Why we need an economic stimulus package in 2025

Economic uncertainty, taxes and political pessimism punctuated this year.  They are taking a toll on businesses and entrepreneurs.

Businesses or better enterprises are closing, and their owners are not smiling. The kiosks, shops, or stalls belong to people we know: our siblings, friends, or neighbours.

We often think of listed firms and big corporations closing, relocating or downsizing, a diplomatic term for reducing the number of workers. Unless we know someone who works in such firms, their actions are distant and not that emotional.

But when small firms - small and medium enterprises (SMEs) start closing, it’s more personal and poignant. We start feeling it. Economic reality comes home.

The owners cite subdued demand or reduced customers. In a country where 80 per cent work in the informal sector, that is a matter of national concern. Simply put, eight out of 10 people in your neighbourhood have no formal employment, with a regular salary, and pension.

When the government reported reduced inflation, that was a sign of subdued demand and a slowdown in the economy. The rush during Christmas was a statistical aberration, Kenyans seeking relief in the countryside from hard economic times in the city.

Money has not just vanished from the economy. It’s there but not circulating fast enough. We spend less during economic uncertainties. We have seen enough uncertainties in 2024, through protests, strikes, cabinet reshuffles and spillovers from global conflicts.

Taxes take money from the more efficient private sector, leaving us with little to spend and stimulate the economy. Think of the money taken by the Social Health Insurance Fund (SHIF) and the Housing Levy.

Any economist can attest that money would have a bigger economic impact if left with employees. They spend it faster and more rationally.

They spend money where they will get the highest return, not in one sector. That spreads the risk too.

Unpaid debts (pending bills) hold money from circulation. Beyond the national debt, most suppliers and contractors have not been paid.

Again money is withheld from the more efficient private sector.

This is made worse by the government competing for credit with the private sector getting an edge by raising the interest rate on treasury bills and bonds.

Most people reading this are owed some money or owe someone money. That includes Fuliza (short-term overdraft by Safaricom) and Hustlers Fund. Suppose the non-performing loans in banks and their provisions started circulating.

Economic expectations

Political pessimism, fueled by protests and national anger has left many unwilling to spend or invest.

The great political and economic expectations that fueled the 2022 polls have been deflated.

How can we forget corruption which has drained citizens and their economic spirits? Many ask why make money for others to enjoy. Noted there are fewer reports on corruption? Has it reduced, more PR or has it just got more sophisticated and secretive?

What of the New Year? Will the economy turn around? The reduction in economic growth projection by IMF in 2025 to five per cent demands we take corrective measures beyond the reduction in interest rates undertaken by the Central Bank of Kenya (CBK).

How about reducing the cash reserve ratio? If the weather remains good, with rain and political temperatures cooling, we could see a change in economic fortunes. One great fear is that the convergence of the Kenyan political elite is for their own good not for the masses.

Will this convergence bring back national optimism?  Shall the ordinary Kenyans reap economic benefits? Some fear it could lead to eating together, with no one watching over the government and subsequent corruption.

That would worsen the economy. Will this convergence reduce fear engulfing the nation, characterised by abductions and silencing of alternate voices? Fear is an enemy of economic growth. How can we turn around the economy beyond turning national pessimism into optimism? How can we give Kenyans an economic smile in the New Year?

All indications are that we need a stimulus package in 2025, something akin to the one we had during Covid-19. And it worked. Remember?

Reduce corporate and income tax rates, reduce turnover rates and VAT to say 12 per cent. Tax cuts have traditionally been used to stimulate economies and ours can’t be an exception.

The feel-good effect and Laffer’s curve could surprisingly lead to higher tax revenues.

Can the Kenya Revenue Authority (KRA) confirm tax revenues did not reduce significantly because of the Covid-19 stimulus package? That was a free experiment for economists.

The other good reason why we should reduce taxes and their rates is that money in private hands is used more efficiently than in public hands, read government.

It does not matter if it’s in investment or consumption. That is why tax refunds should be prompt too.

The firms or individuals getting tax refunds spend and cheer up the economy. Do you have siblings or relatives in the United States?

Ask them what happens after they file taxes and get tax refunds. Some have persuasively argued that more and higher taxes are sneaking back the spirit of Harambee. What do you think?

Let’s enhance cash transfers to the elderly and more vulnerable members of society. They are disproportionately affected by economic decline and it makes political sense.