Budget reflections 2009
We are not lost to the fact that this year’s budget was read in the backdrop of huge economic challenges arising from the 2007/8 post election violence, current severe drought and the global financial crisis. However some experts feel that we can still swing back on track.
KSP Economy and Business Team spoke to John Kiarie of Deloitte Consulting on the subject.
Kiarie says of the 2009 budget: “The most important feature of 2009 budget is the support for the country’s long term objectives by maintaining its allocation of resources to the three key long term economic development drivers; education, health and infrastructure.”
This was particularly important because in difficult times, it is easy to be derailed from the long term strategic goals to fulfill short term social and political demands.
Kiarie adds that the quality of economic planning needs to be improved in that some key trends do not seem to be built into the plans. He says the plan should incorporate trends occurring naturally such as those of rainfall. The country had poor rainfall in 2002/2003, then a relatively good 5 years. The plans in the last five years should therefore have taken into account these intervals of drought and prepare well for food requirements. “Emergency food buying derails the country’s stable economic growth,” he asserts.
Another concern in the budgeting process is that there is less focus on outcomes and the systematic appraisal of performance against desired goals. If these measures and processes were built into the plans, there would be more rigors in the management of the budget. From a corporate perspective, the government does not have an effective management accounting system and the budget remains largely a list of promises.
There is a feeling that the government’s bookkeeping has improved but the financial control mechanisms which include the annual audit of its activities leave a lot to be desired.
The Auditor General’s reports are concluded and tabled in parliament several years late. Currently the 2005/2006 audits have just been tabled long after a great number of those who incurred and authorized expenditure have left office. These audits are therefore not very useful as financial management and control tools.
The government accounting rules are also technically inadequate. Principles such as accrual accounting are not followed. This makes it virtually impossible to monitor actual expenditure as only what is paid for is included in actual expenditure…….
Kiarie adds, “The government will therefore naturally suffer the ‘pending bills disease’ with expenses incurred not being reported in the period the benefit is received. Again, in a country with such political competition, one regime may incur expenses to be paid by the next regime. Government liabilities cannot be accurately monitored. A lot of bills tend to be paid during the election year, perhaps to coincide with when favours are needed most, i.e. during elections.”
Asked by this writer his view on inequity as one of symptoms of economic management failures, Kiarie is of the view that there are structural initiatives that could have a huge impact on the distribution of incomes and possibly reverse the pressure brought about by everyone wanting to be in Nairobi when the city is finding it difficult to cope with the influx of people from around the country and even from war ravaged nations in the region. This has limited economic opportunities in many parts of the country particularly rural areas.
“The government should put resources into rural areas and other urban centers. The three most critical services are water, power and telecommunications. There is also a need to develop and operationalise a housing policy which will mobilize resources to build decent homes at a reasonable cost in rural area and other smaller towns. For the latter there is need to explore appropriate technologies so that these dwellings can be affordable.
Asked if financing and especially deficit financing is a barrier to the development of these facilities, his view is that there is nothing wrong in borrowing heavily to develop long term assets as long as there is solvency. Most emerging markets have used debt, both local and foreign, to develop infrastructure. “The payback is quick and visible in these countries, but in Kenya long term project planning and implementation is slow” Kiaries says.
One concern is that even where in principal it is agreed that Kenya can borrow from such institutions as the World Bank, projects are delayed by red tape within and increased by the various arms of government. As a result a project may take up to 21/2 years to plan. Implementing is another long wait, not to mention the increase in costs partly due to delays. “A road meant to take 2 years sometimes takes 5 years. By the end of such a period it is difficult to control quality and costs. It is no surprise therefore that a road that should have so many layers would end up so many layers less,” Kiarie says on a light note
Kiarie feels that Kenya has very good planning resources and some countries come here to adopt our plans, but not so the implementation and finishing of projects. “For better yield on projects the government should compliment the planning with real managers or implementers whose capabilities are in getting thing done fast and efficiently. If the yield is good, international lenders will be attracted to doing business with Kenya, making it easier to source finances for long term projects,” he concludes.
One way of financing the diverse local authorities is to go back to municipal bonds, which apparently used to be issued by Nairobi years ago. This would give councils access to long term funds for composite development of utilities and amenities in towns.
Currently councils have poor administratively capacity to handle this kind of financing. There is need for better governance in form of accountability and transparency.
With a proper management structure Councils can make use of long term capital that will enable them not only to increase capacity in services but also improve aesthetics. It will also enable them undertake long term assets projects such as housing, which in the short run can provide the much needed employment.
“Today there are cost effective technologies that could enable more people to access decent housing. Women have shown great capabilities in managing resources and a Women’s revolving fund for housing could transform the Kenyan landscape,” Kiarie says.
It is also possible to transform Kenya’s marginal areas. Kiarie gives the example of Phoenix Arizona….The dessert district has…….
He suggests that there are simple things that can be done to transform hardship areas. One is to provide utilities such as water so that pastoralists do not have to travel too far for it. Another is re-afforestation of these areas, or applying more innovative agricultural and new more productive technologies.
Kiarie regrets the growing poor work ethics in Kenya. He points out that Australia, a country of 20million people has a GDP of US$ 1 trillion.
“Many Kenyans are hard working people and there is no reason the country cannot achieve higher growth. The challenges are that the hard work has low yield resulting into low productivity. There are many inefficiencies in our work processes including corruption, limited technology and not working smart. Sometimes the processes are either unsuitable or ineffective,” he says.
Asked about the general attitude to work and productivity, Kiarie sounds a warning. He feels that Kenyans, when compared to many other countries, especially in recent days, have slipped to the bottom quarter of the pile. There are many cases where attitudes are not aligned to the service culture required in today’s business environment.
Another handicap is our national pre-occupation with politics. Kiarie’s view is that politics alone will not fix the economy. It is therefore important, he suggests, to keep our focus on the economic goals, even as we push for a more inclusive and accountable political system.
When did the rain start beating us? We asked him.
After independence we failed to invest in developing a strong social fabric. “It is not that India and China do not have corruption, but rather the strong social fabric which holds the society together even when things are difficult and corruption gnaws at it.
“Kenya will find it difficult to compete unless work ethics and work processes are adapted to the needs of a modern competitive economy. It is our historians and sociologists who have the biggest job now; to rebuild this social fabric,” Kiarie adds.
Asked about the destruction of the environment which has taken place in the recent past, Kiarie says that ‘indigenous’ societies had respect for the environment but the destruction of the environment has come in the modern era due to greed.
With such good plans why does Kenya not achieve the development goals it aspires?
“We have good planners. What we need now are good implementers, good finishers. These may have different skills in terms of human capital. We need who can make people work towards the goals in the plans. There will be numerous barriers. These people must be able to navigate through these barriers. They must be ready to make enemies with those who stand in the way of the broader national goals. That is how people like John Michuki have gone about getting things done in their ministries. In the beginning people find it hard but with time they see their good work.
Asked about the endemic corruption in the country, Kiarie insists that people must not steal from their country. “After all a ‘good’ thief does not steal from his mother’s house. There is visible nationalism in countries that are doing better such as South Korea, Botswana, Brazil and Mexico and certainly less stealing by their leaders,” he concludes.
Outlook for business
On the economic outlook, Kiarie says: The economy has changed a lot. “Competition is closing in and knowledge alone is insufficient in giving that edge.”
He adds that an important component of human capital will be risk taking, college graduates are not always shaped for the needs of a dynamic business environment.
“Businesses must therefore challenge themselves. Graduates need to have good attitudes and behaviour and still be ‘street’ smart enough to handle a rather rough business environment (and of course professionals are there to help you)
What missed the headlines
Agreeing to disagree, a political score
The quiet that accompanied the reading of the budget speech may suggest that Finance Minister Uhuru Kenyatta succeeded in his debut presentation. There were some pleasant matters such as the usual tax increases were absent. The added devolution of some funds to the constituency level was another positive surprise. The reaction may indicate one of the rare occasions that the coalition governments has received approval hence a political score.
Kenya closed 2007/8 with a growth rate of 7.1% and 2008/2009 with 1.7%. There was reason to hope that political bickering will not interfere with the plans because with the effect of the global recession hot on our heels lack of unity could completely derail the plans.
Better news in developing economies
There was a bit of good news however. “Despite this, East Africa has managed a solid, if unspectacular year…Kenya, Uganda and Tanzania all registered reasonable growth,” says Deloitte’s commentary on the region’s outlook. The top Accounting firm is of the view that the rapid growth in the region will (continue to) open up investment opportunities.
This view seems to be supported by some Chief Executives. Diageo’s CEO, the company that controls the majority shareholding of local industrial giant East African Breweries had some positive view of developing world markets. The company is celebrating the rather better market conditions in Africa, South America and Asia.
Be ware of the recession Tsunami
However the strong decline in exports and tourism due to fear of the recession in Europe and the USA may have a serious delayed effect on the economies in these regions as well. In addition to preparing for these outcomes, Kenya should not overlook the serious underlying socio-political issues which caused the election violence at the end of 2007 and beginning of 2008, if it is to survive the global economic and local political woos.
Keeping enterprises alive
Governments around the world are pumping money in their economies. Kenya is doing the same in its own small way. Although perhaps there is little else they can do planners are aware of possible economic downturns associated with too much government spending.
There will also be the tendency to hold back expenditure due to the slow down of the economy. Holding back planned investments may be counter productive in that it will hurt the already constrained demand. Business is about innovation and taking risks. There is the need to ensure that the productive side of the economy receives appropriate stimulus. Government should therefore reassure investors through communication and facilitation to ensure there is no hesitation to carry through investment plans.
If there is the kind of confidence suggested by some leading consultants investors should not to hold back their plans. Instead they will take appropriate business risks. All the same our planners should pre-empt the delayed effect of low demand and expenditure from the rest of the world and prepare appropriate intervention.
The hardships in agriculture, the most important of the productive sectors is evident. The formerly beautiful landscapes in some parts of the Rift Valley and numerous other parts of the country are now scotched by the drought and littered by homesteads burned out during post election violence. These sights are a shame to a country with a visionary 20 year plan and one that is currently rolling out country branding plans including international advertising of its magnificent tourist sites. Uhuru’s budget remained shy on the intervention in agriculture but hopefully, he and his colleagues will rethink the matter.
Devolution; the devil in the detail
The budget tries to address devolution by distributing more funds down to the constituency level through CDF. This is a good beginning. However, it presents a number of challenges. First there is no assurance that the frequent complaints about poor accountability have been addressed. Secondly the quality of work done at constituency level is wanting.
The country is in no state to waste the billions of shillings rolled out in devolved funds and the minister should with the help of professional institutions rush through the necessary management and control mechanisms to ensure that the public gets value for money. The constituency management should be strengthened to create a system that will deliver value. It should stand the test for accountability and probity.
Due to political, social and economic issues around the country, there is a rush by thousands of people to settle in Nairobi and its satellite towns. As a result the city is eating the rest of the country and turning itself into a human settlement mess.
Rather than looking up to central government and Nairobi as the answer to all problems, things should be such that constituencies look up to them for facilitation.
Devolution may have attempted to reverse this phenomenon. However it should be accompanied by adequate resources and a total change of attitude so that there is relatively balanced development throughout the country. Perhaps it is time each government department’s issues were handled at the new district or constituency level and ministry headquarters are shared by different towns in the country.
And how pleasant is it to live in a Kenyan town outside Nairobi? These towns, most of them road side markets are a mess to behold. Besides the mud and filth, they have clustered around the highways and railways in dangerous ways causing accidents and inconveniences.
There are very few people who would like to settle there.
There is need also to enforce planning and management regulations, raise standards of security, cleanliness and pleasantness. This could help upgrade these towns to make them attractive for settlement and investment. This could reduce congestion in Nairobi.
It is also time to consider local fund raising for the development of municipalities. There is no harm in going back to the days of municipal bonds and have them guaranteed by government. If the money is used to improve the towns pay back for these bonds will be a matter of a few years. This view is supported by experts John Kiarie of Deloitte and Ally Khan of Satchu…..who quips: “Anyone would be foolish not to buy bonds in Africa.”
Kenya has great potential for trade. The private sector has numerous initiatives increasing trade in the region, but there is little attention from government to the specific development of this sector. Uhuru’s budget should have considered the establishment of an inter-ministerial committee that could draw membership from private sector with a specific objective to seek new opportunities.
The 2009 budget allocated sh140 billion to infrastructure. This looks like a commendable move but this is still short of the numerous needs the country has. It would be helpful for government to explore new funding models such as concessioning major roads to significantly expand infrastructure development capacity. In addition there is need to improve on the speed of rolling out the funds to increase absorption of allocated funds. Hopefully the minister will be looking at these areas in the near future.
The minister was generous on tax allowances for new investments and to the disabled. Some of the notable investment incentives are the now 150% deduction for investment (buildings and machinery) in satellite towns adjoining Nairobi, Mombasa and Kisumu. For all other locations the investment deduction will be 100%. These new rates were made applicable from 12th June 2009.
Filming equipment will now attract a 100% investment deduction. This hopefully is the beginning of a positive view in the industry. In future however a lot more will be needed so as to stimulate the sector sufficiently for it h to realize its potential.
The disabled will be allowed an income of Ksh150,000 tax free per month and an additional Ksh50 000 on health care services. It is not very clear what the minister had in mind. Perhaps that will be clear when the rules on this are gazetted.
Back door borrowing
Treasury intends to legislate that funds set up from statutory deductions can only be invested in government securities. The proposal, it is argued, is to stop the funds being invested in dubious ways.
This would however limit the fund managers from exploring the investments with the best returns. With the government running huge deficits this may be a way of accessing pension funds for own financing rather than a sincere move to safeguard social security funds. Some analysts have already suggested that it could be backdoor borrowing.
Hopefully there will be adequate debate over the matter.
Fiscal management; Late audit reports
Finally, fiscal management is far from perfect. Currently the watchdog, the Auditor General’s reports are tabled at least three years after the fact. How can the government possibly manage finances when financial impropriety is reported to parliament three to four years after the act? In a company, some of those ‘weaknesses’ reported in parliament this July are reason to overhaul any institutions, people included.
The government should treat the lull in public outcry as an opportunity to overhaul the whole fiscal management process. Perhaps they could use a benchmark. New Zealand is suggested as one.
2009 political economy review
From the 1980s, the Kenya’s economy performed below its potential due to various reasons among them the structural adjustment programs and political failures. Less prominent but just as damaging was obsolescence arising from poor response to the economic needs of a changing world. This is a world which became less and less sympathetic to the world’s poor nations. Population explosion, perhaps arising from the improved health care in the first decade after independence also meant that traditional economic means were becoming more and more inadequate.
The weak economic performance has brought with it high incidence of poverty with low savings and investments. Per capita income in constant 1982 prices for example declined from US$271 in 1990 to US$239 in 2002; instead of rising. Unemployment doubled increasing from 7 per cent in… to 14.6 per cent of the labour force, with the youth accounting for 45 percent of the total. In addition there is a staggering number of working poor which is normally a sign of economic decay. This has brought serious threat to social and political stability.
The confidence that brought us to a growth rate of 7.1% in 2006/7 was destroyed in the short period of post election violence (PEV) in 2007/2008. PEV brought us face to face with the socio-political issues underlying the evolving Kenyan society. It served as a resounding reminder of the urgency of a new political economy direction. Hopefully however we have taken some lessons from the folly of these events. Did the minister address these issues?
Key political economy issues
Unemployment is at upwards of 14.6 % of which 45% are the Youth and almost 50% of the school leavers not being absorbed in the economic system is like an avalanche and the huge number of working poor is political quick sand.
This has arisen from the small size of the economy and poor skilling. Disillusionment and freedoms existing as part of the chaotic democracy have also created uncertainty, lack of faith and a generally negative attitude. A major source of these handicaps is the school system which includes universities. Yes, we have a decent literacy level but the teaching fails in creating a civil culture. It also does not link knowledge to the socio-economic needs effectively. As a result large sections of Kenyan communities have found
themselves marginalized, unable to compete for the few opportunities and unprepared to create new ones.
There are glaring signs of these challenges in the growing crime culture, the general tolerance of lawlessness and greed. There is a sweeping don’t care attitude and hunger for danger such as exposing ones self to danger especially among the youth. No wonder siphoning fuel from petrol tankers is a vocation for many, knowing very well of the imminent danger especially after watching 120 people burn in a related incident recently.
There is a growing negative attitude to effort with many people having learned to blame government and others for their predicament. There is also a precipitation of anger and contempt to authority such as of Government plus a loathsome attitude towards each other.
Political Economy Direction
The suggested policy thrust for Kenya should be to get the economy growing again at rates above 7% whereby the growth will start being experienced at lower levels of income. The policy should continue addressing the fundamentals through a structural review in order to lay a foundation for stronger and long term growth without inequity.
Economic growth cannot be very useful in an environment of fear and hate. Therefore, while keeping an eye on the underlying real economy, policy should address the current, still explosive social-political issues, such as the youth, inequality, security and the environment. The marginalization and attitude problem is core and urgent one. It cannot be resolved without direct intervention.
Direct, purposeful and active engagement of the different classes of people in Kenya’s society is necessary . Perhaps it is time to use our anthropologists, sociologists, psychologists and other ‘logists’ who are often left out of economic development models. Failing this Kenya faces a difficult time ahead.