On the very same day when the famous handshake between President Uhuru Kenyatta and Raila Odinga took place, a five-star hotel in Nairobi immediately recorded a 40 percent increase in tourist bookings.
The negative relationship between high political temperatures and business confidence in Kenya is well documented. This is the reason why the political truce that is anchored on the Building Bridges Initiative (BBI) has created a golden opportunity to fix the economy.
The BBI report that was launched last Wednesday, presents a broad framework that can guide the country into shared prosperity. However, the hard work now is for policy makers to distill the broad aspirations in the BBI report, into a specific set of actionable fiscal and monetary policy reforms.
The first set of reforms need to take place at the Treasury which oversees the country’s fiscal policy. One of the BBI proposals is to ensure there is a 70:30 split between development and recurrent expenditure.
This represents a significant departure from the minimum 30 percent threshold to be allocated to development expenditure as stipulated in the Public Finance Management Act, 2012. Such a radical shift might prove difficult to implement in the medium term. Perhaps a more practical approach would have been to identify key institutions that have been victims of chronic underfunding such as the Judiciary.
Free-market economics struggles in environments where justice is in short supply. As it stands, the overwhelming backlog of cases has meant that a significant portion of the country’s factors of production have been tied up in a litany of court cases and litigations.
Several parcels of prime land, and billions of shillings of cash have been frozen in never-ending court cases that have dragged on for more than 10 years. The result is these assets are not employed in economic production leading to lower national revenue and unemployment.
Furthermore, the issue of public debt needs to be addressed within a long-term framework that helps the country to refinance its debt downwards through the support of development partners. This should work in conjunction with a new tax policy that spells out a predictable, fair and transparent way for government to collect revenue.
The monetary policy conducted by the Central Bank of Kenya is also in need of reform. Every major central bank in the world carries a dual mandate of monitoring both inflation and unemployment.
This is because the two quantities have a stable and inverse relationship, also known as the Philips curve. Nobel laureate and economist George Akerlof, once referred to it as the most important macroeconomic relationship. While the CBK has done a good job in monitoring inflation, it has done little to provide rigorous analysis on unemployment in its Monetary Policy Committee (MPC) briefings. This is at a time when youth employment in Kenya is hovering north of 40 percent. Moreover, it would be a step in the right direction if the CBK could publicly share the minutes of MPC meetings, capturing the contributions of each of the members as well as the voting decisions on whether to raise of lower interest rates.
Such an open approach as employed by the US Federal Reserve often results in promoting greater public confidence about the economy.
The county leadership will also need to play its role in reviving the economy. The BBI proposal to move to a 100 percent e-service nation can unlock huge economic benefits for counties. However, efforts to digitise land records have been consistently frustrated in the past. Most counties for example are unable to collect their fair share of land rates because the existing land valuation rolls are out of date and highly undervalued.
For instance, the Kericho county land valuation roll was last reviewed in 1994, while the Nairobi county one has not been updated since 1980. This has meant that the county coffers have missed out on revenue from land appreciation, funds which could have helped support the local public works ultimately improving the business environment.
The private sector cannot be left behind in the journey of economic transformation. The BBI proposal for companies to set up foundations to champion mentorship and training for young entrepreneurs is significant. Entrepreneurs have a much better track record in creating jobs than government does. Equipping them with the resources needed to do what they do best can only lead to a more prosperous and stable Kenya.
Ken Gichinga, chief economist, Mentoria Economics.