Just as we began to turn attention to the ‘Big Four’ agenda, “macro-stuff” was back in the headlines.
First, an international credit rating downgrade by Moody’s owing to a “fiscal outlook that is weakening with a rise in debt levels and deterioration in debt affordability that (we) expect to continue”.
And then the pronouncement that “the drivers of the downgrade relate to an erosion of fiscal metrics and rising liquidity risks consistent with a B2 rating”. The Treasury shrugged off this “bunker busting” bomb.
Then we learnt that last year the IMF “postponed” the second and third reviews of its current precautionary $1.5 billion (Sh150bn) SBA/SCF programme with Kenya as “agreement could not be reached on stronger fiscal policies” even as a fourth (now, apparently second) review is already underway.
Let’s be clear. Senior Treasury officials are holding a multi-city Eurobond roadshow from Las Vegas to London at the same time that the IMF is visiting Kenya? “Casino economics” anyone? Better, could we please call this moment — with apologies to songster Mark Morrison —’Return of the Macro’?
Fiscal cliff. Debt treadmill. Greece. Ghana. All words covered in the press in the past week or so. Think about it. In a tentative political-economic climate with weak revenue collection, more mega-investment to complete previous mega-investment cannot happen without mega-borrowing, right?
Start with Sh150 billion to get the standard gauge railway (SGR) to Naivasha, and another Sh500-plus billion to Kisumu and Malaba. Yes, we’re only a third of the way through the SGR.
Add at least a trillion shillings for our 57 mega-dams. Throw in Lamu Port (Lapsset) (Sh2.5 trillion), plus Sh230 billion Mombasa-Nairobi expressway.
Actually, a peek at the draft 2018-2022 Medium-Term Plan shows a transport, infrastructure and energy resource requirement in the order of Sh2.7 trillion, without SGR borrowing and before dams.
Add ‘Big Four’, as yet un-costed in the 2018 Budget Policy Statement and 2018-2022 Medium-Term Plan. That’s just looking forward.
Meanwhile, as Moody’s tell us, there’s a debt to pay. That syndicated loan. Plus another loan at LIBOR-plus from the PTA Bank. The first tranche of the first Eurobond is repayable in 2019; the second in 2024. And a second Eurobond on the way in 2018.
Others have spoken to our burgeoning debt story. Yet the Treasury — in that 2018 Budget Statement currently before Parliament — promises to cut the fiscal deficit from 8.9 per cent in 2016/17 to 7.2 per cent in 2017/18, and eventually, to three per cent in 2021/22. This is the stuff that worries the IMF, and the rest of us.
The concern is justifiable. When the current programme was signed off in early 2016, Kenya promised to cut the fiscal deficit — which it then predicted at 6.9 per cent of GDP (not the 8.9 per cent actual outturn) — to 3.9 per cent by 2017/18 (refer to above 7.2 per cent).
Several initiatives were promised in our ‘Letter of Intent’ to IMF MD Christine Lagarde. We would reduce tax expenditures (subsidies and exemptions), rationalise non-wage recurrent expenditure, improve tax administration and strengthen county revenue performance.
We would advance public finance management through value for money in investment projects, tracking pending bills, consolidating government’s financial statements and strengthening e-procurement.
In its only review of the programme to date — in January 2017 — the IMF observed zero “on-time” progress on all of the above, and only delayed progress in tracking pending bills.
So, in 2017, “digital” Kenya is still trying to integrate the payroll into the IFMIS, develop guidelines for investment projects and understand tax expenditures. Nothing on revenue performance or cost rationalisation and control. It doesn’t get less “fiscal” than that.
Here is a final set of thoughts.
A tax study by the World Bank in its December 2017 Kenya Economic Update suggests that we currently forego tax revenue of as much as five per cent of GDP, mainly through domestic tax exemptions in the areas of corporate income tax and VAT.
Indeed foregone VAT is estimated to be as much as 70 per cent of actual VAT collected.
Which sectors are “over contributing” to corporate tax collections in comparison to their specific GDP contribution? Finance, ICT and construction. The under-performers?
Education and health (justifiably for socio-economic reasons), then real estate and agriculture. In which sectors are tax exemptions most prevalent? Finance, manufacturing, health and ICT. ‘Big Four’ all round.
Meanwhile, that five per cent in foregone tax revenue is roughly Sh350 billion, around what is reportedly the upper level of our ongoing Eurobond ‘pitch”.
Fiscal consolidation in Kenya soon? Let’s try fiscal discombobulation first, it seems.