Why Rotich needs more than a miracle to fix struggling economy this year

National Treasury Cabinet Secretary Henry Rotich

National Treasury Cabinet Secretary Henry Rotich may have wrapped up 2015 unfazed following the Kenya National Bureau of Statistics (KNBS)’s figure that indicated the economy grew by 5.8 per cent during the third quarter.

The growth, which improved by 0.6 percentage points compared to a similar quarter in 2014, was mainly driven by expansion in agriculture, construction, and financial and insurance.

But the economy is bleeding. The World Bank, International Monetary Fund (IMF) and National Treasury all revised downwards the country’s economic growth prospects for 2015 and 2016.

The World Bank cut the economy’s growth projections in 2015 from 6 per cent to 5.4 per cent citing “strong headwinds the economy was facing in the foreign exchange market and the monetary policy response to calm those fears.”

Even Treasury admitted to the economy facing turbulent times owing to El Nino rains and the tightening of monetary policy. Thus, they too revised downwards the country’s economic growth from 6.5 per cent to the range of 5.8 per cent.

In 2015, the exchange rate was far from being stable as the shilling slid to a three-year low trading at 106 against the US dollar - a scenario last seen in October 2011 when it touched 107.

To strengthen the shilling, the Central Bank increased the benchmark rate from 10 to 11.5 per cent, a situation that saw most banks increase interest rates to as high as 27 per cent to protect their profit margins.

Last year was also characterised by job cuts, employment freezes and profit warnings, a pointer to a shrinking employment space. A record 16 Nairobi Securities Exchange-listed companies issued profit warnings. Chances that the firms will hire when their profits have shrunk by at least a quarter are dim.

By December last year, more than 10 companies had either laid off workers or announced plans of restructuring. Even government, the biggest employer, also announced plans to cut the number of civil servants.

It was not surprising, therefore, for Kenya Revenue Authority to miss its target with collections for the first quarter ended September 2015 amounting to Sh300 billion against Sh328 billion it aimed to get. “The government is the single largest employer and consumer and it has frozen employment. The private sector is also not employing,” KRA Commissioner General John Njiraini told The Standard in an interview at the close of last year.

In his budget statement, Rotich said that the fiscal policy was to target revenue collection of 21.8 per cent of gross domestic product (GDP) over the medium term and containing the growth of total expenditure. That remains just on paper as debt still accounts for 51.29 per cent of the GDP as at August, 2015. National debt had soared to a record Sh2.9 trillion.

Reports of revenue shortfall may cause Rotich some nightmares.With Pay-As-You-Earn (PAYE) accounting for more than half of taxes collected, job freezes, pay cuts and lay-offs will only drift the taxman off the revenue target further. Already the taxman closed the quarter with a deficit of Sh10 billion on salary-related taxes.

Cut waste

News that Kenyans wrapped up 2015 with inflation numbers hitting 8.01 per cent may also deny Rotich a royal nap especially that for eight months last year, inflation was above seven. In January last year, inflation stood at 5.53 per cent and by April, it had hit 7.08 per cent. It only eased in August and September before starting to rise. The basket of goods may become dearer if last year’s trend persists.

It is against this background that Rotich goes into 2016. But there is more to that.

His bosses —President Uhuru Kenyatta and his deputy William Ruto would want their 2013 manifesto fulfilled as their term comes to a homestretch. The duo promised to grow the economy at between 7 and 10 per cent in two years creating a million new jobs.

They also promised to ‘cut waste and fight corruption’ to guarantee wise and proper expenditure of public resources. They also promised to ‘reduce public deficit’ enabling the government to spend money on services instead of paying debts. The Jubilee Government would also keep the exchange rate stable and control flow of money in order to lower interest rates and keep inflation at check.

This makes analysts to paint Rotich as a man lying on a bed too short to stretch his legs out with a blanket too narrow to wrap himself in.

Economists agree that some life needs to be injected into the economy. To do this, Rotich can either borrow or hit the already over-burdened taxpayer with new taxes.

Deloitte East Africa Tax Partner, Fred Omondi says for the three years that Jubilee has been in power it has introduced more new tax measures than any other government. These includes getting rid of zero-rating and exceptions from the value-added tax (VAT), the Capital Gains Tax, which has since been shelved and the recently revised excise duty taxes.

“Taxes have substantially increased in three years. The economy is under-performing but taxes are increasing,” says Omondi.

And taxpayers have not felt the last sting of VAT. Omondi says that VAT was staggered so that this year petroleum products will start attracting VAT. Also, with the excise duty pegged on inflation it is bound to change annually.

The Institute of Economic Affairs—Kenya, the public policy think tank, CEO Kwame Owino feels that the tax-base has been stretched to its limit. Omondi and Owino add that what Kenyans need is tax relief.

National debt stands at a record Sh2.9 trillion and borrowing may not be a viable option. At this level of debt, and assuming Kenya’s population is 40 million, then each Kenyan owes donors about Sh72,500, what is expected to overburden many generations to come. Owino says that the level of borrowing is too high and should be watched this year.

“Government should allow much space for private sector to grow. It should stop scrambling for credit with the locals,” says Owino adding that the level of taxation is high and expanding tax base cannot be an option.

But Gerrishon Ikiara, an economics lecturer at the University of Nairobi differs. He says that it still makes economic sense for the government to borrow again. However, he says that the government faces a tough time to convince the public that it is transparent enough.

“It is only that borrowing has been made more of politics than of economic sense. From Eurobond to Standard Gauge Railway intrigues, the narrative in the minds of common mwananchi is that the government cannot be trusted,” says Ikiara.

In its October 2015 Regional Economic Outlook on Sub-Saharan Africa, the IMF noted that the global financial conditions were gradually tightening. As such tapping into international sources of financing such as the Eurobond might not be advisable.

The Fund noted that expected monetary policy normalisation in the United States and the reassessment of global risks since mid-June 2015 have already altered the environment of abundant liquidity and low borrowing costs experienced by emerging and frontier market economies over the last few years.

Indeed, United States’ Federal Reserve Bank has since increased its benchmark rate. So, another issuance of the Eurobond by Kenya would mean borrowing at higher yields than in previous occasions.

Moreover, the Eurobond issued by the country in June 2014 has already attracted enough controversy—so much that Kenyans may not warm up to a similar undertaking.

Also, should Kenya issue another bond, investors may be reluctant to take it up. “Investors would want to see both a proper investigation into what happened to the Eurobond money — which might result in a totally innocent explanation, I should stress that —and then also evidence that the government is improving oversight and management of expenditure,” John Ashbourne, an Africa economist at Capital Economics in London, told Bloomberg, a US-based news media company, in mid-December 2015.

Nonetheless, the government appears to have carried over its appetite for loans to this year. Just last week, it floated two Treasury Bonds in a bid to get Sh35 billion for budgetary support.

And as 2017 beckons, the rising political temperatures characteristic of campaign period and which have traditionally dampened the investor confidence will disturb Rotich’s balance sheet. The ruling class and the opposition have been in battle fields severally and it has taken the government seven lives to keep going. Nevertheless, the political environment has for the better part of 2015 spread out to the heart of the economy.

Ikiara cautions that it is suicidal when politicians take the centre stage and squeeze professionals to the back seats. He assesses that this will continue to harm the growth prospects of the country to a significant level.

“Only major players understand that politics is a passing phase but for many people, politics is an impediment to growth. It is a colossal damage when an economic growth declines by even one per cent,” added Ikiara.

But Kwame subscribes to a different school of thought: “It is up to the government to ensure the economy is on track. This idea that politics must stop before the economy grows is not accurate.”

With barely six months before the next financial year sets in, Rotich needs to tread carefully and steadily to redeem himself and impress his boss at State House.

On revenue, Rotich and his team need to be realistic. Omondi thinks the Government’s revenue collection target in 2015 was “over-ambitious.” They expected the tax basket to be filled by revenue from new tax measures, some of which were ‘socially’ sensitive while others like capital gains tax were simply unpopular.

There were also some expectations on the excise duty, which the President signed into law in November 2015 yet to-date nothing much has come out of it.

Omondi thinks that this year, KRA should up its game on enforcement to minimise taxes that escape the basket.

There is also need for the Government to come up with effective measures to help the informal sector to easily comply. “They should come up with simpler provisions for people who don’t keep accounts or those who are not IT savvy,” says Omondi. He adds that the taxman needs an efficient system to collect more taxes by roping in the informal sector as well as ensuring compliance on rentals and property.

The penalty system, Omondi feels, is more punitive. “To encourage compliance Kenyans have to be encouraged that they will not be over-burdened with compliance,” he says explaining that tax-evaders who voluntarily step forward to start paying need not to be victimised.

Economist and governance expert Kariithi Murimi says that the main drivers of the economy in 2016 will include the on-going heavy infrastructural projects which include roads, the railway as well as extra energy focus.

Introduced incentives

Mr Murimi also thinks that county governments will compliment these efforts and complete most roads during this period as governors only have one year in office.

“But the country will need more imports to furnish the massive infrastructural projects, as such the shilling will suffer,” cautions Murimi.

The colossal Sh224 billion that the Government pumped into security plus Sh5.2 billion for tourism recovery should start laying golden eggs.

According to Murimi, tourism whose performance has been below par for the most part of last year is expected to make a come-back in 2016. But this is subject to “a bit of improved security,” he cautions.

Already, the sector has received a shot in the arm after the entry of Kenya’s poster-boy of tourism Najib Balala. He has already introduced incentives to help boost the number of chartered planes landing in Mombasa and Malindi.

Such incentives supported by relatively secure country could help drive up the tourism numbers.Ikiara opines that should the security remain calm and then hope that the weather will favour farmers, the economy can blossom by five or six per cent this year.

Rotich did not pick our calls or respond to short messages when reached for comment.