Of the many lessons that emerge from the coronavirus pandemic whether we deal with it permanently, or alternatively, learn to live with it forever across the globe, the future of the economy, and work, will come to the fore. Will manufacturing be localised (“make/buy at home; build at home)? What is the future of air travel, and tourism? Do we foresee a new world of “basic rights” first: food, education, health, shelter, clean and green environment and the like? All debatable in the coming years.
One angle interests me. The future of America and China (the present seems pretty different given the pandemic’s impact on lives and livelihoods in both countries). While Mr Trump strives to “Make America Great Again” (MAGA), does China foresee a different “MAGA” (Make America Go Away?) having seemingly stolen a march in two developments for the future: 5G and digital currency (a Central Bank Digital Currency – CBDC), which they are piloting and rolling out? On the latter (CBDC), there’s excitement about an alternative to the dollar as a reserve currency, though people like the International Monetary Fund (IMF) believe that that’s still some time away.
IMF? Well, back on Planet Kenya, we received a Sh79 billion ($739 million) Rapid Credit Facility as “liquidity support to cover a balance of payments gap this year”, as well as resources “to safeguard public health and support households and firms” and “catalyse necessary financing from other donors”.
Kenya’s Letter of Intent (basically, the request for this facility), used a working assumption of 0.8 percent GDP growth in 2020. It estimated additional crisis-related spending of 0.4 percent of GDP (around Sh42 billion), and revenue shortfalls from recent tax cuts of around the same amount. Recall that Treasury’s own estimate of the shortfall was roughly Sh172 billion (a gap twice to four times as much).
Interestingly, and contrary to public knowledge, a promise was made to “review our tax measures to fully restore revenues as a share of GDP once economic activity recovers sufficiently”. Fiscal consolidation will be implemented “more gradually” than originally envisaged. Kenya’s external vulnerability will rise as forex reserves fall and international capital flees emerging markets; even though cheaper oil will offset expectedly weaker exports and diaspora remittances.
In its accompanying Staff Report, as reported in the press, the IMF warns that Kenya’s risk of overall and external debt distress has moved from “moderate” to “high”, even though debt ratios keep our position as “sustainable”.
For everyone blaming the pandemic for this state of affairs, the report clarifies that Kenya’s vulnerabilities “reflect high deficits of the past, partly due to large infrastructure projects”. We walked into this with our eyes wide open, now we need to fix it.
The recent market mood hasn’t been helped by rating agency Moody’s downgrading Kenya from stable to negative (as they’ve also recently done for countries like Ghana and Ethiopia too; for the record Ghana is also rated negative by Standard and Poors’ while both Kenya and Ethiopia remain at stable). These ratings are not unimportant, especially given our recent penchant for external commercial borrowing over concessional and semi-concessional finance.
Every export and tax shilling spent on debt service is a shilling diverted from basic needs like health and education.
On April 29th, a day before the IMF published details of this new facility, 2020/21 Draft budget estimates were presented to Parliament by the three arms of government. Disappointingly, as with the earlier 2019/20 Supplementary budget estimates, there is no strategic reorientation of public expenditure towards the current health, social and economic crisis we face, or our existing fiscal and debt troubles.
In what the Parliamentary Budget Office describes as a “business as usual”, the budget estimates fail to either address immediate public health, societal and income needs, or frame a medium to long-term response to “remake” the economy. Inertia prevails, and sectoral allocations look broadly the same as they did a decade ago.
There is a limit to tax collection in a faltering economy, just as there is to borrowing that fails to deliver capacity-enhancing economic and financial returns.
In other words, as I have often said before, it’s time to take a good hard look at public expenditure. Yes, it’s a time of crisis for many countries. Yet, we also have a chance to listen to what markets are saying.
Four thoughts: Harmonise all activity-induced spending between national and county governments to remove duplication. Balance total government spending between current and capital costs. Squeeze this spending back into revenue. Rethink the revenue base in a way that supports a growing economy.
Then we can move to matters like debt forgiveness, standstill, relief, rescheduling or restructuring.