Policies hurting Kenya’s economy and devolution


Treasury building in Nairobi. FILE PHOTO | NMG

A deputy Auditor-General on February 20, 2024, queried the Treasury on unsustainable debt and deficit strategy. Yet a Eurobond topping 10 percent (yield, in bond-speak) was issued, partly paying the $2 billion bond repayment due June 2024.

Compare this to single digits Benin and Cote d’Ivoire obtained recently. We focus on the faulty macro-experiment and knock-on effects on devolution.

Drafting the Central Region Economic Bloc (Cereb) Blueprint recently, funded by the Foreign Commonwealth Development Office (FCDO), supported by a wonderful team, I assessed Cereb in Kenya’s fiscal quagmire as of 2024. In 10 counties, we interrogated over 800 experts, many more stakeholders, managing to attract Kiambu (the largest county contributor to Kenya's GDP after Nairobi) to offer Cereb a secretariat in Thika. What is it that links the bond issuance and Cereb to the iconic movie, The Godfather? Or its quip, ... ‘I am gonna make them an offer they can’t refuse’?

It is the national government’s obsession with borrowing and deficit financing, to the detriment of counties, spiking poverty, and the deputy auditor general's curiosity. Borrowing and taxation now come before impactful projects.

Dubious policy gambling and improvisations lack ambitions or a growth strategy for Kenya and substitutes for cohesive macroeconomic policies. First off: governments never have money of their own.

In debt markets, Kenya offers bondholders money KRA will collect from current and future generations. It flaunts ‘offers they can’t refuse.’ An earlier yield of 6.875 morphed to10.375, the highest rate in sub-Saharan Africa, higher than New York rates.

Markets trooping to Kenya know they can repatriate repayments, guaranteed as the first charge in the Consolidated Fund. Kenya’s growth is sacrificed as debt servicing squeezes all expenditures, e.g., equitable allocations to counties.

What is at stake? Severe financial strains, delays, and unbalanced revenue allocations and disparities turning counties into beggars for survival, and low Own Source Revenues (OSR). Equitable revenue shares are disbursed erratically, marked by disparities.

NT paints itself as a bean-counting agency ignoring economic growth drivers in the sectors. It hikes taxation irrationally. Absent goes credible macroeconomic frameworks for development of productive sectors as mandarins bite their pencil tips doing math to balance the books.

Alarmed, the Kenya Association of Manufacturers (KAM), the Private Sector Alliance (Kepsa), the Federation of Kenya Employers (FKE), the Kenya Association of Stockbrokers and Investment Banks (Kasib) and the Nairobi Securities Exchange (NSE) delivered a plea to State House, to guarantee a stable tax environment, reboot the economy by allowing businesses to thrive and create employment.

Production, revenues, and exports compatible with sustainable development would emerge. The anti-economy approach is forcing counties to think creatively on investment as national government boxes itself into a blind alley of balance sheets of near-term debt to finance debt servicing and deficits.

It is the Moi era government debt to GDP ratio, repeated. From 78.30 percent of GDP by 2000, the Kibaki presidency dropped it to 38.20 percent by 2012. Economists everywhere applauded. By 2023/2024, it’s over 70 percent of GDP, sparking overarching structural disparities in the economy, leaving devolution in tatters. The residual revenues of under 30 percent are the subject of a scrimmage for revenue allocations to national government and skewed allocations to counties.

During 2024/25, the government allocates a record Sh1.35 trillion to public debt repayment, which takes up 47 percent of projected ordinary revenue for the 2024-25 budget year. The allocation is 3.5 times more than the allocation to the 47 county governments, 32 times more than the allocation to Parliament and 56 times more than the allocation to Judiciary.

The squeeze on public finances would seem to be even worse if recent diagnostics are accurate as gazetted by Treasury Cabinet Secretary Njuguna Ndungú, highlighting Kenya’s total debt service costs for February 2024 at 96.8 percent of revenue (also see BD, Oped, February 23, 2024).

The CBK imitates NT’s pencil chewing despite the guarantees of Article 231 of the Constitution. It dangles high interest rates and high returns on securities, not to tame inflation (God and the rains help Wanjiku on food inflation as it is the key inflation driver) but to entice foreign inflows of portfolio investments, temporarily bolstering a wobbling Kenya shilling that speculators attack.

Again, CBK ‘makes them an offer they can’t refuse.’ It squeezes domestic credit, destroys lending to the productive sectors and spikes non-performing loans.

Private sector borrowers from sectors of growth potential simply cannot compete with lucrative rates the government offers on securities to foreign and domestic lenders. CBK goads money-minting local banks with rates ‘they can’t refuse,’ to sell securities.

Banks’ spectacular world-beating profits are legendary (see latest outturn, Stanbic Holdings Plc report of Sh12.2 billion Net Profit, a 50 percent dividend payout, and 34 percent growth, based on net interest margins).

The agriculture sector (22.4 percent of GDP) is deprived. Here Cereb is now incidentally the county’s food basket as per KNBS’s gross county product (GCP) Report 2023. Meru, Nakuru, Nyandarua, Muranga and Kiambu are the top performers. Yet agriculture receives only 3.3 percent of total lending.

The fiscal/monetary policy mix thus buries Kenya in debt bondage. I advised that public and private sector projects in Cereb for example must seek alternative financing models outside of fiscal allocations. For identified cross-county bankable mega-projects utilising endowments and economies of scale, the private sector can collaborate with guidance from high-level expertise run from a strong secretariat.

To succeed in controllable and bankable developments, Cereb must develop a blueprint with bankability propositions rising to levels that private sector investors understand.

Investment Guideline (CEREB-BIG)

A body of competent sector leaders (economists, bankers, project bankability experts, etc.) needs to advise County Governors at the level of a CEREB Investment and Development Authority, reporting to the Summit. The transition is under way, anyway in Kiambu Muranga, and Kirinyaga. Kisumu and Homa Bay Counties now prioritize private sector investments- e.g., the prime pharmaceuticals startup in Kisumu County. GCP from private investment will rise in the Counties. The Blueprint should worry CEREB on revenue allocations.

Dr Wagacha is a former acting CBK chairman and senior economic adviser, Executive Office of the President.

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