A nation hanging by the thread

Jubilee’s ‘borrow and let waste’ philosophy has the country in straits so dire we may soon find ourselves in a hole deeper than Greece’s in 2010

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By Shadrack Muyesu

The average Nairobian earns a paltry Sh10,000 per month. A third of this amount goes to house rent, transport takes a quarter of what remains and food, fees and related expenses squeeze into the rest. Clearly, it isn’t enough. To survive therefore, he juggles creditors – borrowing from one to pay off the other, spreading the risk between mama mboga, the kiosk fellow, the bank and mobile lenders. And when he has gone full circle, he simply vanishes.

It’s a terrible way to live life. With no insurance and nothing in terms of savings and investment, a small shock could push him over the cliff. The saddest bit is that this life offers no chance of development. A man’s productive years come and go with nothing to show of it. He lives, he dies, and he is buried, his only legacy being the sack load of debt which he passes onto his survivors.

That is how the Kenyan Republic survives. But unlike the Nairobian whose circumstance is simply the instruction of fate, her troubles are largely of her own design. She staggers because she doesn’t appreciate the logic of living within one’s means. 

You see, some years ago, we were poor, but we were happy. We accepted our situation and found ways of making do with the little we had. We owed, but not so much as to be unable to pay back. And even when we failed, our benefactors would excuse our negligence with the understanding that sometimes a poor man can simply lack the means to pay. We spent, but never lavishly because, after all, what does it take to run a small home? We ate full meals, not always because we had the money to buy food but because big brother in the West was always ready with help whenever we lacked. It was bad, but it was good.

Rebasing

The problems started in 2014, back the when we decided to change the definition of wealth. Keen on a big boy status and tired of following the long hard route to the fabled vision 2030, those with knowledge of these matters agreed to revise the formula and data of calculating the Republic’s Gross Domestic Product so as catapult development. At that time, they assured us that it was simply a more accurate way of capturing our economic situation. “Everyone is doing it” they said, “we have done it before and the results were superb. In fact we recommend that you do it every five years.” 

Suddenly we found ourselves several levels richer, closer to Greece, Spain and Turkey, and sharing a table with Jordan as a low-tier middle income economy. There is nothing wrong with rebasing. I mean, with new industries being created every day, a formula that acknowledges their contribution to the national basket can only be good. Unfortunately, rebasing also meant that we no longer qualified for the cheap loans and aid which fuel the sick countries of the world. Being rich, it was only fair we be treated as such henceforth, negotiating loans at the market rate and investing in luxuries that would justify our status. In short, we had grown to the level where we now despised tokens.

Infrastructure spending

There are things a man counts as wealth yet they do not mean money in the pocket. With rebasing, it is possible that the changes do not automatically translate into the wellbeing of the people. Take ICT, for instance, one of the new industries which was considered in the revaluation. The nexus between the price of unga and the right to information is hard to find. Others, like real estate, are actually lucrative in the short term. However, built on speculation, they later tumble down on the investor. The concept is easy to appreciate when you consider the vast number of beautiful homes on Riat Hills lacking buyers and the many office spaces countrywide lacking occupants. 

A man only ought to spend money he has. And if he borrows, he has to do so with a view to invest lest he ends up in the revolving door of ever-growing debt. Not us. It’s after we had our funds cut that we decided to spend the most. Where the idea was to invest in a project that would bring money and help catapult us to the next level, we wasted most of what had been borrowed on lavish projects that made little economic sense and lost the residue to corruption. What remained was the riddle of how to pay back our creditors. This time, defaulting wasn’t an option; after all, we were rich. 

I am a fan of roads, but they are only good when there are cars that can use them. Roads and railways are better when there is farm produce and natural resources to transport. It’s foolish to construct a beautiful highway in the heart of Baringo where the impoverished locals only use them as carpets to spread grain. 

Infrastructure investment is good in the long-term. Nevertheless, the only time such a route should be pursued is when a country is stable enough to spend money without suffering constraint in the short term. A significant portion of our budget has always been funded by debt. The difference between our debt pre-2014 and now is that while the former loans were often cheaper and had long grace periods, the current debt is normal – expensive and with a short payment window. You cannot use money from the latter to finance a project that will be profitable 20 years down the lane. 

The game of losses

As we speak, the country has just borrowed another Ksh210 billion from the international market, bringing our total debt value to figures above Sh5 trillion – or 57 percent of the country’s GDP. A third of it will be used to repay the first portion of the 2014 Eurobond due on June 24. The remaining will go towards plugging a Sh635 billion size hole in the 2019/20 budget.

Lest it be forgotten, this Eurobond we are servicing is the same one whose whereabouts of the proceeds remains a mystery (according to the Auditor General, 98 percent was either illegally spent or misappropriated). If you ask government, they will point to the Sh500 billion worth (in construction fees and illegal payments) Chinese owned and operated Standard Gauge Railway which is yet to make a profit and whose completion remains far behind schedule. Every month the railway swallows an excess of Sh1billion of taxpayers’ money in operation costs.

They will also point towards a Galana-Kulalu irrigation project that sank billions only to be abandoned; a beautiful highway in Baringo where the only traffic residents know is that of cattle; an ambitious programme to expand the pipeline network which has resulted in a Sh7 billion scandal at the ministry of Energy; or a similar programme at the Kenya Electricity Transmission Company Limited (Ketraco) where more than Sh6 billion was lost in illegal contracts, not to mention the procurement of defective transformers that cost Kenya Power some Sh4.5 billion in losses. 

We haven’t even discussed the Lake Turkana Wind Power Project where, after costing the taxpayer some Sh74 billion in construction and an extra Sh5 billion in fees, the firm could only realize 40 MW against the 310 MW that was promised back in 2015 when the project commenced. Yet, not to fret, whenever we think of the Jubilee Government in future, it’s the roads, the SGR and that picture UhuRuto in leaking yet electrified grass thatched mud hut that we shall remember. It’s a proud achievement.

Treasury CS Henry Rotich is the man at the centre of Jubilee’s planning and spending.

A house of cards

Amid all this, the World Bank Group assures us that the economy will grow by 5.7 percent. The good news doesn’t end there. Boosted by consumer spending and strong investor sentiment, the good numbers are likely to stretch into 2020, with growth expected to improve by a percentage point. Overall spending for 2019/20 will rise to Sh2.70 trillion up from Sh2.51 trillion for the year ending June. They should be good times. 

But they are not. For starters, the Sh2.70 trillion budget faces a deficit of Ksh600 billion which will have to be plugged by loans. And that’s assuming that the taxman, for the first time ever, achieves the ambitious targets Treasury has set for him. The government intends to borrow some Sh271.4 billion from the domestic market and the remainder from external sources. The latter portion is already home thanks to the latest Eurobond. Although this stabilises the cost of credit in the short term, it will have serious ramifications in the future.  

Now, domestically, Government will borrow from local banks through government bonds and treasury bills. Due to their low risk and other favourable terms, banks are more likely to lend money to government than they are to Wanjiku. This will drive the cost of credit upwards in the long-term leaving the common man heavily reliant on loans, with little to spend. Unable to spend, s/he cannot invest, translating to a reduction in overall production. Such a reduction translates into a greater budget deficit in the next financial year which in turn means that government will have to go back to the loan market, more desperate.

There are two ways to curb this menace. The first is to let the rules of demand and supply take their course: instead of pretending to be rich by cosmetically adjusting GDP, lets borrow less, accept a slowdown in growth and live within our means. Clearly, it’s not an option that is very popular with the masters in Nairobi. They say that this will hurt investor confidence. The second option is to reduce wastage and focus more of the Sh2.70 trillion on development – not fancy, vain development but on simple investments like agriculture that will bring money into the pockets of the people and boost export revenue in the short term. Another option, related to the first, is to simply exit the domestic market – for government to stop competing with Wanjiku for loans, allow her access to money and let her spend. Unfortunately, government isn’t keen on this option either.

Peppering the cracks

Calculation of GDP takes into account the market value of all the goods and services produced in a country within a certain financial period. Per Capita income on the other hand is the average income earned by individual citizens within the year. It is calculated by dividing the GDP by the country’s population. Unfortunately, none of these methods give a clear picture on the quality of life within the country or the distribution of wealth. GDP tells us the story of a few individuals thriving while the rest merely make up the numbers and wallow in abject poverty. This is the story of Kenya today, where less than 2 percent of the population own more wealth than the bottom 98 percent (more than 44 million people)

Of the Sh2.70 trillion recently released budget estimates, Sh1.1 trillion will be spent on servicing debt. This translates into about 60 percent of GDP. Less than half of what remains will go towards development – and not of the desirous kind. Virtually all of this development money will go towards financing President Uhuru Kenyatta’s Big 4 Agenda of manufacturing, affordable healthcare, affordable housing and food security. The first is really a waste of resources; affordable healthcare and housing, while important, are public utilities that do not have direct benefit on export revenue. Food security is perhaps the most urgent, economically viable project yet the one that is allocated the least resources. With interest rates not projected to drop any time soon, it is difficult to see where tomorrow’s money is going to come from. 

Be that as it may, the biggest threat to the Republic lies in the fact that more than Sh2 trillion or 72 percent of our total external debt is dollar calibrated. This poses a huge risk on the economy should the US currency strengthen significantly against the shilling. According to analysts at Morgan Stanley, the good news is that the Federal Reserve Bank is holding for now and its likely to stay that way or even fall as the Reserve seeks to fuel growth amidst a hostile trading environment. The bad news is that, with recent reports by Amana Capital and the IMF that the shilling is overvalued by 30 percent, the value of our debt could be significantly higher than we think. 

As we ponder reviewing the constitution to accommodate political interests, we should also think of ways of regulating government borrowing and expenditure. An honest discussion would one that contemplates a return of the regulatory mechanisms which existed under the Harmonised Draft Constitution and which members of parliament in their greed, ensured never appeared in the Constitution of Kenya 2010. But that won’t be so; we are too excitable to think about such things. For now, Providence sustains us, tomorrow, with a slight increase in oil prices, we could be staring at the fate of Greece.

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