BY SHADRACK MUYESU A massive economic crisis is likely to hit Kenya in the near future. Less to say, all economic indicators point us towards that direction. Ignoring IMF’s advice against stretched borrowing; the government has gone ahead to procure a Sh640 loan that leaves Kenyans massively in debt to the tune of close to Sh76, 000 per head. The understanding is that these monies are meant to plug the gaps in Jubilee Government’s unprecedented 1.8 trillion budget whilst also going a long way in funding the government’s ambitious infrastructure investments. As though that’s not enough, plans to float yet another sovereign bond are already underway; all this when questions abound as to the whereabouts of the proceeds of the previous one. Though negative, the effects of such mass borrowing would not have been potentially crippling had most of these monies not gone to waste through corruption, misguided investment and recurrent expenditure. The government’s borrowing in one year alone has eclipsed former regime of President Kibaki’s borrowing within a similar period by more than 41%. Jubilee Government borrowed close to Sh680 billion in one year alone (December 2014 to December 2015) against Sh738 billion that was borrowed for the entire period that the Grand Coalition Government was in office! Public debt has ballooned to 42% of the GDP while the size of government has more than doubled since the ratification of the new Constitution. The problem with the government’s borrowing is that as it escalates, revenue streams remain significantly thinned. There are no returns. Jubilee has moved to stem salary increases with damning consequences on tax revenues. Income tax levels have dropped. While the portfolio of commodities to be taxed has been considerably diversified, VAT remains low at just 16 %. For a country that intends to rally its economy through public spending, these numbers are just too low. Though lucrative, public spending on investment commodities is quite an expensive venture that can only succeed in the realms of minimum wastage and good income bases- an example that Nordic countries have taken with tax rates of as high as 46%. Bad Spending Our recurrent expenditure has risen to more that 46% of the GDP. A lesser sum goes to the government’s infrastructure projects such as the Standard Gauge Railway- a project undertaken at the concern of many economic analysts. According to Political Economist, David Ndii, poor absorption of resources means that the SGR might not realize any gains. To support this argument, Ndii cites competition from existing projects, poor structure of the SGR that would still leave it reliant on the old networks and high building costs. Furiously condemned at first, that government has borrowed yet again to finance an inflated project, seems to have vindicated his claims. What is not spent in offsetting bills or taking care of investment expenditure is wasted in corruption. The NYS saga and the Youth Fund debacle alone have claimed close to ksh 1billion. Meanwhile, the Eurobond seems to have had little positive effect considering that we borrow all the more and interest rates remain quite high anyway- even actually rising at some point. Failure to realize its main purpose in cushioning citizens from government borrowing coupled with contentious information from the government as regards the whereabouts of the bond proceeds only give credit to claims that the money was lost. To put this waste into proper perspective, Ethics and Anti Corruption Commission chairman Mr Philip Kinisu has actually come out to say close to Sh604 billion is lost each year to corruption. This is slightly under one third of the entire budget! The Controller of Budget presents the same loss as standing at at least a quarter of the budget with only 1% of the 2015 budget having been spent legally and wisely. What is lost yearly could comfortably fund up to an excess of 20 Thika Super Highways! Federal Reserve Rates and Insecurity The negative impact rising Federal Reserve rates might have on our economy ought to be our biggest concern. That our economy is very unbalanced with imports dwarfing exports by more than 11% (one of the highest figures in the world) leaves as very vulnerable to Federal Reserve shocks. Rising Federal Reserve rates have the potential of multiplying our already high external debt reducing investment money in the process whilst also making it more expensive to import commodities. For a country that imports almost all of its industrial goods, the effects could be harrowing. While there is hope that the rates are going to drop in the near future some economists quickly pick this out to be a false hope. According to them, falling commodity prices mean a fall in US exports which would leave the US government with no option other than to intensify austerity in the best possible way she can- multiplying her Dollar reserves by further increasing rates. Furthermore if earlier trends are anything to go by, looming elections mean that the Shilling is only bound to drop further against the Dollar. Domestic instability synonymous with this period coupled with terror threats means a poor business environment and therefore a significant drop in external investments. Boiling political tensions, a high stakes election for the main protagonists Raila Odinga and Uhuru Kenyatta, corruption, increased tribal rhetoric, administrative changes and most disturbing, a Supreme Court that has somehow, managed to throw itself to disrepute predict serious political unrest and in consequent, more damaging effects to the economy compared to past situations. In such environment tourism, our second highest foreign exchange earner is destined to take a serious beating as well. More so, austerity in the wake of the global economic crisis means that many people will have much less to spend, tourist numbers are likely to suffer as a result. The Chinese dip: A Mouse Trap The world economic crisis has significantly impacted on our biggest trade partners. The US economy is not as robust as it used to be, the Chinese economy seems to be heading south. Over and above increasing rates, the US is likely to reduce the amounts she loans us. On the other hand, a slowing China means a reduction in her Kenyan imports and an increase in Chinese investment domestically. (Chinese contracts are tripartite in nature. They provide the funding in expensive yet easily accessible loans but this money is to be spent on Chinese labour and Chinese machinery. The Chinese have been known to push favorable policy for their imports within as opposed to monetary payments.) While cheap Chinese imports hurt domestic industries, the government is increasingly left with no choice but to subsidize Chinese goods or face loan cuts and pressure to pay full gratuity! Death or Life? According to Wheliye, to stop further decline of the shilling and curb runaway inflation, we could either reduce our borrowing, rise interest rates so as to increase our foreign currency reserves or let the shilling fall anyway with the hope that this will boost our exports later. A reduction in borrowing automatically means an increase in taxes to more than 30% annually so as to plug the deficit. Yet feeling the tax heat already because of poverty and unemployment, this wouldn’t be such an agreeable suggestion to Kenyans. Increasing rates also works against the small borrower and probably increases bank debts as well. Our industries are not robust enough to sustain such an onslaught. Of the last proposal, it should be enough to say that we are not China that has a fine export- import balance. Yet amidst all this, the government’s projects cannot stop. We need more cash and we need it now so we have to borrow anyway. The remaining measures such as reducing size of administration and effecting spending cuts are simply politically incorrect! We find ourselves between the proverbial rock and a hard place. The harrowing effects of a domestic slow down may be downplayed with many even terming it as a crisis alright but not one in isolation. Granted, the entire world may have slowed down as well but circumstances unique to Kenya make us most vulnerable. Ambitious development and a large government against a thin tax base leave us with little option but an inclination to loans. A flailing humanitarian record and a poor reform agenda coupled with negative diplomacy means curious Chinese loans remain our best source of cash. Yet mass wastage in corruption and almost zero return on investment means that we shall for a long time be paying for monies we never used. Meanwhile, any hope we may have had in rallying domestic production dims since with high interest rates, domestic industries cannot access the monies they need to compete with cheap Chinese imports.