Worrying state of economy as post-poll season concern rises

What is the state of the economy as we go into the controversial presidential election on Thursday? Controversial because in civilised societies, elections usually take societies through a catharsis - a course of emotional cleansing and healing. After elections, political temperatures are expected come down.

Confidence among economic actors is restored and kind of nervousness that has recently caused investors at the Nairobi Securities Exchange to lose billions of shillings in value, is calmed.

Theoretically, widespread fear and trembling in money markets that has recently seen our currency face intense pressure is expected to ease after successful elections.

The big question we must ask ourselves as we approach this election is: What is post-election Kenya likely to look like in terms of political temperatures, ethnic polarisation, and intensity of conflict within the political elites?

VOLATILITY

What must we do to graduate from the ranks of failed states that invariably go through violence and  extreme economic volatility and instability at every electoral cycle, and whose economies must plunge into recession after every general election? 

This society craves for the politics of compromise, inclusion, cooperation and proportionality in the allocation of resources? Will these elections help us to achieve these values? I can’t claim to have the answers.

What is clear to me, however, is that we are approaching the election at a time when our economy is dithering towards a downturn.

The first sign of hard times is the state of the finances of the government. Looking at the numbers in the recently published supplementary budget, it is clear that the National Treasury is overstretched as it has never been in 10 years.

Financial management has been reduced to a cut-and-paste job with the Treasury juggling to deal with huge and persistent pending bills, ballooning wages, burgeoning debt service obligations and recurrence of large unbudgeted expenditure.

TREASURY

Because of the collective bargaining agreements the signed with doctors and teachers, the Treasury is now spending 33.7 per cent of the revenues collected by the Kenya Revenue Authority paying salaries of civil servants.

The budget for debt service in this financial year has ballooned to Sh58 billion. When you add this to the budget for domestic debt service, at Sh212 billion, you begin to appreciate that the government in the middle of a crippling recurrent costs financing crisis.

How about revenues? With the depressed economic conditions, revenue targets will not be met this year.  

Forget what they and their cheerleaders from Washington tell you about how our economy is likely register high growth.

It is clear, for instance, that KRA is not likely to meet its targets going by trends we have been observing in the private sector, including declining profitability by firms, an upsurge in number that have issued profit warnings, and widespread distress in the retail sector as demonstrated by the predicament of Nakumatt and Uchumi supermarkets.

TAX TARGETS

But what might hit KRA income tax targets hardest are collections from the banking sector. The evidence from recently published financial statements of banks show clearly that the banking sector has significantly been affected by the general decline of economic activity.

And, with the banking sector accounting for 40 per cent of corporate taxes, income tax remittances are likely to be adversely affected by weak performance of the sector. 

Indeed, commercial banks are the reason why April is the single largest revenue month for the KRA.

Income tax was supposed to be the key driver of high revenue tax collections in this financial year. Tax exemptions for the infrastructure project such as SGR will also hit revenues. And, following the recent decision by the government to allow duty-free imports of massive amounts of sugar, maize, milk and other food commodities.

VICIOUS CYCLE

Clearly, we are in vicious cycle.  As we saw in the supplementary budget numbers, the National Treasury responded to the hard times by adopting the lazy option of cutting the development budget.

Indeed, the highlight of the supplementary budget was a massive Sh30.6 billion cut in the development budget.

Yet under the PFM Act, ceilings of development expenditure that have been approved by parliament shall be binding for the next two years.

How I hope that there will come when elections in this country will one day be able to deliver to this country honest public officials, transparent decision-making, effective administration and the rule of law that protects human rights and private property- and respect for the sanctity of contracts.

[email protected]