Where is the money? Lessons from a broke government

Business man showing his empty pockets. [Getty Images]

In a rare admission, the government revealed it does not have enough money to pay for its obligations from debts to salaries and pensions.

The message first came from one of the president's top advisers before President William Ruto admitted it publicly. Why is this candidness that has characterised the Kenya Kwanza government, and more importantly, where is the money?

The message could be double-edged. One is to make citizens tighten their belts or force them to work harder. It could also spawn fear that things could get worse and lead to unintended consequences.

The government would have to raise interest rates to attract private funds through bonds or treasury bills. Already, Treasury bills, which are short-term, are preferable to bonds, which are long-term and riskier. Investors would be alarmed by a government that can't pay its workers. Consumers are rattled too.

Remember, many businesses rely on the certainty of government employees' salaries. The pronouncement is likely to dampen the spirit of both consumers and investors who drive the economy.

It's worse when the opposition is accusing the government of not handling the economy as expected. Will they start saying: " I told you so?"

No matter how bad things are, that was a rare admission. Could it be geared towards unlocking money from lenders (read the International Monetary Fund and World Bank)

Could it be an ingenious way to ensure civil servants do not ask for salary raises, which would fuel inflation further?

What if Kenya Kwanza is determined to wean the country off debt? One statement caught my attention: "We shall not use debt to pay for recurrent expenditures (read salaries and wages)." Does it mean that someone was doing that before? I have read that some counties are planning to do just that. And banks must be smiling.

It has also become apparent that even if we do not borrow from China, which Kenya Kwanza was openly against in the run to the polls, there are other lenders, who unlike in the past, are very quiet.

Can you name them? They probably learnt from their past mistakes. Is this lending part of the grand scheme to shift Kenya from the Eastern orbit (read China)?

Create enterprises

Let us accept the fact that we cannot wean ourselves off borrowing in the short run. It's easier than taxation. You do not create enterprises overnight to tax. And raising taxes on existing businesses or employees would depress the economy.

Is tax, not an expense? I would go for a tax cut to stimulate the economy. Reducing government expenditure or waste is politically sensitive.

Which waste do we reduce without political repercussions? Remember retrenchment during the structural adjustment programme (SAP) in the 1980s?

The expenditure part of the national economy is a hot potato. No wonder the focus is on the revenues (taxes) and debt.

The long-term solution is faster economic growth so that we have more enterprises and workers to tax. How do we do that? Make counties centres of economic growth not politics, and let them focus on what they are good at.

Today, counties are known for their new exuberant hotels, not factories. We should relook at regulations that hinder growth, including unpredictable tax regimes. Investors and consumers hate uncertainty. Our market is too small, let's focus on the global market - what South Korea and even China did to spur growth - with quality goods and services.

But we have not answered the question of where the money went. Was it there to begin with? With the drought, Covid-19, terrorism and the war in Ukraine, businesses have been subdued, making less profit and by extension paying less taxes.

That includes less money to lend to the government through bonds. Did radical changes in the Kenya Revenue Authority (KRA) affect collection targets? Did public demos subdue the economy leading to less taxes?

There is even a possibility we are hoarding money due to economic uncertainties, particularly dollars and other hard currencies. Remember Kenya's economy is 80 per cent informal, with the other 20 per cent having disproportionate power over the economy. Did we rattle this 20 per cent through the political transition and threats?

Let's be fair, Kenya Kwanza is still implementing the Jubilee government's budget. It's like running someone else's home! Could it be the Ruto administration inherited a poisoned economic chalice? The government seems convinced things cannot get worse, they can only improve. We have overcome worse economic crises in the past.

Remember SAP and Goldenberg? One wishes the current financial crisis espouses the birth pangs of a new and vibrant economy with a budget surplus, near-total employment and a confident citizenry that will leave the comfort of its home and make the world its playground economically.

All we can do is wait and watch. After all, turning around an economy is not as easy as voting. But that does not exonerate the government from preaching optimism, not pessimism.