Columnists

Bloated public sector hurts Kenya’s push to become regional hub

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National Treasury building. FILE PHOTO | NMG

Summary

  • Business managers polled in Stanbic Bank’s Purchasing Managers Index (PMI) say the rate of new hires in January was the highest recorded since last October.
  • This trend is likely to continue as the Treasury expects Kenya’s economy to bounce back to 6.4 per cent growth in 2021 from an estimated 0.6 per cent in 2020.
  • Despite this encouraging outlook, a series of economic and political reforms are needed to breathe new life into Kenya’s Vision 2030 aspirations of becoming an industrialising, middle income country over the next decade.

The prospect of economic recovery in 2021 has encouraged businesses to make new investments and resume hiring. Business managers polled in Stanbic Bank’s Purchasing Managers Index (PMI) say the rate of new hires in January was the highest recorded since last October. This trend is likely to continue as the Treasury expects Kenya’s economy to bounce back to 6.4 per cent growth in 2021 from an estimated 0.6 per cent in 2020.

Despite this encouraging outlook, a series of economic and political reforms are needed to breathe new life into Kenya’s Vision 2030 aspirations of becoming an industrialising, middle income country over the next decade.

The reality of doing business for both large and small enterprises is often at odds with the rosy picture painted by economic reports.

As an example, Kenya ranks position 56 in the World Bank’s Ease of Doing Business 2019 report, ahead of Italy and Mexico and up 80 places since 2014.

This makes us one of the most improved countries in Africa and globally, which ironically, is difficult for company executives and directors to comprehend in view of the difficulties they face running their businesses.

An increasing number of businesses today focus more on government affairs than they do on their core business. This is because of the overwhelming amount of compliance required of enterprises. A plethora of regulatory and licensing agencies has emerged in recent years, making compliance costlier, time consuming and complex.

One of the unintended consequences of the 2010 Constitution has been the exponential increase in the size of the public sector.

We moved from having one executive and one legislative body to 47 devolved units and a similar number of legislative bodies at the county level. The increase in the public sector’s headcount has resulted in massive public spending, putting pressure on the government to increase revenue collection and turn to domestic and international debt markets to plug revenue shortfalls.

This explains why regulatory and licensing agencies have turned into de facto revenue collection centres. It also explains the unfavourable tax regime and the rising public debt, which is now in the Sh8 trillion region (more than 60 per cent of gross domestic product) and fast approaching the Sh9 trillion ceiling imposed by Parliament in 2019.

An analysis of the state of public finances in Kenya leaves no doubt that we need to make tough choices about the size of the public sector.

The dividends of our new constitutional order need to be secured, but not at the cost of our economic future. Our legislative headcount far surpasses many of our peers. It’s the quality of ideas and debate — not the number of legislators — which counts.

This needs to be reviewed urgently in view of the packed political calendar ahead of the 2022 polls.

Although Kenya stands tall as a leading business and investment destination in Africa, competition is set to grow as trade dynamics shift following launch of the African Continental Free Trade Area (AfCFTA). The time has come for Kenya to address its competitiveness and indeed readiness to lead the charge in realising the long term benefits from the expanded markets envisaged by AfCFTA.




This requires an enabling environment with reasonable taxation that allows businesses to increase productivity and operate at scale. Businesses should not be turned into a cash cow for the government, but should serve as the engine for job creation and help foster innovation.

On a positive note, the substantial investment made by our government in infrastructure – evidenced by the commendable improvement in road, rail and air connectivity over the past decade – provides a solid foundation for sustained economic growth. We also have a talented and young labor force, rapid urbanization and are early adopters of game-changing technologies. It is no coincidence that multinationals such as Microsoft, Google, Cisco, IBM and Coca-Cola, as well as multilateral institutions such as World Bank, and IMF have set up camp in Kenya as a regional hub.

To maintain this edge, we need to address the underlying issues affecting our economic competitiveness, particularly the size of the public sector. Let’s not slay the goose that lays the golden eggs at the altar of big government.