“If we are elected on August 9, our first job will be to lower unga (maize flour) prices to Sh90 from over Sh230 currently.”
This was Deputy President Rigathi Gachagua’s promise at a campaign rally in Kinamba, Laikipia County, on July 6 as Kenya Kwanza used the high cost of living to advance its agenda.
Fast forward to Sunday. As President-elect William Ruto addressed a congregation in Meru County, he maintained the promise to lower fertiliser prices starting this week, but he was careful to contextualise it to paint the picture of the poor economy he is inheriting.
Dr Ruto said: “I have had long meetings with those in charge of Kenya’s economy. We have a big problem with debt and our economy is not in a good position.”
This is the reality the President faces in his bid to fulfil his promises to “hustlers”.
The country that President Ruto is inheriting is scarred on all fronts. Kenya is broke, living beyond its means, choking on corruption and unemployment, with millions of citizens heaving under the heavy burden of a high cost of living.
Dr Ruto has made an array of promises to various groups, including consumers, businesses, youths and farmers, most of which are tied to the budget and within the first three months in office.
He has promised to rationalise all business licences and cap total taxes they pay at 1.5 per cent of turnover, blaming a hostile environment for poor performance of the informal economy,. In addition, he promised to inject Sh50 billion in small and micro enterprises in credit, and another Sh50 billion to agriculture to offer capital and extension support to farmers, starting this year.
Kenya’s agricultural sector has recorded dismal performance on the backdrop of high costs of inputs and erratic rains, with the Central Bank of Kenya last week reporting that the sector contracted by 0.7 per cent in the three months to June. This is on the back of a 1.2 per cent contraction in the first quarter of 2022.
Prices of agricultural inputs have also been rising, with money spent on importing fertiliser and agrochemicals between 2018 and 2021 having increased by 37 per cent to Sh20.5 billion and Sh16.2 billion respectively, the Economic Survey 2022 shows.
Over the four years, money spent on importation of manufactured feeds increased by 55.5 per cent to Sh12.3 billion.
The rising costs within the agriculture sector have impacted the cost of food production and farmers are desperate to see prices of fertilisers, feeds and other inputs brought down.
Dr Samuel Nyandemo, an economics lecturer at the University of Nairobi, says most of the promises made by the new President may not be fulfilled due to the state of government finances, demands by creditors and budgeting cycle.
“On issues such as lowering maize flour prices, the first thing to consider is that this year’s harvest has been poor and so the maize shortage will continue. While the government may lower fertiliser prices, that will not have an impact on maize flour prices in the short-term. Only h use of subsidies can help, but our creditors, mainly the World Bank and the International Monetary Fund, are against this,” he said.
The manufacturing sector is choked by over-regulation, with some manufacturers paying levies to over 40 agencies. Kenya National Bureau of Statistics (KNBS) data shows the sector’s costs of production have grown by 32 per cent since 2017, even as output grew by 27 per cent.
“Lengthy and manual processes for obtaining regulatory permits and numerous licences as well as fees, levies and charges are significant barriers to entrepreneurship.
“We urge the incoming government to reduce the number of regulations and bring down the cost and time spent on compliance, and consolidate regulators at the national and county levels,” said Kenya Association of Manufacturers Chairman Rajan Shah.
Dr Ruto has promised to reduce the SMEs’ tax burden to 1.5 per cent of turnover.
“It’s true taxes will help us grow, but it can’t be collected in the manner they (Kenya Revenue Authority) are doing currently, by force and destroying businesses,” said Dr Ruto on Sunday.
When President Ruto walks into his new office at Harambee House, he will find a National Treasury that has in excess of Sh8.56 trillion in debt to both foreign and domestic creditors.
Treasury will be at the centre of the President’s administration and will be tasked with equitably distributing the scarce resources generated from revenue, loans and grants to both the national government and county governments.
The debt burden – which is now about 67 per cent of the country’s gross domestic product – has had a huge impact on government spending. In the financial year 2021/22, debt servicing costs hit Sh1.17 trillion.
Dr Nyandemo said: “The fact is he was in the previous government, which invested heavily in projects that will not have immediate returns, pushing the government’s debt to the current level. Now he finds a wrecked economy with a high cost of living and fulfilling his promises, especially within first 100 days, will require a miracle.”
KRA raised a record revenue of Sh2 trillion during the period, which means that of every Sh10 collected, Sh6 went to servicing debt, squeezing the development budget.
President Ruto on Sunday said he had already held talks with KRA and Treasury on how to increase tax collection and reduce government borrowing.
“We have to stop borrowing, but Kenyans must also pay taxes and save. We have had a conversation with KRA and we asked them not to punish taxpayers but collect taxes without threats and intimidation because this is the only way we are going to grow our economy,” he said.
President Ruto will find himself in a tight spot that will need him to delicately balance how to raise enough revenue to implement the projects he promised, while also easing the tax burden on households and businesses that are struggling under a tough taxation regime.
Experts reckon that Dr Ruto’s administration has to prioritise cutting expenditure on non-priority items and tackle corruption to cut the budget deficit and lower debt accumulation.
“He (President Ruto) has got a very difficult job ahead of him. The expectations from his supporters are very high, and to deliver quickly, he has to trim government spending instead of raising tax rates,” said Mr Nikhil Hira, a tax expert and partner at Kody Africa.
National Tax Policy
The proposed National Tax Policy, which will be reviewed every five years, will also be another thorn in the flesh, as it proposes to impose presumptive tax on informal businesses and subsistence farmers, in an effort by the taxman to squeeze an extra coin from citizens.
“The Kenyan economy is dominated by subsistence agriculture and a large informal sector, which are difficult and uneconomical to tax. To progressively increase tax yields from hard to tax sectors, the government will explore ways of enhancing taxation in the agricultural sector and the informal sector, including use of presumptive tax,” the proposed tax policy states.
President Ruto will also immediately be confronted by the high cost of living that has pushed many basic commodities out of the reach of poor Kenyans.
Annual inflation hit 8.5 per cent in August – the highest in five years – driven by a sharp increase in the cost of food and fuel.
The year-on-year cost of food commodities has gone up 15.3 per cent between August last year and this year.
President Ruto’s predecessor, Uhuru Kenyatta, had been managing the inflation through fuel, maize flour, electricity and fertiliser subsidies.
The new Head of State will, however, have to make painful decisions on whether to continue the fuel subsidy and the others.
A subsidy deal between Kenya Power and the state has kept electricity prices stable since December, helping alleviate an increase in power costs arising from high global fuel prices.
The IMF, which is in a 38-month loan deal with Kenya, has given the country until next month to end the fuel subsidy to ease pressure on the exchequer.
Mr Hira said the new government should rationalise tax rates and tax laws to bring certainty to Kenya’s tax regime, and cut taxes on key products such as fuel to substitute subsidies.
“The last thing consumers need now is an extra tax burden. The best approach is to cut the high taxes on products such as fuel, which allows the prices to come down naturally without the need for subsidies,” he said.