The cracks: First the PR part. There is evidently some oomph to Kenya’s feats of stepping out confidently to hobnob with the world of hardnosed businessmen, the billionaire variety. And as easily whipping up climate change ideas in Nairobi’s gigantic bottle called the Kenyatta International Convention Centre, shaking things up vigorously as we poke fun at the inequitable global financial system.
The true challenge is the ‘hardnosed’ part: They ask, what are you doing? We display a crippled economy. Unless economic management is professionalised for increased output, employment, productivity and increasing tax revenues to facilitate stability and lower indebtedness, much that is pronounced is just bling-bling. What’s lacking is the irreplaceable compass of a macroeconomic framework – short-to-medium term. This article outlines the cracks, implosions, contradictions, and results.
PR will never win while expanding expenditure and borrowing, even adjusting upwards what a gagged Parliament has approved, as last week’s Budget and Economic Outlook shows. The government takes the money while Wanjiku takes the hindmost and some bureaucrats mistake hype for a framework of advice to the President on a headline understanding requiring a sober understanding: There’s little to harvest in a collapsing economy, until economic management is professionalised. The most pressing objective is to discover a headline fiscal and monetary policy framework to achieve this.
One certainty is that the so-called Medium Term Revenue Strategy (MTRS) a new tool being rammed in poor economies since 2016 and Covid era, will disappoint. Kenya already offers an example in spurious logic of lowering corporate income tax from 30 per cent to 25 per cent, giving as a reason poor compliance and a widening gap between collections and the potential. This shifts higher burdens of taxation to workers and households with far higher ratios to GDP than corporates.
Economic inconsistencies have brought predictable results in largely rural counties like Laikipia and Nyeri; economic contraction; output (falling), revenues (own portions crushing while national budget is propped up with supplementary budget appropriations); deficits (upwards, propped up with borrowing – shuffled like a deck of cards between domestic and external sources); unemployment at historic levels job layoffs and business shutdowns; uncontrolled inflation; poverty; and general collapse of economic activity. Do authorities attempt to understand the taxation evidence and the need to reform fiscal policies to reposition the economy?
Recap on taxation
An outstanding question is inequitably shared taxation, a pandora’s box ripped with evasion, stealing, and contradictions. The government as arbiter in the MTRS confuses everyone with a multipronged menu of incentives and disincentives in design, administration, and the way it treats poor compliance, favoring the corporate sector. Taxes are wielded like spears to a hapless population, with market impacts and rates biased against personal income and consumption taxes, on a mostly unemployed population.
The latter is now officially encouraged to migrate after education on taxpayer shillings (to the Middle east as example, where remittances/earnings are a fraction of total output their labor contributes to the recipient economies (with dreaded death at work not infrequent). Kenya’s corporate oligarchs in contrast get a hug from MTRS.
In reality, corporate tax in Kenya (tax paid compared to households as ratios of GDP) is surprisingly low. In the Weekly Review (No.50) I pleaded for a return to principles of taxation, especially equity and fairness, citing eminent global computations (in the Global Revenue Statistics Database covering 120 economies) and showing the main tax-to-GDP ratios and categories averaged for all regions since 1990. Kenya emerges a ‘wild card’ in low corporate taxes. At 11 per cent ratio to GDP, the rate is the lowest effort in the developing or emerging regions. These include Africa (averaging 19 per cent for 31 countries) Latin America and the Caribbean- LAC- (16 per cent) and Asia-Pacific (19 per cent).
The National Treasury’s MTRS proposes to cut corporate taxes, unsupported by long-term evidence. It mimics and could outdo the developed world’s (OECD’s) rate of 10 per cent. Fig.1 paints an even more drastic comparison of Kenya relative to Africa. In key categories displayed (notably Personal Income Tax, Taxes other than VAT) Kenya has higher rates on average than Africa. A lower VAT is set to rise with the proposed increase from 16 per cent to 18 per cent. In the event, all tax categories, save for corporate tax thanks a cut in MTRS, will be higher in Kenya than in Africa. Income taxes (26 per cent) and Taxes other than VAT (29 per cent) are already far higher than in Africa (18 per cent and 23 per cent).
Kenya’s low corporate tax shares as ratio of GDP suggest lowering of the corporate tax rates in MTRS is hardly a vital building block in the roadmap for reforming public finances, nor for curing or tackling the revival of investment for economic recovery. Kenya features in high-level research indicating where to fix the main flaws: Business mis-invoicing, transfer pricing, tax evasion- especially by foreign entities-, and illicit financial flows.
Yet the authorities reportedly have their scissors ready for the cut. It will induce increased outflows, escaping KRA revenue collections. The tax cut mind-set seems to tap from a Republican vein: keep low shares of the tax burden for the rich, in the (false) belief that they’ll drive capital formation. In Kenya’s case, leading corporates buy a beach towel instead and head to Cayman Islands after the AGMs and profit-taking; they never forget to take their cash.
So, Kenya loses potential cumulative domestic re-investment. In contrast, the forces of democratic ideals of progressive taxation to prime society to equitable access to opportunities in social spending and provision of basic services - such as education, health, infrastructure - lose out. The result is repugnant inequities where economic managers pay only lip service to Kenyans’ world-leading position as believing in democratic government.
The gap also turns “Bottom Up” on its head. We’ve learned nothing from other countries that tried tax cuts for the rich, such as Prime Minister Liz Truss (and her Finance Minister Kwarteng) in Britain who ran a 45-day government nearing the shelf life of a lettuce.
How does a corporate tax cut square (for revenues) with a contracting economy and the tight fiscal and monetary stances that now deepen Kenya’s economic contraction? Endless economic promises were made in the last election, that could have worked to propel the real sector. Much is history, condemned to the waste bin of uncoordinated economic policy, especially fiscal and monetary policy.
The conundrums of the economy are unprecedented. Leaders shot many arrows that fell barely at our feet: To provide free NHIF by December 2022, status, not done; to cut spending by Sh300 billion – announced September 29, 2022, only to effect an increase by about the same amount; to build 100 dams and 1000 small water reservoirs by June 2023, status, not done; to facilitate the boda boda sector with fiscal assistance and operating zones, not done; to lower unga prices to Sh120, status, not done; to wrestle US$ exchange rate to Sh120, status, not done; to not to raise the cost of electricity – up by 63 per cent now; to assist with three months’ supply of diapers to new mothers – status, not done; to construct 250,000 new affordable houses every year, not done (impossible); to stop the leasing of the port of Mombasa and other ports, not done, instead, adverts are out for a Sh1.4 trillion deal to lease five ports to private operators; to settle squatters from Kilifi, Taita Taveta, Kwale, Mombasa and Tana River and Lamu on two million acres of idle land, status, not done; to employ 11,000 youths to plant 1.5 million trees in Nairobi, status, not done … ad infinitum, ad nauseum.
CBK’s Monetary Policy in a pickle
Our interest rate policy rides rough-shod over the real economy with a trajectory of availing most credit to government while starving the private sector. Fig.2 demonstrates that trajectory. The devil is in the details. A good demonstration of how the impact of interest rates can elude the numbers released from CBK is the concept of real interest rates. A realistic example is the Covid era when interest rates were in some countries nominally zero.
Yet, annual average inflation was running at 5-6 per cent. Real rates turned sharply negative, not zero. In ‘real interest rate’ terms, they were highly stimulative of economic activity as one could borrow at zero while inflation was running at say 5-6 per cent. Inflation and a margin of real growth brought good returns from sales with money borrowed at zero rates.
CBK today does the opposite: Escalating interest rates to 13-14 per cent (even higher for securities) while inflation declines. In recent months, annual average inflation peaked at 8.78 per cent in May 2023, falling to 8.52 in August. With inflation declining and CBK tightening interest rates, businesses borrowing at 13-14 per cent and grossing price increases of 8.78 per cent are heading for closure and job layoffs, even if inflation is falling.
This is how monetary policy collapses the real sector, including the much-vaunted small businesses of ‘Bottom Up’ now reeling from both CBK interest rates and taxes on the fiscal policy side. The Budget Review and Outlook paper of September 15, serves as a warning. Major counties such as Mount Kenya’s 10 counties contributing 26.3 per cent of GDP, averaged over the past eight years, face collapsed own revenues: Laikipia (-45-6 per cent), Nyeri (-35.6 per cent). High interest rates and rampant government borrowing and spending could crush the Kenya economy.
Dr Wagacha, an economist, is a former Central Bank of Kenya chairman and adviser of the presidency