Approach Kenya economic woes honestly

Treasury secretary Henry Rotich. file photo | nmg
Treasury secretary Henry Rotich. file photo | nmg 

It was inspiring to hear Treasury secretary Henry Rotich admitting openly that we are broke and that we should tighten our belts in the coming months for tougher times.

I have always held the view that there is one thing we need to do more than anything else to return the economy to a sustainable growth path, and that is to admit and approach our economic challenges with more honesty.

Until we openly admit we are not doing too well, we will continue putting off the hard decisions we must make urgently before the economy can start recovering in a sustainable way.

One of the biggest contributory factors to the hard economic times we are in today, is the fact that we have reached a point- according to the latest Budget Policy Statement - where we are now spending close to 20 per cent of revenues to service interest on the loans the government has been borrowing.

Indeed, the interest cost on government debt has become a big headache for the National Treasury.

You cannot postpone interest payments because interest on both domestic and external loans are a first charge on the Consolidated Fund.

It must be paid in priority to anything else, including the taxpayer.

I would not be too worried about repayment of the principal on domestic debt because payment of principal does not carry refinancing risk. You can just issue more Treasury Bills to pay for Treasury Bills forever.

The millstone hanging around the neck of the National Treasury right now is interest costs on government debt.

I read somewhere that when in the 90s Ireland found themselves in a position where the cost of servicing debts had ballooned to 15 per cent, the government took drastic action to reform the management of debt issuance.

The first thing the Irish did was to establish an Independent Treasury Management Agency to take over responsibility for issuance and redemption of government securities.

Responsibility over the government’s current accounts at the Central Bank was also handed over the agency.

But perhaps most significant, this new body was given a very tightly-defined task, namely to ‘‘minimise the long-term, risk-adjusted cost of government debt to three per cent of government revenues’’ within a specific period.

By 2006, the target had been achieved. Today, what Ireland did is regarded as best practice.

What is my point in citing the Ireland case? It is to demonstrate that part of the reason why we are where we are in terms of the cost of government debt is because the institutional framework for managing government debt is weak and inefficient.

With Mr Rotich’s admission that we are broke, we must now start debating the integrity of GDP statistics and whether official statistics are a true reflection of what businesses are feeling on the ground. When you track trends in some of the major proxy indicators of growth over ten years, do you, really, see a rosy picture?

How many companies have issued profit warnings of late?

When you track trends of growth in revenues in listed companies, what do you see?

We all know that the performance of the banking sector is a barometer and proxy for GDP growth.

Yet when you track trends since 2014, long before the advent of interest rates capping laws- the inescapable conclusion you will reach is that growth in this sector has flatlined.

Electricity consumption is a proxy for GDP growth. Yet statistics published in audited accounts of Kenya Power show stagnant revenues.

The ultimate proxy for the growth of the economy is revenue collection by the Kenya Revenue Authority (KRA).

The picture you see from tracking trends over long periods is sluggish growth. Indeed, KRA has been struggling to meet Exchequer targets.

Mr Rotich should not just stop at declaring that the government is broke.

He should also admit that – as a consequence- too many small and medium scale businesses and suppliers of the government are undergoing untold suffering because of delays in payments.

And that because most of these government contractors had borrowed money from local banks to service the contracts, the impact of delays of payments has a connection with rising non-performing loans in our commercial banking system.