Ideas & Debate

Second chance to tame debt binge and give the informal business a lift

Treasury secretary Henry Rotich (left) and PS Kamau Thugge during a past media briefing. FILE PHOTO | NMG
Treasury secretary Henry Rotich (left) and PS Kamau Thugge during a past media briefing. FILE PHOTO | NMG 

Now that the election season is over, it is time for the incoming administration to develop priority areas for action. Three core areas need urgent attention and should form part of the priority plan.

First is fiscal policy where decisive action has to be taken. Kenya has been on a path of unsustainability defined by aggressive growth in expenditure, subpar revenue generation and growing public debt.

With a debt burden of Sh4.4 trillion, it is important that the incoming administration detail a plan that will put the country on a more sustainable fiscal path.

The plan should include strategies to reduce overall expenditure, improve the divide between recurrent and development expenditure, and improve the absorption of development funds.

Non-priority spending has to be ruthlessly cut and revenue collection improved.

This is because Kenya is currently in a precarious fiscal position where expenditure is growing at over 14 per cent while revenue collection is lagging it at about 12 per cent — resulting in expanding borrowing requirements.

Policy action has to be taken to get growth in revenue collection ahead of growth in expenditure. It must be clear that this is an urgent issue. Both Moody’s and Fitch (credit rating agencies) having only recently indicated that they are considering a downgrade of Kenya’s credit rating due to the debt position.

If it happens, this would have serious negative ramification on the economy as any new foreign debt would be more highly priced. This makes it imperative that the Uhuru Kenyatta administration gets expenditure under control, reduce borrowing and improve revenue generation.

Which leads to the next point. The new administration must focus on the informal economy where 90 per cent of employed Kenyans earn a living.

In the past four and half years, the government failed to take any decisive action that would make the sector more productive and profitable.
While the ultimate focus should be to pull more informal enterprise into the tax net, there are currently limited incentives to formalise.

Threats of increasing taxation of informal business will merely push activity in this sector further underground and even spark social unrest.

The national government should create programmes in partnership with county governments to improve productivity and profitability of informal businesses.

The programme should include support to informal enterprise in financial and business management, improvements in access to and use of technology, improvement of informal business premises, concessionary financing packages and business mentorship.

Over the next five years, a focus on strengthening the performance of the sector will create a boost in incomes that will not only increase the spending power of Kenyans, but also put the sector on a path where formalisation becomes more feasible.

Only through such action can the government sustainably expand the tax net and increase revenue collection.

Finally, the government needs to focus on truly developing light manufacturing. And that can only happen by boosting agriculture.

Whether it is food and beverages, leather and leather products, textiles and apparel, a solid agricultural base is required to develop light manufacturing.

There are two segments of agriculture that need attention. The first is subsistence farming where over 70 per cent of rural labour is locked in largely unproductive agricultural activity.

National and county governments have to work with farmers to make their farming more productive, improve storage facilities, help with market access and create options for agro-processing and value addition through light manufacturing.

The second segment of agriculture is export-orientation with its fairly productive, dominant output in the sub-sectors of tea, coffee, floriculture and horticulture.

The government must create and implement a five-year plan focused on value addition of this sector by linking export farming to local manufacturing and value addition.

Linked to this is the textile value chain which desperately needs revival so that local farmers can supply EPZ firms that tap into the AGOA clothing and apparel market.

A process of backward integration is required that builds the value chain from cotton farming, to milling and fabric manufacture, and finally textile and apparel product development and manufacture for export.

If government focuses on these three areas with determination and grit, the next five years can put the country on a more sustainable fiscal path, spur formalisation, expand the tax base, create new and better quality jobs, and reorient the country’s economic structure through building light manufacturing.

In doing so, the economy will be more diversified, productive, robust and resilient.