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Budget lacked clear fiscal policy road map

Henry Rotich
National Treasury CS Henry Rotich at Parliament buildings during budget presentation for the fiscal year 2018/19 on Thursday, June 14, 2018.PHOTO | DENNIS ONSONGO | NMG 

Pundits had predicted that Treasury secretary Henry Rotich’s budget for this year would be low-key and short of exciting announcements. We did not expect to see any revealing insights into the current state of the economy.

After all, budget speeches don’t carry big surprises any longer. Indeed, a great deal of information on the budget was already in the public domain having been tabled in Parliament by the National Treasury ahead of Budget day.

The documents included the budget policy statement, tax amendment bills and budget estimates. The expectation therefore was that all that Mr Rotich would do was to parrot the usual announcements about a few billions for infrastructure, roads, railways, housing and security. Yet in terms of giving us a clear road map on what fiscal policy was likely to look like in the coming months, his delivery was disappointing.

The Budget statement was dominated by big spending plans that were not accompanied by a clear map on how the plans would be funded. Even the assumptions for domestic borrowing requirement and for plans to issue another Eurobond sounded unrealistic.

Where is the fiscal space to fund these projects going to come from? His projections for the budget deficit for the new financial year also sounded unrealistic. He projected that he will bring the budget deficit down from last year’s level of 7.1 per cent to 5.7 per cent without spelling out a comprehensive programme of spending caps- including scaling down on programmes, dealing with wastage and a Civil Service retrenchment programme.

It remains to be seen whether the fiscal strategy the minister has chosen will deliver. Indeed, the revenues projected by the minister would appear to be also unrealistic because when you look at the revenue enhancements and measures he announced yesterday, there is nothing radically different from what has been in place.

Our policy makers always get it wrong because they pursue a fiscal strategy based on the make- believe assumption that our economy is doing well and that the fundamentals of the economy are strong. Yesterday, Mr Rotich went on and on about how inflation has consistently been low and how macro-economic targets have consistently been met.Kenya’s biggest economic problem is stagnant production.

You see the dire state of the private sector when corporate profits stagnate and when the number of firms issuing profit warnings are on the rise.

Trends also show that profits of our large and profitable banks have stagnated since 2014- while non-performing loans are also on an upsurge.

Cement production is on the decline, while per capita consumption of electricity - a key proxy for GDP growth- has also stagnated. Indeed, Kenya is yet to return to the high growth rates of the early parts of former president Mwaki Kibaki’s administration.

It has remained a low-growth, low- private- investment economy perhaps characterised by stagnant productivity and dwindling investment by the private sector. Corporate spending on new assets and accumulation of investment assets has been weak.

The enduring lesson we have learnt is that high government spending on infrastructure cannot compensate for an underperforming private sector. We are also learning that debt expansion- private as well as public – can keep the economy ticking over by creating the appearance of recovery, but debt financed growth has its limits. We have stretched the tools of crisis management – fiscal restraint, expansion, monetary easing- to elastic limits.

Until we go back to reviving the engine of production, this economy will keep bumping on the stagnant growth mode.In a context of shrinking revenues-and without a comprehensive retrenchment programme, and a plan for pruning low priority project sacross all ministries- the assumption by the minister that the budget deficit will come down to 5.7 per cent of GDP is misplaced.

Today, we are at a point where wages and salaries as a share of expenditure are significantly above the levels in most African countries

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