- The IMF will advise and finance the government’s programme to address immediate challenges of the coronavirus pandemic.
- But the real programme objective is to gradually stabilise the public debt.
- There will be short-term support owing to Covid-19, but the long-term vision is a reduced budget deficit through revenue growth and cost rationalisation.
Written through gritted and clenched teeth, the web post ends thus: “The alternative to this financing is much sharper fiscal consolidation or much more expensive borrowing on commercial terms”. I refer to the International Monetary Fund’s (IMF) Frequently Asked Questions (FAQ) on Kenya response to this week’s outcry over loans.
While social media ‘tweetstorms’ are fine, it is tempting to think that we might not have been here if our constitutionally mandated public participation worked better, for Kenyans, and Kenya.
The FAQ offers four answers. The IMF will advise and finance the government’s programme to address immediate challenges of the coronavirus pandemic. But the real programme objective is to gradually stabilise the public debt.
There will be short-term support owing to Covid-19, but the long-term vision is a reduced budget deficit through revenue growth and cost rationalisation.
Further, the programme will promote procurement transparency, publish audited Covid-19 spending and do something about asset declarations, conflicts of interest and money laundering. No surprises there.
Which brings us to that pithy final sentence, which answers the question about why the IMF is lending to Kenya and increasing our debt burden when we’re already at high risk of debt distress.
As the Business Daily dramatically translated, “IMF warns protesting Kenyans face job cuts, taxes without loan”. Let’s take a step back and translate this week’s brouhaha into a couple of policy thoughts for Kenya.
The first one begins with the “no-IMF loan alternative” above. In this difficult debt moment, IMF support partly relieves us from the frightening prospect of a painful fiscal balancing (cuts to people, services, and/or development or unpopular, unviable tax rises) or expensive commercial borrowing overseas.
Except that it doesn’t. It would appear that our external borrowing appetite remains, with a couple of Eurobonds and more concessional funding (World Bank et al) to come before June 2022. And the IMF’s own staff report points towards “revenue-based fiscal consolidation”. So, what’s new here?
Probably the novel, and oft-stated (and equally often ignored), an overarching advisory that Kenya must learn to better protect its public sector balance sheet. Remember, this is a debt stabilisation moment.
Let’s move on quickly. For reasons most likely of timing, Kenya’s Covid-19 third wave isn’t quite factored into the programme’s calculations. The gross domestic product growth in 2021 and 2022 is projected at 7.6 and 5.7 per cent respectively, against 5.5 and six per cent in the Parliament-approved Budget Policy Statement (BPS). There is heroic mention of the national post-Covid economic recovery strategy that is unknown to many, and none at all of the equivalent county socio-economic reengineering and recovery framework.
Meanwhile, in comparison to the same Parliament-approved BPS, the programme projections adjust county allocations downwards until 2024/25, provide for civil service reform every year from now until then, and forecast higher overall gross debt levels by June next year (Sh8.997 versus Sh8.59 trillion).
The Building Bridges Initiative (BBI) is honourably mentioned, but not factored in, though, to be fair, neither did (or could) the Treasury and Parliament. Second policy thought, what’s our priority agenda right now?
Implicitly in this prioritisation, for anyone thinking global, Covid-19 vaccination is the only game in town. Is this now the time to make Covid-19 recovery top budget priority, not simply a spending “add-on”? Before this third wave becomes a fourth and those still alive by then wait to be vaccinated in 2024.
Next, structural reform, and specifically State-owned enterprises (SOEs). From what we now understand, the government says it has evaluated nine high-risk, significant SOEs, and Sh36 billion in bailout support is factored into the ongoing 2020/21 budget. A forward-looking financial evaluation and reform strategy for the top 15-20 SOEs by fiscal risk, presumably including these nine, is promised by May 2021. For the avoidance of doubt, the initial nine include Kenya Airways (KQ), Kenya Airports Authority (KAA), Kenya Railways Corporation (KRC), Kenya Ports Authority (KPA), Kenya Power and KenGen.
OK, what does this mean for the recently announced Integrated Transport and Logistic Network (KPA, KRC and Kenya Pipeline)? Or, what now happens to the National Aviation Management Bill in Parliament that envisages a holding Kenya Aviation Corporation that will house KQ, KAA and the proposed Aviation Investment Authority, among other recommendations? Further, does a real reform opportunity now exist to sort out our electricity value chain (Kenya Power, KenGen, IPPs, nuclear, geothermal, rural electrification and renewable energy), rather than fruitlessly do battle with IPPs and their PPA contracts? Different policy thought here, what’s our real forward agenda for these mega-firms?
Finally, some numbers for reflection. The previous Grand Coalition spent roughly a fifth more than it collected. The current Jubilee administration averages almost 50 per cent more than it collects. By June 2022, its cumulative nine-year budget deficit will be roughly Sh6.5 trillion (against a tax take of Sh11 trillion out of Sh13.5 trillion revenues), which equals the growth in public debt. Broadly un-restructured national recurrent spend over this time has been Sh12 trillion. National development will have cost a little less than Sh5 trillion, with around Sh600 billion in counties from their Sh2.5 trillion equitable share.
Mathematically, therefore, Recurrent National > All Taxes and Growth in Debt > Total Development. Now that’s a policy thought to ponder and make noise about. For Kenya and Kenyans, not the IMF.