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Ideas & Debate

Three pillars that will make Kenyan economy stronger

Sabaki River
Small-scale farmer Sifa Katana fetches water for irrigation from Sabaki River in Malindi, Kilifi on July 23. Agricultural sector gets meagre budgetary allocations. PHOTO | JEFF ANGOTE 

The Kenyan economy is recognised as one of the strongest in Africa. However, the country has been undergoing an economic downturn evident by the reduced stock market activity, rising cases of unemployment, declining investments among others.

The dire situation Kenya finds itself in is happening at a time a lot of funds are channelled into mega-projects and even more unfortunate, a huge percentage of the same funds end up being embezzled.

Besides, an alarming prognosis points out to the fact that outcomes such as level of employment and quality of healthcare realised relative to inputs in terms of public expenditure do not match up.

But it is somewhat pointless to continue voicing criticism as witnessed in many reports without providing solutions that can help reboot the economy’s health.

Here are three key interventions that the government and key policymakers could consider:

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CUT WASTEFUL SPENDING FOR STRATEGIC PRIORITIES

What emerges from an analysis of the 2019/20 fiscal policy is that the government prioritises spending on mega projects while ignoring key sectors that would give their fiscal policy the multiplier effect in growing the real economy.

Are some of the projects receiving the most money, the highest priority? And are Kenyans reaping full benefits for the hundreds of billions of shillings spent on these developmental projects?

Worse, our overall expenditure lacks a monitoring structure that can capture wasteful spending before it is too late.

From our half-year economic update, Amana Capital established that, with more than 70 percent of the employed population in the agricultural sector, direct and indirect national output at 50 percent coming from the agricultural sector, roughly 50 percent of Kenya’s exports being agricultural products and 64 percent of all SMEs being engaged in the agricultural sector, to then only allocate three percent of the Sh3 trillion budget is the height of confusion.

For instance, the share of spending on infrastructure projects standing at Sh316 billion out of the Sh670 billion allocated to development is much higher than the share that goes to agriculture.

Yes, developing transport networks is critical to facilitating trade and economic activity across the country and to connect the nation as a whole, but we need to get our priorities right.

Despite the ramp-up in development spending, economic growth remains low.

According to a report recently released by World Bank on Kenya’s public expenditure, weaknesses in project selection, procurement planning and implementation delays are behind the relatively low public investment outcomes.

What Kenya needs is a fresh look at national priorities and to do a sector-by-sector deep-dive analysis to identify opportunities of minimising wasteful spending.

Budget allocations should prioritise sectors such as agriculture that could be boost revenue and maximise value for taxpayers.

BALANCE THE BUDGET

The split between recurrent and development expenditure in the financial year 2019/20 was 64 percent and 36 percent respectively.

This indicates that far more spending goes to recurrent items like wages, operations, and other day-to-day expenditures within different government institutions, leaving only 36 percent for developmental projects including repayment of debt.

While the devolved governance structure is commendable, 47 counties may not be sustainable.

Reports by the Controller of Budget show that recurrent expenditure takes the lion’s share of devolved funds at the expense of development expenditure.

The Budget Appropriations Committee of Parliament should free up more resources to develop sectors, which would have a higher multiplier effect in the economy.

More trouble emerges when the country finds itself with a net foreign borrowing standing at Sh3 trillion as at June 19, and domestic borrowing projected at Sh8 trillion.

Seeing that Kenya Revenue Authority (KRA) missed the Sh1.65 trillion target, the government is likely to continue borrowing as well as pursue the new tax proposals to plug the budget deficit.

Kenya can counter the budget deficit by spending based on KRA’s collections from previous years and living within their means. This will entail cutting expenditure in non-priority ministries and programmes as well as a reduction in the public sector wage bill which will minimise the probability of raising taxes.

MAKE SOUND ECONOMIC DECISIONS FREE OF POLITICS

Historically, most governments tend to impose their political agendas over their nations without looking at the bigger picture.

For example, enforcing the interest rate cap was a political decision to win the popular vote.

The intended effect has not been achieved as private sector credit growth has declined to less than five percent from the historical average of 15 percent.

The winner following the passage of the interest rate cap has been the government since they have been the recipient of the funds that would have given out as credit to the private sector as risky borrowers have been priced out by the cap.

Mwangi is an investments analyst at Amana Capital.

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