Experts: Kibaki would be shocked at Rutonomics

The tax policy fronted by the current regime has been faulted for the spiralling cost of goods, but the president had an explanation for it.

"I am a student of Kenya's third President Mwai Kibaki whose clarion call was that a country is built with taxes, not debts," Ruto said in August.

Despite that promise, he has been accused of hobnobbing with the International Monetary Fund (IMF) and of overseeing plunder even after promising austerity, with his regular international travels a hot topic of discussion, and disenchantment, in public.

Interbank rate

Analysts differ on the direction the economy could take in the near future. The interbank rate, which was at 4 per cent in September 2022, is at 11.04 per cent. The Central Bank Rate is at 10.5 per cent, up from 7.2 per cent in July 2022; since then it has been on a steady climb.

A dollar exchanged for Sh120.42 when the president took over. In a year, it has risen to Sh153. The consumer price index was 128.31 in November 2022. It is now at 137.03 points.

Economist Ken Gichinga, who heads Mentoria Economics, says that Kibaki's playbook entailed easily availing of money to the private sector and thus powering the economy in an unprecedented way.

"Kibaki was keen to keep interest rates on government securities low, at 1 to 3 per cent. When they are low, banks can lend to the real economy. So the banks were hawking loans because they could not get as much returns from bonds," he says.

But now banks are leaving risky borrowers because investors put in their money where returns are higher. Incentivised by the huge returns in the government paper, which is risk-free, they crowd out the private sector, he says.

"Lending to the private sector leads to the circulation of the money. The government needs to bring these interest rates down."

He also feels the tax regime is punitive, which could see key business people and manufacturers seek options to set up business outside the country.

Mr Gichinga is, however, critical of the former government, which he says borrowed heavily for infrastructural projects whose returns were expected quicker than could realistically be realised.

"Mega infrastructure deals were not an entirely bad idea because infrastructure helps open up places, but the expectation that it would pay within 10 years was overambitious and unrealistic. Sequencing could have been a little more orderly. Productivity improves with good roads; many businesses open in the interior, so the idea was good but the execution poor," he says.

A former Mandera Senator, Billow Kerrow, and chairperson of the parliamentary Finance, Commerce and Budget Committee thinks President Ruto has not followed President Kibaki's playbook. Mr Kerrow says Kibaki's administration was actively engaging players in the economy to grow it.

"The government is not the only player in growing the economy. Here we have a government that believes it has all solutions and does not engage with all players in the economy," he says.

Mr Kibaki did not immediately increase taxes, Mr Kerrow says, but grew the economy and tax grew commensurate with that economic growth.

"Here, we are putting the cart before the horse. Hiking taxes when the economy is not doing any better."

Mwai Kibaki, an economist, was Minister of Finance and Economic Planning, between 1969 and 1981. [File, Standard]

Free primary education, he said, brought more than one million children to school, "and this today renders Kenya's skills capacity a major plank of its development opportunities". "Altogether, development resumed in all areas of the country, including the hitherto neglected and largely undeveloped semi-arid or arid north.

Many sectors of the economy recovered from collapse."

When Mr Kibaki took over power, the exchange rate of the shilling against the dollar was 79.53. The rate remained within the 70s, crossing the 80 mark once or twice before rising to 101.27 in October 2011, then dropping back to the 80s.

While a lot of troubles, such as the hiking cost of fuel, have been blamed on international turmoil, Mr Gichinga says it is not entirely honest to do so.

"Domestic policies, such as the doubling of VAT on fuel, have nothing to do with the Russia-Ukraine war. If the VATs are not increased, people will have more purchasing power. Inflation on power, for example, is very high. The taxation policy is our worst problem now," he says.

Reliefs offered, such as on fertilizer, are therefore quickly eroded by other costs, such as transportation.

"We need to review the tax policy and have one that is non-inflationary, just and proportional."

Dr Patrick Muinde, an economic, public finance and governance expert, says that there have not been major interventions to target 'hustlers', who featured heavily in Kenya Kwanza's manifesto.

Apart from the Hustler Fund, from which many borrow to buy food rather than put into business owing to the relatively low limits, many other measures have not resonated with those at the bottom of the economic pyramid.

The main Jubilee economic policy of big infrastructure barely supported the domestic economy, he says, and the current regime "has done nothing to change the situation".

"Local businesses need to get opportunities. Even for these foreign-driven projects, the materials could be bought locally and companies here subcontracted. Employ domestic workers and money circulates within our economy," he says.

Dr Muinde says that the government should, in prioritising agricultural production, provide infrastructure and in projects such as The Galana-Kulalu lease out to private organisations which can then do irrigation-model agriculture.

It should not overlook agencies which can do this and choose to carry out farming itself.

He remembers that President Kibaki opened up opportunities for the private sector, with small and medium enterprises (SMEs) tapping into a fund for their working capital, through which they create robust employment and paid taxes.

President William Ruto is shown a 26-inch shoe by Kenya Industrial Estates MD Parmain Ole Narikae (left) during the Hustler Fund anniversary. With him is Cooperatives CS Simon Chelugui (right). [Edward Kiplimo, Standard]

"That has a better impact than The Hustler Fund," he says.

He also faults the current regime of propagating corruption in an economy that lacks the fiscal space.

"If we cut costs through prudence in costing, because we do projects at corruption-inflated rates, we could save a lot of money. The President also needs to show restraint in travel;

it is almost as if he has not appreciated that he is a leader of a poor country and such extravagance is very expensive," Dr Muinde says.

He feels the president could face the wrath of an increasingly disillusioned population, whose livelihoods are hurting, and his support could crumble going into the next elections.

"They are killing formal jobs and talking about creation of informal jobs. With the increased taxes, people are losing jobs. When the government misses its targets on pay-as-you-earn (PAYE) tax collections, then they should know that people are getting laid off, and this is a recipe for disaster," he says.

And when the workforce is in constant fear of losing jobs, the multiplier effect of the uncertainty is seen on their productivity.

Senator Okiya Omtatah is of the opinion that the government needs to address food, cost of health, education and transport above anything, with such a determination of priorities necessary to better citizens' lives.

"And if you look at our government in all those sectors it has done nothing to intervene. If it was to intervene and make them no-go-areas for cartels, do-no-gooders and thieves, this country would not be going through the mess it is going through," he says.

Beggar's bowl

Critical of the IMF and the World Bank, the senator says that the institutions "just want Kenya moving around with a beggar's bowl as a client state".

"Some of the things the president is doing are treasonable and could get him impeached," he says, claiming the president is going "overboard".

And while many others see the government's dalliance with the IMF and World Bank as a detour from the government's promises of reducing borrowing, Dismas Mokua, a political commentator says that the current government's first duty was to mop up a mess overseen by the former regime, and that the results are already palpable.

"The economy was struggling when Ruto took over. The biggest challenge was public debt and policy confusion. Infrastructure was growing but manufacturing was dwindling; everything was being imported," he says.

Ruto's efforts to seek job opportunities for Kenyans abroad will increase diaspora remittances and position Kenya in the global space, he says. Coupled with the proposed Pan-African Payment and Settlement System (PAPSS) which will reduce transaction costs through more efficient direct rates and markedly faster transfers, the pressure on the shilling will reduce as intra-African trade increases.

Ruto has invigorated Kenya's economic diplomacy infrastructure by making Kenya stand out in the region, Mr Mokua says.