A lot has been said about the 2019/2020 budget pointing out the impotent nature of the fiscal policy and the worrying trend of having an ineffective budget which leaves the country in more debt. As the saying goes, if you find yourself in a hole, stop digging.
Given the magnitude of financial illiteracy and the technicality of the sector, Kenyans only scrutinise the fiscal policy in passing.
The government would want us to believe that the debt situation is improving by throwing to us indicators such as ‘debt to GDP’, ‘deficit to GDP’ and ‘current account to GDP’ which have been used to mask the true state of the debt situation of the country.
Latest figures from Central Bank show that our debt to GDP currently stands at 54 percent. However, a more important measure is to monitor to what extent debt servicing has been consuming the nation’s revenue.
In 2012, debt service to revenue was 15 percent. This implies that for every Sh100 earned, Sh15 went to service debt. But in the financial year 2017/2018, for every Sh100 earned Sh30 went to service debt. This has dramatically deteriorated as 30 percent of our national budget was spent on interest payments.
Fund manager, Amana Capital in their latest report on Kenya’s economy stated that Kenya’s debt situation has worsened by 250 percent hence the cost of Sh30 is not commensurate with the revenue generated by its use. The Country’s debt is therefore unproductive. A country does not pay debt with GDP but with revenue and the risk of default is better measured by the revenue to debt service. If revenue shrinks, the country’s ability to service its debt especially the ones denominated in US dollars impossible.
Deficit to GDP has also been reducing and is currently standing at 5 percent. However, revenue to expenditure ratio worsened with the country going from spending 1.53 times more in 2012 to spending 1.61 times more in 2018. On average Kenyan has overspent 1.50 times in the last five years.
Revenue to expenditure helps us know how much more we are spending above what we earn, and as a result we are forced to borrow to cover the deficit.
So as much as deficit to GDP has been reducing, the gap between revenue and expenditure has not reduced. Kenya has been living beyond its means and with no tangible economic benefit as most of the money is spent on wages and corruption.
As long as the government is on average overspending 1.50 times more, the debt problem is not solvable and it will implode on a future generation which is not so far from reach. The main measure that needs to be taken to arrest this situation is to balance the budget at a bare minimum with an aim of a budget surplus.
Balancing the budget should not mean that the government does not spend. It implies that the government ought to spend within the true earning capacity of the economy and not under the illusion of revenue generating capacities that have informed the growth of fiscal spending.
This then calls for direction in our fiscal policy with a focus on the areas of the economy that generate real income and value addition. About 90percent of the country’s manufacturing sector is agro-processing. In this case, value addition from agriculture will trickle down directly to the manufacturing sector.
Continuous and focused spending on agriculture and subsequently on manufacturing sectors should generate income for the factors of production. Increased disposable income should also increase demand in the economy with the assumption that the taxation regime is equally adjusted downwards or maintained,
The government should also reduce recurrent expenditure. Much as this is an emotive subject, the size of counties is not economically viable. The country needs to take a step back and review from an economic standpoint guided by sustainable development indicators, to arrive at the right framework for equitable distribution of wealth.
Ending corruption will also allow funds to be utilized for the intended policy interventions. The true cost of corruption should not be seen just in monetary terms but the value of the service it has deprived the nation including unemployment, shortened life expectancy, poor infrastructure and illiteracy.
Kenyans are addicted to living beyond their means. The debt problem is solvable, and the first step is to cure the deficit problem.
Hannah Randa, Consultant at P&L Consulting