Thursday, 16 March 2017

State of the Economy: Discontent, Progress & the Road Ahead

President Uhuru Kenyatta delivering the State of the Nation address.
Courtesy: The Star
Following the State of the Nation address by President Uhuru Kenyatta, various remarks have been made on just how well or how bad the economy is performing. Of course, the interpretation of the aforementioned statement is directly dependent on which side of the political spectrum your conscience gravitates towards. A dose of sycophancy is therefore the absolute denominator of such fundamentalism but a sober, pristine and objective review of the state of economic affairs is vitally important.

With acknowledgement that Kenya is making progress on the economic front, much more needs to be done for an inclusive economic trajectory to be established. The economy is growing, isn’t it? The answer highly depends on whichever metrics and school of thought one subscribes to as far as ascertaining economic progress is concerned.

In 2016, Kenya’s economy is believed to have grown by 5.9%, an impressive growth considering the growth rates registered by the Sub-Saharan Africa (SSA) sub-continent and the world in general. The average GDP growth rate for SSA was 1.4% and for the entire world was approximately 3%. GDP remains an important macroeconomic indicator but it’s a flawed calibration of ascertaining economic progress. One way through which politicians and majority of journalists as well as a significant number of other pseudo-economists propagate confusion is by attempting to depict economic growth as structural transformation (economic development).

Fast forward, the tax man has done quite well with respect to the recorded increases in tax collection from Kshs.847 billion in 2013 to Kshs.1.2 trillion at the end of 2016 just as the president noted. The crux of the matter, however, is on the expenditure side with ostensibly 50% of the revenue collected going towards the payment of salaries and allowances for the 700,000 plus public officers. Statistical data compiled by The National Treasury indicate that in 2016, Kshs.627 billion was exclusively spent on salaries and wages. The public wage bill is approximately 10% of the economy’s GDP which is way above the global best practice of 7%.

A raft of policy measures were proposed by President Kenyatta to bring down the public wage bill as per the recommendations of the toothless and sort of ineffective Salaries and Remuneration Commission (SRC). The most notable among the proposals is the institutionalization of the pay cuts for the occupants of the political offices. There is no doubt that Kenya’s Members of Parliament smile the loudest at the banks compared to the other nations of the world. The happy-go-lucky Members of the County Assemblies also earn relatively high amounts of salaries. But just how feasible is this proposal to effect the reductions in the salaries and wages? Can we also put on the table other effective ways of dealing with this Kenyan economic monster in the name of the public wage bill?

Good economics is bad politics and bad economics is good politics and so how will the next administration deal with the voracious members of the august house to slash their salaries and allowances? With hindsight, the plausibility of implementing the salary cuts after the forthcoming general elections remains a Herculean task. In 2013 the Executive attempted to implement the proposals by the SRC focusing on cutting the salaries/allowances of the MPs and came up with new remuneration structures. This move was quickly thwarted due to political expediency. The number of representatives both at the national and county levels should be reduced and so is the number of workers employed by both levels of government. However, this is an issue that will be politicized bearing in mind the doctrine of political arithmetic.

Unemployment remains a thorn in the flesh for the current administration. In the State of the Nation address, the president highlighted that 2.3 million jobs have been created since the inception of the Jubilee administration. From the available statistical data by the Kenya National Bureau of Statistics (KNBS), this is in fact very true but the devil therein lies in the details, especially in the hidden information; there is need to assess the total number of jobs created in the formal sector and the informal sector. Facts indicate that for the last three years, around 20% of the total number of jobs created within the Kenyan economy was in the formal sector implying that the informal sector has been creating a larger proportion of the employment opportunities.

President Uhuru being received by MPs before the SOTN address.
Courtesy: Business Daily
A significant number of Kenyans feel that the president should also have addressed the retrenchment and lay-offs by various firms in the country. He simply couldn’t; it is politics you know! I hold the view that politics overtakes this crucial national issue of lay-offs. Most of the people do not endeavor to focus on the microeconomic aspects especially the business strategies for the affected firms and incidence and impact of technology which is a pronounced factor in engendering creative destruction. This is not in any way to suggest that perhaps the macroeconomic environment is not responsible but methinks the labour redundancy in the affected firms has been majorly occasioned by the microeconomic factors.

Official statistics by The National Treasury indicate that the national debt currently stands at Kshs.3.5 trillion which is approximately 51% of the country’s Kshs.6.9 trillion GDP (2016 estimates). There is a lot of uneasiness that perhaps the debt level is spiraling upwards at a very fast pace. There are two things to note with respect to this issue. First, borrowing is very crucial for any economy only if the money borrowed is chiefly used to finance key projects that generate more output in the future. Secondly, excessive borrowing is dangerous for the economy especially if a huge chunk of the national debt is in foreign currency. What exactly is the Kenyan debt situation?

If the last three years are to be considered, there is little doubt that borrowing is going to reduce. Reflect on the just-to-be read 2017/2018 Budget Policy Statement which as per now is pegged at Kshs.2.6 trillion. The relatively huge budgetary deficit will certainly demand for an increase in borrowing domestically and externally. Locally, banks will always be ready to lend to the government and in view of the misinformed capping of the interest rates we should expect the banks to lend more finances to the government than the private sector. Excessive borrowing, if not checked, will result in the crowding out of the private sector. The president’s reassurance that the country is not at risk of defaulting its loans because of the budgetary provisions to service the debts offers a glimmer of hope but we must be wary of the “whats” and “ifs” of the external debt. What if the economy of China (our largest creditor) or of the sovereign bond (read Eurobond) creditors experiences a recession or financial crisis? What if the government is unable to repay the debts? This is an economic discussion for another day. The borrowed funds have extensively been invested in the construction of the Standard Gauge Railway (SGR), roads, expansion of the Port of Mombasa, among other infrastructural projects.

The capping of the interest rates has outrightly backfired and the president acknowledged that the usury laws have slowed down the credit advanced to the SMEs and other high risk borrowers. I have always been consistent in castigating the regulation of the interest rates which appears to have been a matter of gaining political mileage. This is a perfect illustration on just how good politics is bad economics. The proponent of the Banking Amendment Act (2016) seems to have been acting on behalf of some interest groups (read cartels) who may have intended to run a very huge credit black market or who have the largest market share in the microfinance industry. This is a perfect example of the tail wagging the dog, as clearly put by Charles Wheelan, a move which ultimately dents the economy. Equity Bank, a bank which lends to most of the low-end borrowers, has already made losses. The good news, however, is that the president gave an indication of reviewing the laws on capping the interest rates. But did he not envisage the legislation as a perverse incentive? It’s good politics and bad economics after all.

The SGR passenger locomotives.
Courtesy: Standard Media
Key infrastructural projects in various sectors seem to be taking root thanks to economic diplomacy. The SGR is a key project whose input in the economy cannot be underestimated. While I am in agreement that the cost of the SGR was seriously inflated, I differ with most critics that it is destined to be a white elephant. The SGR is certainly not a brainchild of the Jubilee administration nor is it a flagship project of the same administration. This is one of the key infrastructural projects as outlined in Vision 2030 and the aspect of continuity of government is responsible for the implementation of such. The commissioning of the operations of the electric railway linking Ethiopia and Djibouti has elicited debate as to why Kenya opted for the SGR and not a modern railway line as per the global standards. It should be well-known that the EAC members formally agreed to construct SGRs in their respective countries. However, the Kenyan SGR can still be upgraded to an electric one at a cost of Kshs.40 billion.

Other notable benefits from the economic diplomacy that will go along in transforming the economy include the construction of the Kenya Advanced Institute of Technology at the Konza Techno City fully funded by the South Korean government. The German government is also developing new curricula for technical and vocational training institutes offering automotive engineering courses. Israel has also come in to facilitate agricultural expertise and technology. These are critical investments that will increase the capacity and sophistication of human capital that is a key driver of structural transformation. The manufacturing sector that is on a lull is a beneficiary of economic diplomacy with various plants set up and others being established. However, the government must also be committed in implementing the policy on setting up the Special Economic Zones (SEZs) to speed up investments in the manufacturing sector. India has also pledged to provide a market for some of the agricultural produce from Kenya.

This economic diplomacy also sets ground for more suspicion. It is of essence in economics that economic agents and units observe the doctrine of trade-offs. As much as these countries have pledged to invest in Kenya and Kenyans, what are they getting in return? My hunch is that they are after the oil and markets. In fact, for China, the oil is on their radar in addition to helping most of their unscrupulous businessmen to set up shop in the country. Economic crimes continue to drain the financial resources of the economy. We are told Kshs.3 billion has been recovered but we should have in mind that close to Kshs.500 billion of the budget is never accounted for. The Jubilee administration has not been impressive as far as the fight against corruption is concerned. More needs to be done.

We have to acknowledge the progress made but at the same time offer constructive criticism on the economic missteps. The economy is growing after all but developing at a slower pace that is generating frustrations and fueling discontent.

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