To fix the economy, William Ruto must employ his presidential campaign's brutal efficiency

The President ordered hundreds of billions cut from the current budget, but officials excited with their newfound powers are countermanding him, with the Cabinet Secretary in charge of Public Services Aisha Jumwa promising miraculous 'manna,' not to the starving Kenyans, but in the form of higher salaries for the well-paid government officials.

Flour wars

Ms Jumwa's insensitivity to the plight of struggling Kenyans is akin to Queen Marie Antoinette of France who was accused of wasteful spending to pamper herself with luxury as the French people faced famine during the Flour Wars of 1775, and mismanagement stymied efforts to repay state debts, precipitating the revolution that overthrew King Louis XVI and led to his execution together with the Queen.

Jean-Jacques Rosseau refined the social contract theory in his writings by arguing that each individual is sovereign in nature and accedes to unity common good to found a state, but tyranny is only curbed if there is a mechanism for popular will through voting to determine the course of the government. This mechanism of popular will was at the heart of democracy in ancient Greek cities, and medieval Swiss cities such as Berne and Geneve.

Rosseau foresaw the collapse of the state emanating from a corruption of popular will, because the state "on the eve of ruin, maintains only a vain, illusory and formal existence, when in every heart the social bond is broken, and the meanest interest brazenly lays hold of the sacred name of 'public good,' and iniquitous decrees directed solely to private interest get passed under the name of laws."

Kenya must avoid reaching this dreaded stage of decay as the State would not survive it. 'Unga ugali' of Kenya is as potent as 'unga ngano' of France in sparking despondency.

The conundrum the Ruto regime faces is partly self-inflicted because his campaign underplayed the causes of the high cost of living, especially the corruption and wasteful expenditure that has seriously undermined the ability of the State to meet the basic needs of food, shelter, healthcare and social security of Kenyans.

Capital flight

This has been made worse by externalities such as inflation and rising interest rates in the United States and other industrialised economies, leading to capital flight and depreciation of the Kenya Shilling. President Ruto thus created a legitimate expectation that he would magically lower the cost of living soon after he assumed office, promising action as soon as he "set the Bible down," after being sworn in. In effect, the president will not lower the cost of living and improve lives of Kenyans without decisively dealing with corruption, cutting wasteful spending and implementing prudent fiscal and monetary policies.

The government collects so much revenue and spends almost all of it on recurrent expenditure, including paying hefty salaries and allowances to politicians and civil servants, leaving very little to create opportunities for people to earn a decent living.

According to the Central Bank of Kenya, when the Grand Coalition government of Mwai Kibaki and Raila Odinga completed its term in March 2013, recurrent expenditure took 75 per cent of total expenditure, the balance going to development. By the end of the Kenyatta-Ruto administration in July 2022, recurrent expenditure gobbled an incredible 82 per cent of total expenditure, leaving only 18 per cent for development. Much of this is then stolen by politicians and officials, and Kenyans get almost nothing, as public services are poorly funded and executed. It is therefore clear that the fiscal space for the Ruto regime to spend more to provide public services and spur job creation does not exist.

Some in the Ruto administration are harking back to John Maynard Keynes, seeking a purely fiscal way out of the hole they are in, which is the wrong remedy for a Kenyan economy of high inflation, low employment and limited revenue.

Keynesianism was a response to deflation during the Great Depression of the 1930s, where the massive government spending proved not apt as the root cause of the problem was a collapse in credit that the likes of Milton Friedman eloquently argued should have been addressed by a controlled expansion in money supply. The Keynesian response adopted by President Franklin D Roosevelt involved massive spending in New Deal programs as well as price controls and industry codes to condone low wages, poor working conditions and prop up uncompetitive businesses in the hope that they would create jobs.

High unemployment

These policies spectacularly failed to cure the deflation, prolonged the depression that lasted for a decade, and led to unprecedented unemployment that peaked at about 25 per cent.

If President Ruto pursues Keynesianism, he will utterly fail to solve the Kenyan problem of high unemployment, skyrocketing cost of living, a stifling tax burden on people and profligate pay to wealthy officials and dig himself deeper into the quagmire.

The solution to these difficulties is to spark business growth to create jobs for the millions of unemployed people, mainly through monetary policy to increase money supply so that firms and households can borrow more at lower interest rates. The Central bank of Kenya should ramp up reverse repurchases of government securities in a more consistent manner and lower the cash reserve ratio for commercial banks to lend more and lower interest rates. The Central Bank should not overplay its hand in raising its rate, which went up from 7 per cent in January this year to 8.25 per cent in October 2022, as the current inflation is largely driven by external forces.

Whereas it is important to moderate inflation, this is best achieved by a modest expansion in money supply and credit, which in the short-term may put some pressure on prices but would spur domestic production of food, manufactured products and services to offset the impact of imported inflation while creating the much-needed employment in Kenya.

Interest payments

A growing economy and better domestic output would generate more tax revenues for government spending on development, reduce imports and increase exports, leading to a stronger Kenya shilling that curbs inflation and reduces the external debt burden due to less need to borrow abroad, and lower costs of dollar-denominated interest payments.

A bit of fiscal loosening should complement monetary policy. Friedman famously said that monetary policy must be calibrated to control inflation and spur employment by using it in a manner that did not make it "a string on which, you could pull on it to stop inflation but you could not push on it to halt recession." Fiscal policy to cut exorbitant payments to politicians and officials and curb theft, coupled with controlled expansion of money supply is the only way President Ruto can raise revenue for development and spur job creation to avert starvation and despondency.

-The writer is a policy analyst working on international development policy in New York, US.