So the IMF agreed to extend Kenya’s $1.5 billion (Sh150 billion) standby credit facility by six months.
Reportedly, a reduced fiscal deficit and substantially modified interest rate controls are the “economic prices” that Kenya must pay during this extension period.
Beyond the headline-making current year expenditure cuts the Treasury is proposing, it is only logical that a reduced fiscal deficit in the medium-term is about less spending and more revenue.
On the revenue side, while year-on-year micro-analysis of the past is useful and important, an interesting question one could ask of the Kenya Revenue Authority (KRA) is why it has not attained the magical no-deficits Sh2 trillion tax collection target promised for 2017/18 in its current three-year strategic plan (which ends in June).
Sh 1.4 trillion this year isn’t a shabby number, but strategic reflection is useful for the future.
The micro-stuff isn’t unimportant though. Why is total tax revenue growing slower than the economy? Why isn’t our booming imports bill translating into massive customs revenue growth?
What happened to the KRA plan to raise the ratio of VAT collections to GDP from four per cent three years ago to nine per cent this year (current forecast is 4.6 per cent)?
Will personal income tax remain the only reliable cash cow? How much are counterfeits and court decisions harming excise duty collections, especially since lack of public participation is the single legal reason bottled water and juices are still not on the table? What is the potential for wealth taxes, and taxes on digital enterprise?
On the expenditure side, we will get no substantive “shape-shifting” until we effect our constitutionally-implied “theory of government”. First, the role of government versus the private sector. Second, the optimal division of labour between national and county governments, plus where parastatals fit in.
Third, how best to optimise institutional design and resource usage between policy, development and service delivery across these levels of government. Underpinning this is the political question of the system of government (presidential/parliamentary) we want.
If we get this right, then we steer clear of the Treasury “macro-babble” that all government borrowing goes into development, when we can’t see Sh3.7 trillion in new national assets in the past four years.
Understanding this means we get a commitment to a transparent debt financing strategy for Kenya. Not what we have now, where the 2018 Budget Policy Statement seeks a 37:63 ratio between external and domestic financing, while the 2018 Medium-Term Debt Strategy speaks to a 57:43 financing ratio.
From all of this, we might then discover that, while cutting the fiscal deficit reduces the growth of debt, cutting actual debt levels might need fiscal strategy tending towards budget surplus. Remember Singapore the other day paid adult citizens a certain sum because “government has enough”. Nirvana!
Then there’s the matter of interest rate controls. First, deficit-ridden government competing with private sector for funds while offering practically risk-free rates to banks. Second, weak credit reference mechanisms that further exclude “risky” small borrowers from the credit market.
Third, Tier 3 bank liquidity difficulties in the inter-bank market since big banks don’t need to “engage” them.
Fourth, the lack of policy space for the Central Bank to use the CBR as a growth-stimulating instrument (since cutting the rate further flattens bank margins). Finally, lower bank profitability leading to lower tax collections which brings us back to more government borrowing. A vicious cycle made in hell.
Yet here, more questions than answers. What does “substantial modification” of interest rate controls mean for business, read SMEs? It can’t be a move from unaffordable to inaccessible credit and back.
Credit reference improvements are fine, as well as the new laws around securitisation of moveable property and assets, but how far is the thinking developed on the proposed “mega-development” bank, that should presumably target these SMEs?
Of course, thinking of this as an SME, rather than banking, problem, how much policy thinking is going into supporting a credible and viable enabling financing environment — from mobile to digital money — from working capital to trade financing to capital development - that supports SME development?
Finally, remember this is the multi-million SME crowd that’s was an important part of KRA’s revenue dream, and recall that we are supposed to be regional leaders in the area of financial access.
This all sounds so cyclically “fiscal and financial” but let’s keep it in mind as we “build the bridges” of our future nation. Before the IMF comes back and tells us what NOT to do yet again.