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NEWS & CURRENT AFFAIRS

The Nairobian

Ruto's double-edged austerity sword casts long shadow over struggling economy

Financial Standard

By Brian Ngugi | Jul 09, 2024

Hoteliers, traders in goods like stationery, consultants and civil servants will be among the hardest hit as the National Treasury moves to execute President William Ruto’s austerity cuts.

The new planned austerity drive is set to have a significant impact on various sectors, including consultants, hotels, airlines, and banks.

The austerity measures were outlined by Treasury Cabinet Secretary Njuguna Ndung’u, who issued guidelines on budget cuts in 24 areas to cover a Sh346 billion gap after the withdrawal of the Finance Bill, 2024 due to public protests.

The cuts range from 20 per cent to 100 per cent across a wide range of government expenditures, including communication, travel, membership fees, training, hospitality, and various contracted services.

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“The number of advisers in government shall be reduced by 50 per cent within the public service with immediate effect,” said President Ruto when he announced new austerity measures last week in the wake of public outcry.

“Similarly, the budgetary provisions for confidential budgets in various Executive offices, including my office, shall be removed, and the budget for renovations across the government reduced by 50 per cent.”

The move is expected to hit consultants hard as the government has imposed a 20 per cent cut on contracted professional services. This could lead to a decrease in the number of projects and contracts for consulting firms.

The hotel and airline industries are also likely to feel the heat, with a 50 per cent cut in domestic travel and subsistence expenses as well as a 20 per cent reduction in foreign travel and subsistence costs. This could result in a decline in business travel and bookings for hotels and airlines.

Banks, too, will be affected by the austerity measures after the government decided to eliminate housing loans and car loans for public servants, a significant source of revenue for financial institutions.

The cuts in government spending are part of the Ruto administration’s efforts to rein in the fiscal deficit and address the country’s economic challenges. However, seen as a double-edged sword, the move is likely to create ripple effects across various sectors, forcing businesses to adapt and find new ways to navigate the changing landscape.

“These austerity measures are a clear indication of the government’s commitment to fiscal discipline, but they will undoubtedly put pressure on several industries,” said economist Wanjiku Mwangi.

“Companies will need to reassess their strategies and find new ways to remain competitive in the face of these budget cuts.”

The government has not provided a timeline for the implementation of the austerity measures, but analysts and traders expect the impact to be felt in the coming months as the cuts are gradually implemented across various government agencies. Other experts said there is still room for the government to eliminate wastage without impacting key sectors or service provision, including health and education.

They point to the recent past where a majority of State agencies have been in the spotlight once again for profligate spending of public funds in the middle of a much-touted austerity drive by the Kenya Kwanza administration. The President’s initial order requiring senior officials to cut public spending and save money to pursue the government’s development agenda appears to have fallen on deaf ears as hundreds of millions of shillings are still being splashed on travel, entertainment, and new luxury equipment.

An earlier spot check by Financial Standard showed several government agencies, which are dependent on State bailouts, continue to defy President Ruto’s order to slash non-essential budgets.

This comes at a time when the government has asked Kenyans to brace to swallow the bitter pill of austerity.

Experts have recently warned that the continued lavish spending by several top key officials and State agencies, which flies in the face of the austerity drive, is likely to stoke social tensions amid mounting pressure on the Kenya Kwanza administration to bring down the cost of living.

For instance, the Privatisation Authority of Kenya (PAK) recently faced scrutiny for spending millions of shillings on a rebranding exercise even as the National Treasury enforces austerity measures across government ministries.

A report detailing contracts awarded between March and December 2024 reveals that PAK spent Sh9.995 million on consultancy services for the rebranding, awarded to M/s Artful Eyes Productions Ltd in March.

The six-month contract is set to expire in September. The ongoing lavish spending is likely to heighten the focus of State agencies’ ability to walk the austerity talk as advocated by the President.

Critics say while citizens are being told to swallow the austerity pill, there is no clear sign yet of government officials cutting back on their costs or trying to be more efficient when it comes to completing different government projects using taxpayers’ money.

The new administration plans further spending cuts to achieve its target of a structurally balanced budget.

The cuts are expected to affect subsidies for maize and fuel, exposing Kenyans to higher costs of living at a time Treasury is also aiming at broadening the tax bracket, signalling more pain for taxpayers. The government has been facing a major budget crisis due to reduced tax collections amid ballooning debt repayments, forcing it to introduce new taxes and increase others, sparking public outrage. Months after taking office, President Ruto ordered for implementation of austerity measures to reduce the budget deficit in the 2022-23 financial year.

The planned October 2022 cuts were to affect communications, advertising and printing, training, travel, hospitality, motor vehicle and furniture purchases and motor vehicle rentals.

However, most government ministries, departments and agencies as well as county governments ignored the push, especially on domestic and foreign travel and the purchase of office furniture.

The target was to save Sh300 billion, but this was never achieved.