BUDGET POINTS TO BIG TEST FOR GOVERNMENT

On Tuesday finance minister Matia Kasaija read his 2022/23, sh48trillion budget.

There were some highlights, like that the economy grew at 4.5 percent, faster than the previous year's 3.5 percent and is expected to grow at 6.5 percent in coming years. The dark clouds came in the way of the jump in inflation to 6.3 percent.

The Parish Development Model (PDM) has breathed some new life in our budgeting process -- the more than 10,000 parishes around the corner will each receive sh100m to support data collection, production and financial inclusion. It will be interesting to see which parishes or districts are able to execute the model better.

"In Kenya the devolution of government, a higher level of PDM, and now about a decade old has seen the capital city, Nairobi's share of GDP fall to about 25 percent from more than 50 percent a decade ago as a result of the regions deciding and executing on their development priorities. There has been a disparity of course, in execution, with the better regions seeing tangible developments in quality of social services and infrastructure.

The PDM may very well be the answer to how we can more equitably distribute the economic growth we have been enjoying over the last three decades, but whose benefits have really been concentrated among the urban elite.

The cynics will not be blamed for not giving it a chance, because of the failure of previous initiatives and because of endemic corruption in our society. They will be wrong in the first instance and the money may very well be with them in the second instance.

Comparing the PDM with past initiatives, is like comparing passion fruits and oranges. Previous initiatives were not well thought through and were really dead on arrival. The PDM on the other hand is well thought out beyond the finances committed to the project. Unlike other initiatives that focused only on dishing out cash, the structure and mechanisms for execution have been laid out.

Execution of the project will be hampered by corruption, but the hope is that when the people at the grassroots are clear about what is due to them and what it is for, they will be better able to hold the respective officials to account and ensure things are done. Government should consider also having a competition to see which parishes or districts utilise the funds best as a way to spur results.

"But the big test in the next financial year is how government responds to the rising inflation...

In October 2011 inflation peaked at 30 percent, the highest it had been since 19 years prior, in 1992. Government brought prices under control by being unflinching in its resolve to control money supply, even if it hurt the private sector, the hangover from which we are still paying for.

The inflation this time is a different animal. Unlike 2011 when it was a result mostly of  government campaign spending, regional food shortages also played a part. This time around government spending isn't an issue -- government spent less than it was projected to spend in the last budget, but external factors like rising oil prices,  supply disruptions caused by the Covid lockdowns and the Russia-Ukraine war are the major drivers of price increases not only here but all around the world.

When your inflation is internally generated by say, government printing money, to bring inflation under control you suck excess money out of the economy. The challenge with that is that it also puts the brakes on the economy, putting the brakes on the economy is the last thing we want to do now. Coming out of the Covid lockdown the natural response is to turn on the taps and let the money flow to let the economy recover.

But the current inflation is not being driven by excess money in circulation as explained above. And so sucking up excess liquidity is not going to be very useful especially as it would slow economic recovery...

In this case government will be crossing its fingers that the food harvests are good so that food inflation does not add itself to imported inflation.

But most importantly, government has to hang on to its resolve to maintain discipline in its spending, because if government loses the plot and starts printing shillings, inflation will run out of control and we can very well see a return to double digit inflation, which will set us back another few years.

Thankfully, unlike Kenya we have come out of the campaign season. In our eastern neighbour bowing to political pressure the government has done some questionable things, including providing a fuel subsidy, they have now been forced to lift because they can not afford it, expect a crazy jump in pump prices in Kenya after July 1st.

In Turkey the government hesitation to take the painful but much needed steps to bring prices increases under control last year has seen inflation jump to 70 percent -- this means prices are doubling every 12 months!

"It bears repeating, inflation not only has an immediate impact on our cost of living but also discourages saving or investment and encourages speculation, which in turn feeds the price increases. A vicious cycle that when it gets out of hand is hard, without much pain to rein it in.

There will be a lot of snake oil salesmen, suggesting all sort of remedies to the price increases, (they have already started), but the only solution in the current circumstances is for government to be doubly vigilante on how it spends as we wait for the international storm to wash over.