Kenya’s Economy on a Dangerous Slide
Economists and analysts have warned that the new wave of political unrest could drive Kenya’s economy to the brink, given the country’s dangerously high debt levels, unrelenting inflation, daily depreciation of the shilling, tax shortfalls, and rising interest rates.
While the largest economy in East Africa reversed seven consecutive quarterly growth declines to post 5.3 percent growth in the first quarter of the year, economists warn policymakers not to be lulled into a false sense of security.
The middle class in Kenya is becoming impoverished due to inflation-adjusted wage cuts, and businesses are defaulting on loans because interest rates have reached levels not seen in seven years.
Half a month into the new fiscal year, the government is still awaiting a court’s decision on whether it will be permitted to implement a slew of new taxation measures, such as doubling the value-added tax on fuel and deducting 1.5% of workers’ gross pay to finance low-cost housing.
The delay in implementing the provisions of the Finance Act 2023 poses a challenge for President William Ruto’s administration to fulfill the campaign pledges he made to Kenyans.
Robert Shaw, an expert on public policy, predicts that “tough economic times will get tougher” unless the government devises and implements a more daring strategy to prevent the economy from veering off course.
“Now, everything is pointing in the opposite direction. We have a government with a voracious appetite for both collecting and spending additional funds. Mr. Shaw comments, “This is almost like a self-inflicted wound.”
“The court case and subsequent demonstrations are of concern. The economic recovery will be jeopardized due to the disruptions caused by the protests. Continued protests will discourage investors.”
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Mr. Shaw warns that the collective action could “take on a life of its own” even in the absence of politicians, as the people use it to amplify their anger over the high cost of living and widespread unemployment.
The government has instructed Kenya Revenue Authority (KRA) to collect Sh2.57 trillion to help fund a Sh3.58 trillion budget for the fiscal year that began on July 1.
As a result of missing its revenue collection objective by Sh107 billion for the fiscal year ending in June 2022 due to a harsh economic climate, the outlook for the KRA is now bleak.
The tax collector collected Sh2.166 trillion, a performance rate of 95.3%. The objective was Sh2.273 quadrillion. Reduced tax revenue could force the government, which carried a Sh9.63 trillion debt at the end of April, to borrow more money or reduce development expenditure, both of which would be detrimental to economic growth.
This comes at a time when Kenya’s first Eurobond payment of Sh280 billion is rapidly approaching.
The Treasury anticipates that Kenya’s economic growth will increase to 5.5% in 2023, up from 4.8% last year, but is cognizant of the fact that an increasing number of citizens are presently confronted with rising prices for basic commodities, particularly food, energy, and transportation.
Recently, Treasury Cabinet Secretary Njuguna Ndung’u stated that the increase in food insecurity and the increase in the cost of living will necessitate “urgent and decisive interventions,” particularly on the supply side.
According to Ken Gichinga, Chief Economist at Mentoria Economics, the return of opposition-led street protests and threats of a prolonged period of civil disobedience will cause more dark clouds to accumulate over the economy.
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“The outlook indicates a slowdown because we are experiencing multiple levels of monetary and fiscal policy tightening.” When you add political risk to the equation, the outlook becomes even more uncertain,” said Mr. Gichinga.
In the past, political unrest and Al Shabaab-affiliated terrorist attacks in northern Kenya caused foreign investors to reduce or suspend their investments.
In the first half of the year, the Nairobi Securities Exchange eroded 26 percent, or Sh653.7 billion, of investor wealth.
The demonstrators are, among other things, concerned about the price of sugar and fuel, as well as the impending implementation of new taxes.
Kenya’s cost of living pressure is proving to be more widespread and persistent than anticipated, with June’s inflation rate of 7.9 percent falling outside the government’s targeted range of 2.5 percent to 7.5 percent for the thirteenth consecutive month.
Due to Kenya’s reliance on agriculture dependent on rainfall, insufficient precipitation could derail Dr. Ruto’s plan to increase production by subsidizing farmers.
According to official data, Kenya’s food imports bill in the first quarter of the year reached Sh80,2 billion, virtually matching the Sh87.5 billion earned from food exports and jeopardizing the country’s status as a net food exporter.
This leaves Kenya vulnerable to the fluctuations of food prices, such as rice, wheat, and maize, on the import markets, with the potential for pressure on the foreign currency and ignored taxes in the form of importer tax exemptions.
In addition to cautioning against lethargic growth, banks also anticipate a decline in purchasing power following the implementation of the Finance Act.
Yvonne Mhango, chief economist and director of research at Equity Group asserts that the new tax measures indicate a tightening of fiscal policy, which, when combined with the current rise in interest rates, will reduce economic development.
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“A higher tax burden does result in less disposable income for households. Therefore, we anticipate a slowdown in expenditure, which has implications for GDP growth. In terms of businesses, this means a decline in retained earnings available for reinvestment, which will ultimately harm development prospects, as Ms. Mhango stated at a recent meeting with equity investors.
In response to the sustained increase in yields on T-bonds and T-bills, banks have increased their appetite for government paper.
For instance, a new five-year paper had a coupon rate of 16.84 percent, a rate that poses a risk for individuals and businesses seeking bank loans.
Commercial banks have increased their loan rates in tandem with the central bank rate, which is currently at 10.5% — the highest level in nearly seven years.
Mr. Gichinga anticipates that banks will focus more on the government at the expense of the private sector, where the ratio of non-performing loans reached a 16-year high of 14.9% in May.
He asserts that as interest rates on government paper rise, investors will eventually question whether the Treasury will be able to raise sufficient funds to pay them on time.
“Eventually, investors utilizing risk models will begin to wonder how the government will be able to raise revenue to service debt redemptions when the businesses tasked with doing so are struggling,” says Mr. Gichinga.
The government has had difficulty paying civil servants on time and releasing funds for other essential activities, such as running counties, paying pensions to retirees, and covering hospital expenses for National Health Insurance Fund (NHIF) insured individuals.
Kenya’s Economy on a Dangerous Slide
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