KENYA’S CAUTIONARY TALE FOR UGANDA

My driver Stephen reflected the attitude of many Kenyans to the current rise in the cost of living in our eastern neighbour. He thought it had long gotten out of hand and could cause instability in the region’s biggest economy.

"In 2023 since the ascendance to the top job by President William Ruto, Kenyans have seen their cost of living soaring with the removal of fuel subsidies, increases in consumption taxes and fall of the Kenyan shilling to historical lows....

The Kenya shilling crossed the sh150 mark against the US dollar in October and peaked at kShs156 before Christmas.

But these are just the symptoms of even more fundamental weakness in the economy.

For example, that the export receipts were down in the 12 months up to October despite the shilling depreciating 19 percent during the period. A weaker shilling should see higher export earnings in Kenya shillings even if they just exported the same amount of goods as a comparable period in the past. The fact that export earnings suggests that the economies productivity is also falling.

It could not have come at a worse time. Next year the $2b Eurobond principle comes due at the end of June and they need all the hard currency they can lay their hands on.

So, it makes sense that the government is scrambling every which way it can to raise these funds, including overtures to the International Monetary Fund (IMF) to ease the pain.

The weakening shilling of course not helping matters as the shillings weakening added Ksh810b (sh19trillion) in interest payments in the year to October according to the Central Bank of Kenya (CBK).

How did they come to this? An ambitious infrastructure expansion first during the Mwai Kibaki presidency, which paved way for a questionable expansion drive during the time of Uhuru Kenyatta era, mostly funded by debt, is coming back to bite.

There are questions whether the $2b Eurobond, contracted in 2014, was actually used for its intended purpose, with reports that the proceeds found their way into private pockets.

Few can argue with paying for infrastructure development with debt. Infrastructure should ease doing business in an economy, leading to more taxes making it affordable to pay off the debt. But if the infrastructure developed does not come with an attendant increase in economic activity, then trouble begins.

The ambitious Standard Gauge Railway (SGR) which cost $3.6b and whose loan grace period expired in 2021 is putting great strain on the Kenya treasury, especially since revenues from the SGR operations have not yet caught up with costs.

Industry watchers have said the only way the project can have a chance of viability is if it is linked to Kampala and its rich hinterland. That has not happened as the project is in limbo, having stopped in Naivasha.

There are other things that are conspiring to stress the Kenyan economy – corruption being at the top, and now the bitter pill of economic restructuring has become inevitable.

"We were there in the 1980s and 1990s when revenues were anemic and loans were falling due left right and center. Increased taxes and liberalization of the economy helped us pull out, but the pain still traumatizes a generation....

We hear similar noises in Kenya from what was here then, with the arm chair commentators complaining that the economic moves the government is taking – raising taxes and restructuring the economy, were a sell out to the west.

The net sum of this contrary view, is that the Kenya government should continue with business as usual and somehow things will sort themselves out.

This kicking the tin down the road prescription was tried by the Uhuru government and means the pain of restructuring will be that more painful.

Kenya unlike us in the 1990s have a robust commercial sector and even if there are reports of massive capital flight, one should expect they will come through eventually. The key is the government, does it have the cojones to do what is needed to do or will it only tweak around the edges and hope for the best?

Do the necessary maybe politically expensive, but if they get down to it now maybe by the time of the next election in 2028, the economic pressures will have eased with the greater efficiencies created and the William Ruto adminstration may very well have been forgiven by then.

The current Uganda government cash squeeze, a result of a growing debt servicing bill – it jumped 50 percent to $722m in 2022 from $480m in 2021 and growing, is cause for concern. Thankfully our revenues continue to grow as do our export receipts. The hope is these will continue to grow despite the strain on the private sector, which government owes sh8trillion and shows little willingness to settle – in this budget sh200b was provided towards retiring this debt, but maybe a case of us burying our heads in the sand.

With our politics in transition, it is unlikely that the government can take the hard decisions, like it did in the 1990s to get the economy back on track. The trick is to not to dig ourselves into that hole or take the initiative in cutting down the cost of our public administration before someone comes along and forces us to do it.

Happy New Year!