XN Iraki, University of Nairobi
Kenya faces difficult times ahead because of pressure to pay debts, create jobs for the youth, offer improved services to citizens and uproot entrenched corruption.
The tough journey on the new path begins afresh with the appointment of a new cabinet which takes office after weeks of unrelenting protests by Kenya’s young population demanding better governance.
The protests were triggered by steep tax rises proposed in the 2024/25 Finance Bill 2024. Ensuing nationwide protests forced President William Ruto to withdraw the bill. This didn’t stop the protests and President Ruto subsequently fired his cabinet with a promise to address a growing list of demands.
Now in their second month, the protests have regularly shut down businesses in the Kenyan capital Nairobi.
They are disrupting supply chains and incomes of mostly informal sector business which accounts for about 32% of Kenya’s GDP. Many investors and tourists will also postpone their plans, denying the economy much needed stimulus.
The incoming Minister of Finance – working with parliament – must now deal with the aftermath of the now-withdrawn Finance Bill 2024 which sought to raise an additional KSh 302 billion. This is 7.5% of the country’s KSh3.992 trillion budget presented before parliament in mid-June.
Deep cuts in spending are already before parliament in a supplementary bill that will be considered in a climate of shrinking tax revenues.
I have studied several aspects of Kenya’s economy over the past decade. My view is the government faces the real prospect of missing its tax revenue target and may result in more borrowing and unpopular austerity measures.
The new treasury secretary, as the finance minister is known in Kenya, could respond in two ways.
First, he could find innovative and creative ways of raising tax revenue and creating new jobs. This might calm the Gen-Z storm.
Second is cutting government expenditure, which could trigger job losses and provoke more protests. This is accentuated by the feeling that current economic reforms including new or enhanced taxes are imposed by “outsiders”. Farther protests could trigger a government clampdown on freedoms and rights and could stifle the economy, given the direct link between freedoms and economic growth.
The funding gap
The failure to raise the extra 300 billion shillings could affect or even cripple some priority projects. Treasury’s room for manoeuvre could be further narrowed by calls to remove other unpopular taxes, including the affordable housing levy. The levy is calculated at 1.5% of the gross salary of an employee matched by a similar contribution by the employer. It also applies to business incomes. Added to this are calls to increase funding of universities and to stop further increases in the fuel price through increased road maintenance levy.
The government is under pressure to hire 46,000 junior secondary school teachers. The hiring of medical interns is till on course despite the funding crisis. In the farming sector, the government has committed to offset huge coffee and sugar sector debts owed by farmers and continue with fertiliser subsidies.
It has also promised to settle money owed to county government and increase funding to universities. All these are priority projects with political ramification as the clock ticks towards the 2027 election.
Government spending will be cut by 177 billion shillings and borrowing will rise by 164 billion shillings according to the supplementary budget. There are also plans to merge or dissolve 47 state corporations, reduce the number of advisers by 50% and cuts in non-essential travel by public officers. Budget lines for the president’s spouse and that of deputy have been removed.
In the meantime, Kenya is currently relying on the 2023 finance bill to collect taxes. The projected tax revenue stands at Ksh3.343.2 trillion, equivalent to 18.5% of GDP. There is a deficit of 3.3% of GDP, which is expected to rise with the shelving of the 2024 Finance Bill.
It’s unclear if some government employees will lose jobs. When Kenya last faced an economic crunch, the International Monetary Fund imposed preconditions that included a mass layoff of civil servants and state corporation workers.
It’s unlikely at any rate that scaling down of the government will be enough to reduce the budget deficit.
What happens next
I expect the government to continue borrowing to meet its spending – albeit at reduced levels. More government borrowing could raise interest rates and make credit access harder for the private sector and, by extension, slow down the economy.
But it’s not all gloom and doom. Kenya is in line to get concessional loans from the World Bank and other multilateral bodies. The willingness of bilateral donors to fund Kenya during times of crisis was attested to during the Covid-19 pandemic.
It is also within the government’s ability to start thinking beyond tax to economic reforms that will catalyse growth. How to make the country more attractive to investors and entrepreneurs should preoccupy the new treasury secretary. Deregulating the economy even further could unleash competition, innovation and growth.
This is key, given that value added tax is one of the core sources of public revenues in Kenya. It accounted for 24% of tax revenues generated in 2021 compared to 22% from personal incomes and 11% from corporate entities. If things return to normal and the government builds confidence in the economy, consumption will go up and raise more taxes. The extra taxes will depend on economic growth and consumer sentiments about the future.
Addressing the Gen-Z and other generations’ economic grievances and building more confidence in the economy will attract investors, expand existing businesses and create the jobs that are at the heart of Gen-Z demonstrations. Thinking long term, it seems Kenya must go through a renaissance, a rebirth in governance, leadership and even economics. I hope the question of where the government gets its revenue and its use will now overshadow politics.
XN Iraki, Professor, Faculty of Business and Management Sciences, University of Nairobi
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Source: The Conversation
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