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Country’s excess debt risky to business

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Labour Day, as a celebration of staff, employees, and workers everywhere, is as good a time as any to call a watershed in planning, as we ensure the security of ourselves and of all our staff ahead.

For the time has come for those of us in Kenyan business to plan for our government’s rising debt, moving strategically to ensure we survive well enough to provide jobs tomorrow. Because axed jobs and closed companies will not make for a lot of labour to celebrate. The celebration comes on staying in jobs and staying in business.

So where does our planning equation lie?

Well, first off, with our national debt now at ten times the level it was a decade ago, the dial has moved on how we manage our own cash flow. And that change is probably now long term. Indeed, it may be a generation from now before Kenyan small and medium entreprises(SMEs) – as in, we SMEs, who employ 90 per cent of all ‘labour’ - enjoy any of the business credit that used to maintain our existence.

A few years back, we nearly all had facilities to deal with the months when a whole row of payments were late, or a contract was cancelled and pitching was underway for new, replacement business. If we undertook a public sector contract, and the government organisation took nine months to pay us, we, likewise, had ways of stretching.

These ‘stretching’ ways often came as overdraft facilities. Some of us had invoice factoring, so we could access credit against payments that were due in, but not yet settled. Very many of us had accounts where the bank would lend against post-dated cheques, and definitely against cheques that were paid in, but not yet cleared.

Frankly, just about all of that is gone.

Now, if a payment is extra late, we don’t have the rent and salaries, which has closed many a business, and lost Kenya many a productive job, salary and livelihood.

Ironically, it has also led to a deterioration in tax payments, as the vast majority of SMEs now use their tax payments as the safety valve when payments slow up. So, instead of borrowing from the bank and paying the Value Added Tax (VAT), companies sit on the VAT, and Paye As You Earn(PAYE) too, and use that to pay their rent and salaries until their own inward payments arrive.

That progressive slide towards businesses borrowing taxes has only made things worse for our government. It even triggered a period where the chase got hot for tax compliance, closing many more businesses as the KRA established definitively that SMEs no longer have any alternative credit facilities for when payments are late. Thus, if you close them on not paying VAT on time, you don’t get any of the taxes they were paying, just one less tax payer.

Thus, the Kenya Revenue Authority (KRA) has now placed more emphasis on keeping businesses open, in the absence of laws in Kenya to handle financial distress or any moves to replace the business credit market that get sucked up into domestic government debt.

Against this backdrop, the reality for those of us still in business is that we have moved as far as possible to prepayment, phasing out credit terms, so we cover our salaries from the moment work begins.

Yet, beyond the daily struggle of diminishing liquidity and long-gone cash flow support, there now comes a bigger question of planning: how do we insulate ourselves against the impact of any future government default?

And here the answer is but one: build a leg in another country. Build sales in other countries. Build exports to other countries. Set up offices in other countries. For if the government really does go too far and really does reach the day it cannot service its debt, our banks will close. Paying our staff will then rest on Western Union, so have another branch to bear the load.

In business, every high risk needs a counter balance, a back-up plan, some mitigation.

So, if Kenya wants to push its risk up and up and up and up, spread your own risk, and sit safe ‘somewhere else’ as the counter balance to debt-dangerous Kenya.