Beware the two red flashing economic lights

Kenya’s economic news was coloured by two interlinked issues last week: How the State is taking over from the private sector as the main driver of the economy and the ongoing debate about the bank interest rate capping.

The World Bank revealed that, in the past four years, the public sector’s contribution to gross domestic product (GDP) growth has more than doubled and, conversely, the private sector’s diminished.

The public sector’s contribution grew to 2.5 per cent whereas private enterprise’s declined from 1.1 per cent to 0.7 per cent in an economy that has been growing at 5 per cent-plus per annum.

The government stimulating the economy or nudging it in proactive directions is fine, especially if it uses the carrot — as opposed to stick — approach. A good example is in infrastructure-led growth.

CRUCIAL

This is a vital — indeed crucial — factor since Kenya is the regional economic hub. It is the major gateway to the fast-growing economies of Uganda and Rwanda. To keep its place, it must improve its overall transport and communications infrastructure — the ports, roads, railways, air traffic, cross-border points or any of the inter-related facilities.

Tanzania is improving the ports of Dar es salaam, Tanga and Bagamoyo. In short, we are facing increased competition.

The catch comes when we do it in the wrong way. We spend far too much money on overpriced projects with a disproportionately low return.

I have written often about the SGR project and have no problem at all with the overall concept; it’s the opaque way it was agreed on, the cost and now the staccato approach to it.

BORROWING

The government is borrowing heavily for such projects. Interest and loan repayments come out of our taxes and often result in more borrowing. The SGR project is a significant component of the increased government involvement in economic growth.

The increased government stake in our economic growth should obtain good value for money and not be helping to crowd out the private sector.

The most dynamic ingredient in our economic performance has been the entrepreneurial drive of the private sector. We have a rich mix of go-getters in the formal and informal sectors who drive the economy through thick and thin.

RESILIENCE

Observers often commend the resilience of this economy. Last year’s two elections and a severe, prolonged drought would debilitate an economy for a while but it is picking up, thanks to the private sector.

What it needs is a better operating environment. If it is only contributing around 10 per cent of economic growth, then something is wrong.

Anyone who has had to file iTax returns to KRA recently will know just how hard it is as their IT systems stop and start and stutter along. This all takes a disproportionate amount of the private sector’s time.

Another is the current regime of interest rates cap. Whatever the noble theory behind it, it has just not worked. It has actually denied working capital to many small and medium enterprises, the working ants of the economy, and had the opposite effect to its objective.

CREDIT

It is one of the causes of the economic slowdown last year and among the reasons it is not picking up faster this year.

The answer to the making credit cheaper is to create a more competitive environment amongst the lenders and have a stable macro and fiscal economic environment.

The rate caps must be amended or at least widened.

The government needs to have more carefully honed, focused and less infrastructure projects and brutally cut back on its extravagance and waste. It must also facilitate more dynamism in the private sector and stop crowding it out.

Mr Shaw is an economic and public policy analyst. [email protected]