Is Kenya following in the footsteps of Greece?

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BY ANTONY MUTUNGA

Kenyans are faced by a number of different challenges from an increasing unemployment rate to a persistent credit crunch. Despite the statistics showing that the country’s GDP gradually grew to the year 2016, the situation on the ground was far different as Kenyans couldn’t notice any improvement, rather they could only see things getting worse.

In 2017 the country’s GDP plummeted from 5.8% to 4.5% with the blame put on the severe drought that the country had faced and majorly on the prolonged electioneering period that saw many businesses within the country come to a standstill. However, despite these factors contributing to the decline, it is clear that the country had already been on a downward spiral especially due to the high levels of corruption, rising levels of unemployment, credit crisis especially in the private sector, the increasing oil prices and the ever rising public debt.

“Kenyans need to be more aware that the main economic problem we have in this country is the extravagant government expenditure that is backed by heavy borrowing. Our current debt to GDP ratio is quite high,” said John Ongembo, an economist and former banker.

The signs are clear that the country is not heading towards positive growth rather it is showing similar characteristics to Greece right before it was hit by a financial crisis.

Before Greece joined the EU in 2001, it was plagued by several problems that ranged from high inflation rates to high trade deficits. Henceforth, she decided to find a way out of the problem, which led to it becoming a member of the Eurozone after she understated her financial figures in order to join. After joining the EU, her problems were swept under the rags rather than getting solved and therefore it was considered a safe place to invest.

As a result, the country had easy access to credit at a low interest rate, which fuelled its increase in spending. Due to the rising antagonism with her neighbour, Turkey, Greece spent a huge portion of her credit on military, 3% of its GDP, in order to defend herself. In addition, the public wage was also increased pushing her to further dependent on the cheap loans in order to keep up with the lavish expenditure.

This is the same problem facing Kenya. For example, between 2013 and 2017 the government expenditure rose from Sh1.6trillion to Sh2.6trillion. According to the Institute of Economic Affairs, this can be accredited to the introduction of Devolution, an increase in public wage and the increased investment in infrastructure development. 

Therefore, in order to be able to fill its spending gap the government has taken up various loans from countries like China as well as Japan and from global institutions such as the IMF. With the spending gap still rising, the government has become dependent on loans especially to finance infrastructure development and to pay up its debts. In 2017, Kenya secured Sh21.9 billion financial assistance from China for infrastructure development and drought mitigation.

Apart from depending too much on cheap loans, the Greek economy also suffered as it experienced trade deficits even though a majority of the other countries were benefiting from the EU in terms of trade. As a result of doubling its public wage, the country’s labour cost had gone up causing the costs of the products within the country to go up.

Consequently, the Greek products lost their competitive edge within the EU market and because the products were also considered expensive within the country, Greeks began depending on cheap imported goods rather than their local products growing the trade deficit in the end. On the other hand, Kenya currently also faces a similar problem, trade deficit, which recently hit the Sh1 trillion mark in the 11 months to November 2017 according to the Central bank of Kenya. Despite the similar problem, in the case of Kenya, the deficit has been brought about by factors such as drought, which have seen an increase in food imports.

Even though joining the EU had helped Greece to increase economic growth for a period of time, the country had not dealt with the fiscal problems that were there in the first place. One of the major reasons behind the fiscal problems was a lack of revenue. The revenue the government was collecting in terms of taxes was less than its growing expenditure thus never reaching its target. Tax evasion was among the major reasons as to why the revenue was always below the target. A 2014 report by the EU estimated that Greece had lost a third of its VAT revenues due to fraud and avoidance.

This was normally common among the wealthier class who would take advantage and either evade their taxes completely or with their businesses, they would under report their income and over report their purchases. In addition, the latter became popular among the self-employed as well causing the revenue to greatly fall.

The current state of Kenya greatly mirrors this as the country’s revenue authority; the Kenya Revenue Authority (KRA) has been unable to reach its target. For instance, for the financial year 2016/2017 KRA missed its target by a margin of Sh50 billion as it collected Sh1.365 trillion as compared to its target of Sh1.415 trillion. The revenue authority reported widening of tax band and the freezing of wages especially in the banking sector as the reason.

KRA has missed yet another target. The tax collector missed its half-year revenue collection target by Sh68.3million. By end of December 2017, the total cumulative revenue including annual investment allowance (A-I-A) collected amounted to Sh709.4 billion against a target of Sh777.7 billion according to the Post-Election Economic and Fiscal Report by the National Treasury.

Greece had experienced all these problems before the global financial crisis of 2007/2008 that left the country in a catastrophe that made it very difficult for it to get back on its feet after the crisis. For starters, the country now had a massive budget deficit that was standing at 12.9% of its GDP, which was more than the 3% that was allowed by the European Union. As a result, credit agencies such as Fitch and Moody’s both reduced the country’s credit rating that saw capital to the country shrink.

In addition, because the country was not prepared to cope with the side effects of the financial crisis, they found themselves in a situation where they could not pay off their debts. This weakened the Greek economy leading it into a crisis that it needed bailouts from the rest of EU and the global institutions in order not to collapse completely. Even though they had decided to help, the price that Greece had to pay was not cheap as it came in the form of austerity.

In order to get bailout from the IMF and other European countries, Greece had to make budget reforms which included reducing its spending and increasing its taxes to boost its revenue. Even though it was going to help the country in the long run, the immediate effects were making life very difficult for its citizens as all the merits they once enjoyed were all gone. Public wages in the country were reduced and tax revenues were increased leading to a cycle of recessions, and worse off, an increase in the unemployment rate to 26%.

On the other hand, Kenya seems to be following a similar path as the country also has a budget deficit standing at 9.2% FY 2016/2017 according to a report by the National Treasury. In addition, credit agency, Moody’s also downgraded the country’s credit rating from B1 to B2 as a result of the rising debts level. Recently, the country was also given conditions, such as reforms of the current interest rate cap, by the IMF in order for the institution to extend the precautionary credit facility by six months.

However, in the case of Kenya a few differences stand out against that of Greece that could save it from a similar fate. For instance, the economies of the two are very different with the Greek economy having relied on its membership in the EU. This very same reliance on Eurozone was a major contributor towards its crisis. In addition, the signing of AfCFTA is a blessing to Kenya unlike Greece with the EU. Kenya being among the countries with the largest manufacturing bases in the region, it is likely to benefit a lot once the agreement comes into effect and this would see its trade deficit reduce thus keeping the economy safe from a crisis.

Kenya is not out of the woods as the problems it is experiencing could still lead it down a dangerous path just like Greece. The time for government to act in order to save the country from crisis is now. It is time the government reviews how it borrows and it also puts up measures that will reduce the current trade deficit It is the only way we can avert a similar or even a fate far worse than that of Greece.