfair dismissals and contract breaches.

Mr Odinga would also have to raise in excess of Sh300 billion to fund his plans for transforming the education sector, which include hiring over 300,000 unemployed but qualified teachers and offering free education from kindergarten to university.

Hiring the additional teachers would cost the government Sh150 billion, while paying fees for the over 500,000 university students would punch another Sh9 billion sized hole in the universities budget, where the government is already spending Sh91.2 billion.

Overall, the plan would raise the current budget for education for the 2022/2023 fiscal year from Sh544 billion to more than Sh700 billion.

Mr Odinga will, thus, have to increase the education budget by close to Sh200 billion to fulfil his pledge of transforming learning, if elected on August 9.

For Dr Ruto, his plan entails massive investment in grassroots businesses under the bottom-up economic model.

Last week, he promised to set up Sh50 billion fund for women, adding to an earlier pledge to set up a similar Sh100 billion fund to support youth enterprise.

He has also promised to increase funding for loans to the Agricultural Finance Corporation (AFC) from Sh5 billion to Sh20 billion, reduce interest rates and remove the need for collateral to support farmers.

As for his source of funds, the DP has said that he will be seeking to double tax collections through digitisation and bringing more people into the tax net, a task that has proved a hard nut to crack for successive administrations.

“The bottom-up approach creates more taxpayers without increasing tax, and also expands the middle class,” he told NTV in an NTV on June 12.

The reality though is that both plans would require a significant realignment of government spending, and a cut in wastage that has proved a problem over the years.

Both also promise significant social spending, which requires heavy taxation to fund, at a time when the cost of living is through the roof and jobs are hard to come by.

According to Prof Iraki, an economy actually needs lower taxes to stimulate growth, by putting more money in people’s pockets, while Kenya is also yet to demonstrate it will deal decisively with corruption and wastage of public resources. “Tax cuts could stimulate the economy. Living within our means would mean reducing the number of public jobs by merging departments or using more technology,” he said.

There is also the elephant in the room in form of reduced room to borrow, and the large share of revenue that goes towards servicing existing debt.

In the decade under the Jubilee administration, public debt has jumped to Sh8.4 trillion, equivalent to about 67 per cent of GDP, up from the Sh1.89 trillion the administration inherited from President Mwai Kibaki.

President Uhuru Kenyatta has, however, defended this borrowing, saying it was necessary to fund infrastructure and accelerate economic growth.

For his successor, repayments of commercial loans such as the $2 billion (Sh234 billion) Eurobond principal due in 2024 and regular interest dues will likely limit the scope of borrowing for grand infrastructure projects and any other ambitious spending plans.