Ruto, make fiscal discipline a priority

Deputy President William Ruto

President-elect William Ruto. FILE PHOTO | NMG

From day one, President-elect William Ruto has a full in-tray. From assembling his Cabinet to setting a socio-economic and legislative agenda.

However, there's nothing that will be more pressing than the current disorderly state of Kenya's public finances. First, he has to figure out how to restore fiscal order.

Fiscal operations over the past couple of years have been characterised by expenditure overruns and debt binges. In the fiscal year 2020/21 alone, the fiscal deficit hit nearly Sh1 trillion or just about 8.5 percent of gross domestic product (GDP).

In the current financial year ending June 2023, the fiscal deficit is budgeted at about Sh846 billion. Broadly, this speaks to a country that has been living beyond its means. Dr Ruto's top priority will be to restore the much-needed fiscal discipline.

Given Kenya's current fiscal situation, consolidation calls for cutting down expenditures in line with revenues. This will mean instituting strict austerity measures, which may not be aligned with the socio-economic agenda he outlined in his campaigns.

Even more problematic is the ruinous nature in which budget deficits have been funded. Official figures show that the total nominal public and publicly guaranteed debt stock stood at nearly Sh9 trillion or just about 70 percent of the GDP by the close of June.

Servicing of public debt continues to divert away critical resources. In February, a report by Parliament's Budget and Appropriations Committee estimated that the current debt stock will incur Sh1.36 trillion in debt servicing expenditures or the equivalent of 63 percent of the fiscal year 2022/23 total revenues.

Quite a staggering amount. To achieve a soft landing, it will be imperative that he renegotiates some of the terms of the existing debts, with China topping the list.

In the first two years of his administration, there is a high chance of the President and his Finance minister spending most of their time in planes flying around to meet debtors, both multilateral and bilateral.

This also means that his choice of Finance minister must be a sound negotiator and must have had prior rapport with commercial, multilateral and bilateral lenders.

Another problem is the fact that half of the debt Kenya owes is denominated in other currencies (foreign), which we can't print. Specifically, 70 percent of the external debt is owed in the US dollar.

The economy can only generate these currencies by producing and selling goods and services across borders. Essentially, ramping up the economy's foreign exchange earning capacity also tops his in-tray.

Beyond restoring fiscal order, there is the matter of geopolitical overhang on the domestic cost of living. Specifically, the Ukraine-Russia war has had devastating impacts on the cost of food items as well as energy prices.

To cushion households from the impacts of the war, the outgoing administration rolled subsidies on pump prices, maize flour as well as certain farm inputs.

This hasn't been unique to Kenya. Since the onset of the Covid-19 pandemic, governments across the world rolled out stimulus spending programmes to cushion households from the harsh impacts of the pandemic.

The problem for Kenya has been the lack of sufficient fiscal space for stimulus spending, given the weak fiscal trajectory. Ruto's administration will have to strike a fine balance between cushioning households and fiscal discipline.

One thing he could consider is to bring down income and consumptive tax rates in the hope of spurring consumption and widening the tax base.

Then there is the issue of the economic blueprint. Since 2008, Kenya's long-term economic growth ambitions have been guided by the Vision 2030 blueprint. It was later whittled down into the Big Four agenda by the Uhuru administration.

With only eight years more years to go for the Vision 2030 blueprint, it would be more pragmatic for his administration to continue the alignment instead of curving out a new blueprint.

More specifically, it still makes more sense to pursue the Big Four agenda but this time with a better approach. Since being unveiled nearly five years ago, resource allocation to the Big 4 agenda has lacked empirics.

Additionally, a master plan outlining the strategy implementation of the Big Four, including a results matrix can better guide resource allocation, as well as a monitoring and evaluation framework.

As it is, a sizeable number of flagship projects failed to take off as planned and the outgoing administration has been unable to meet its initial targets.

The writer is a financial analyst