The start of any New Year presents an opportunity for a fresh start.
The lessons from the previous year are an opportunity for us to make wiser decisions in the New Year and get better. In 2023, we learned several things about the Kenyan economy, given the global developments.
Higher interest rates in developed countries taught us to be cautious when borrowing foreign currency-denominated loans because we have no control over interest rates in other countries.
The high food prices early in the year reminded us that drought is an act of God while famine is an act of man and, therefore, we need to focus on irrigation and become less reliant on rain. From the rising taxes and debt levels, we learnt that as a country, we need to live within our means, otherwise we could default on our debts.
The weakening shilling reminded us to rely more on locally produced products than imports. The high fuel prices and power tariffs as well as increased national blackouts taught us that our energy supply and distribution are vulnerable and that if we want to be a great industrial nation, we need to solve our energy problems.
As we focus on 2024, there should be three priorities for the government.
First, paying off external debt should be a priority. In June 2024, the government is due to make a $2 billion principal repayment to Eurobond investors. Zambia, Ghana, and Ethiopia, over the last couple of years, have been unable to pay back their Eurobonds and have defaulted, resulting in severe financial difficulties.
Default should not be an option for Kenya because our banks are investors in the Eurobonds using our deposits. A default could lead to a banking crisis. Thankfully, the government plans on refinancing the debt using concessionary funds from the World Bank and IMF. While this could prevent default in the short term, it doesn’t solve the problem in the long term.
A more sustainable approach would be for the government to set up a sinking fund where it would deposit foreign currency into an account dedicated towards the payment of foreign debt quarterly.
Second, sustaining economic growth should be another priority. The recent 5.9 percent year-on-year growth reported in Q3 of 2023 is deceptive. On a quarter-on-quarter basis, the Kenyan economy contracted by 3.7 percent in 2022, the second-worst Q3 performance in 10 years. The worst Q3 performance in the past 10 years was reported in 2022, ahead of the elections. In short, Q3 of 2022 was so bad that Q3 of 2023 seemed good despite, it being the second-worst performance in 10 years.
Third, the government should focus on ensuring interest rates remain stable. In 2023, the yield on the 1-year T-bill increased from 10.3 percent to 16.1 percent while the Central Bank hiked the policy rate from 8.75 percent to 12.5 percent. Banks price loans based on both rates.
As we begin 2024, we must learn from the lessons of 2023 and work on improving.
These five priorities are a good place to start. Happy New Year.
The favorable base effects end in 2024 which means that GDP growth could witness a rapid slowdown in the coming quarters. To boost economic performance, the government plans on increasing spending to boost the economy.
Government spending in Kenya accounts for only 13 percent of GDP and therefore, the government would need increase expenditure significantly to generate growth. Furthermore, the government has never and will never be a better allocator of funds than the people or what economists call “market forces”.
Most of that additional expenditure might be stolen, wasted, and not achieve the intended goals.
A better approach would be to focus on consumption. In Kenya, consumption accounts for roughly 75 percent of GDP. Any measures that will lead to Kenyans consuming more (in quantity) local goods and services will directly lead to faster GDP growth.
High inflation has the opposite effect because Kenyans are forced to consume fewer (in quantity) but more expensive goods and services. There are two main ways to increase consumption; growing incomes faster than inflation and reducing unemployment. That would be an easier and better way to achieve economic growth.
T-Bill yields are market determined rates that are primarily influenced by the government’s domestic borrowing. If the government borrows too much domestically, it competes with individuals and companies that are also trying to borrow from banks which leads to higher interest rates. The government borrows a lot when it is not able to collect enough tax revenue and doesn’t reduce its spending.
The government plans on growing its revenues by 27 percent in the current fiscal year and by 13 percent in the next fiscal year. In the first 5 months of the current fiscal year, the Kenya Revenue Authority reported only 16 percent increase in revenue collection. Given the court cases challenging some of the tax measures, taxes could fall short of the target which would point to increased borrowings and consequently, higher interest rates.
A more sustainable approach would be for the government to reduce expenditure altogether. A smaller budget would increase the likelihood of the expenditure being funded primarily through taxes and reduce the need for domestic borrowings. Lower domestic borrowings would lead to lower interest rates which would finance investments. In Kenya, investments as a percentage of GDP are at 19 percent which is below the target amount of 25 percent which is required to transform the country into an industrial nation.
Fourth, the government should prioritize resolving issues around the exchange rate. In 2023, the Kenya Shilling weakened significantly against global and regional currencies including depreciating by 26 percent against the US Dollar.
The weaker Kenya Shilling resulted in a rise in debt obligations and the prices of imported items. The Central Bank is attempting to curb further weakness by increasing interest rates locally to slow the growth in supply of Kenya Shillings and incentivize holders of foreign currency to let them go in favour of higher yielding Kenya Shilling investments.
It is also instituting reforms to enhance foreign currency liquidity including lowering minimum transaction amounts.
While hiking the policy rate is theoretically correct, in practice, the transmission of those interest rate hikes to the rest of the economy has historically been weak except during the problematic interest rate caps. This is something the central bank governor admitted to while he was rolling out the new policy framework. Therefore, the actions by the Central Bank while well-intentioned might not achieve their intended impact.
A more sustainable approach would be for the government to enhance exports and reduce external debt repayments. The reforms in the coffee sector and the reserve price on tea exports have negatively impacted export volumes of those crops. Addressing those challenges could partially make up for dwindling titanium exports as Base Resources winds down its operations.
Kenya should also look to develop new export markets for horticulture and apparel as both are largely dependent on economic conditions in Europe and the US respectively. Furthermore, if the government had fewer external debt repayments, it would leave more foreign currency for companies and individuals.
Finally, the government should restore confidence in the Kenyan economy. The Central Bank’s November 2023 CEO Survey showed that only 10.6 percent of the respondents expect growth prospects to improve in the next 12 months. These sentiments were echoed in the latest PMI where the 12-month outlook reported by businesses was at a 7-month low.
Additionally, several listed companies have announced that they expect their profits to decline by more than 25 percent while several recognizable businesses have failed or are facing failure. The fact that the government has significantly diverged from its pre-election manifesto has left the public wondering if it changed its plan, never intended to keep the plan, or doesn’t have a plan.
Without confidence in the government’s plans, the public and private sector can’t make their own plans. Businesses will be hesitant to invest and hire and individuals will be hesitant to spend money.
A better approach would be for the government to put forward a plan or a vision for the country. It would then roll out policies that work towards the implementation of the overall vision of the country. A better version of Vision 2030 or the Big 4 agenda would be ideal.
The government would then invite citizens and the private sector to provide comments and suggestions so that they can buy into the vision. Over the remainder of its term, the government would then work towards the implementation of the vision. With the public and private sector informed of the government’s plans, they would look to invest in the opportunities that the vision presents.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
