BY SHADRACK MUYESU
A World Bank report in April this year Projected Kenya’s GDP growth to decelerate to 5.5%, 0.5% down from the 2016 forecast. Among others, the report cited a subsisting drought, a rise in oil prices as well as a marked slowdown in credit growth to the private sector as causes for the slowdown. According to the report, however, medium term GDP growth was to recover to 5.8% in 2018 and 6.1% in 2019 respectively, depending on successful completion of the ongoing infrastructure projects, the strengthening of the global economy, tourism and the resolution of slow credit growth.
Most importantly, the report emphasized the need to adopt prudent macroeconomic policies in the long-term, including lowering deficit down to 4.3% by financial year 2019/20. Fiscal consolidation was, however, not to mean compromising public investment in infrastructure critical to unlocking the economy’s productive potential.
In its own report on September 15, the Kenyan government announced it had slashed the 2017 economic growth forecast to the World Bank projected 5.5% from an initial 5.9%. Now, 5.5% is a significant upgrade to 4.8% by which FocusEconomics Consensus expected the economy to grow around the same period. Prolonged drought and, most significantly, election jitters meant that the economy in fact expanded at a slower pace of 4.7% in the Q1 down from 6.1% towards the end of 2016, with data betraying an economic situation that is worsening by the day. The Purchasing Managers’ Index contracted consistently mid-year falling to an all-time low of 42.0% in August (down from 48.1% in July and way below the 50% mark that separates growth from contraction).
It has been coming
Elections may, however, not be the problem. Economist and Property Valuer Kosta Kioleoglou believes that elections are just a good excuse for exposing the real face of Kenya’s macroeconomics which has not been doing well for a long time. According to him, among others, an often forgotten fact is that the Kenyan shilling has been losing in value against most currencies following the US Dollar negative course while other currencies are capitalizing on the weaknesses of the dollar pushing the cost of borrowing upwards contributing significantly to the already worrying account balance deficit.
“As long as the Kenyan economy is focused on public expenditure, borrowing money and cannot balance its imports and exports, as long as Kenya will not focus on the primary production sector, agroforestry, manufacturing among others, things will remain difficult and might even get worse. In short, stop consuming, start producing!” he asserts.
Debt to GDP ratio has risen consistently for the five years the Jubilee Government has been in power to more than 50% from less that 40% in 2010 with government borrowing to plug a budget deficit that has widened to around 10.2% for FY 2016/17. More than half of this debt is owed to external creditors. Inflation is also spilling over its target band while exports are shrinking. Political instability coupled with numerous travel advisories issued against the country by western governments have seen Tourism, the country’s second largest foreign exchange earner take a massive hit with revenue projected to fall by more than a third from two years ago. The worst drought in more than three decades has also curtailed agricultural output and with devastating consequences on economic growth considering that agriculture accounts for more than 30% of the GDP. With agriculture contracting for the first time since 2009, GDP expansion slowed down to the mentioned 4.7% in Q1 – the slowest pace in three years. As it is, inflation is at its highest in 5 years. And although the Central Bank had projected food prices to decrease, failing rains, the elections conundrum and perhaps economic sabotage will likely stall any progress.
Things could be worse than they seem
Yet things could be worse than projected so far. Moody’s has again threatened to further downgrade Kenya’s credit scores citing pressure from the rising debts. The global rating agency expects debt to GDP ratio which had risen to 56.4% in June- up from an acceptable 40.5% in 2012 to continue rising due to high primary deficits and borrowing costs. In a statement, Moody’s pointed out that pressure on government’s primary balance, which posted a deficit of 5.3% of GDP in the latest fiscal years ending June 2017, comes from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt to GDP surpass the 60% mark by June 2018. It further noted that erosion in government revenue intake in the last five years coupled with an increased dependency on debt from private sources on commercial terms has seen government debt affordability deteriorate with statistics showing that in the latest fiscal year, government expenditure on interest payments had risen from 10.7% in 2012 to 19% currently!
Thanks to the global financial crisis of 2016, we have seen a rise in Federal Reserve rates and a reduction in loans. We have also seen a reduction in exports, particularly to China and an increase in imports from there. The result is less valuable loans which portends a crisis for a country that is, as we have seen, increasingly reliant on loans. According to Kosta, it’s bad enough that a significant portion of loans and aid is lost or misappropriated; the uncertainty around elections cannot be allowed to persist considering the absurd sums spent on campaigns, considering also that the economy grinds to a halt around elections.
“Elections have seen a lot of money siphoned out of the economy, but this isn’t the proximate cause of the crunch we are now experiencing, we have always been headed here through mismanagement” he asserts.
And he is right when we interrogate especially, the Vision 2030 economic blueprint. The Blueprint in its first Medium Term Plan (MTP) catastrophically preferred public expenditure on infrastructure to agriculture by placing infrastructure amongst the foundations for national transformation. Indeed, the implementation of the first MPT has already been a major catalyst of our increased external debt. To successfully realize phase one, we needed money, which could only be raised by adopting one of two choices; we could multiply production, create surplus and thus improve our export revenues or we could just borrow and bank on returns from wise investment. The former route meant restructuring our goals to make food security and tourism our immediate priority. The blueprint seems to have favored the latter route by actually providing external borrowing as a development driver with the result being a consistent rise in debt to GDP ratio as already highlighted.
Even then, the situation wouldn’t have been as bad if according to leading Economist David Ndii the projects spent on would have been profitable and self-sustaining and, according to another economist, Antony Mutunga who is also a writer with this magazine, government had cared to negotiate a repayment plan at stable exchange rate.
“Kenya should slow down its borrowing to ensure that its public debt stock remains sustainable and does not affect macroeconomic stability,” Kwame Owino, an economist said during a roundtable forum on budget analysis for the 2017/2018 financial year budget.
“Kenya has a budget of 26 billion dollars against revenues of 17 billion dollars. The gap of nine billion dollars will be bridged through a mix of domestic and foreign borrowing. Interest payment on loans has been rising and risks getting out of line” Owino further averred.
Yet perhaps even worse are the large sums of these monies that we are losing through corruption and misappropriation. To highlight the shocking extent of wastage, in 2016, then Ethics and Anti-Corruption Commission chairman Mr Philip Kinisu pointed out that close to Sh604 billion is lost each year to corruption. This is slightly under one third of the entire budget! In his own report coming at a similar time, the Controller of Budget presented the same loss as standing at at least quarter of the budget with only 1% of the 2015 budget having been spent legally and wisely. To put this into perspective, what is lost yearly could comfortably fund up to an excess of 20 Thika Super Highways!
As Robert Bates argues, with affirmation from Kosta Kioleoglu, when a society is predominantly rural then the surplus necessary for industrialization ought to come from the rural sector. This means the commercialization of agriculture and the export of finished products as opposed to raw materials. Large scale infrastructure spending should come later. But what has been happening in Kenya over the years? Instead of subsidizing farmers, government has been subsidizing consumption and decreeing prices and wages. It is not enough that most of the subsistence farming is small scale and that the rains are failing, large scale farmers are running on losses with many of those farming coffee, tea and corn forced to uproot their crop.
The poor operation of parastatals has also seen them increasingly become reliant on government funding. And where they declared insolvent, government is always handy with bailouts instead of pursuing more permanent solutions such as restructuring and privatization. Not only so, aggressive real estate, even against diminished purchasing power has tied up capital that could uplift the economy else where even as it has led to deforestation. This has introduced other costs of irrigation. Now add these costs to the money that government is spending on infrastructure and consider again that economy is barely generating income and you begin to see why Kosta is worried that we are, in economic terms, sprinting towards a cliff and that the elections have little to do with it.