A highly respected senior leader asked me midweek what I made of the economic numbers contained in the president’s speech during the 60-year republic celebrations.
Frankly, I responded, I had not listened to the speech, nor read it. But I had seen on the cover of a newspaper the claims of 5.6 per cent GDP growth, drop in inflation and containment of debt distress.
My quick answer was that I thought the speech writers must have cherry picked, focusing on any positive number they could find, cleverly placing it out of context.
Further, the reduction in inflation and economic growth are almost certainly the result of reduction in the price of vegetables, and recovery in agricultural output, both because of the generous rains we have received this year. But I promised to look a bit deeper.
I did not miss the independence-day celebrations for lack of patriotism. Rather, because of the abundance of it. I had spent the day with a team working with a client who has figured out trade facilitation. From warehousing to collateral management, and most of all, how to get it done without always using the hard to come by US dollars.
The team of ten comprised techies, trade guys, finance folks and logistics experts. As we worked through the day, nobody made any reference to the independence-day goings on. On reflection, I think we are all too jaded by the constant misrepresentation of facts, and outright untruths with which we are daily treated to by this regime, to care.
And having already written them off as economic managers, no one was interested in what they had to say. Instead, we focused on the trade innovation, an amazing story that I am eager to tell soon.
Back to the regime’s numbers, I went to verify.
The cost of living crisis is nowhere near resolution. Monthly inflation is following normal seasonal variations. It was 6.9 per cent in October, and 6.8 per cent in November. It was 6.8 per cent in September, 6.7 per cent in August, 7.3 per cent in July, 7.9 per cent in June, and 8 per cent in May. The reduction was because of lower food (particularly vegetables) prices. This happens every year on the onset of the long rains. Moreover, the sustained upward long-term trend of inflation has not changed. To claim victory over inflation is a long stretch, to say the least.
At any rate, if the regime was making progress in taming inflation, the Central Bank would not have raised the base rate by 2 per cent, the highest such increase since 2011. While announcing the increase on December 4, the CBK insisted that it was necessary in order to bring inflation under control.
On November 7, the regime announced yet another pending bills verification committee. You will recall that all counties and the national government had such committees four years ago. Further, the auditor general has carried out two audits in the last five years. The previous verification committees found that they were founded on legal quick sand. Where the auditor general had found bills ineligible for payment, how could an ad hoc committee rule otherwise?
The Treasury’s budget review shows that total pending bills were 567.5 billion shillings by end of June 2023, a 29.2 per cent increase from the previous year. More recent reports put the current figure at 794 billion shillings, most (80 per cent owed by the national government.
Pending bills have a debilitating effect on economic prospects. They are essentially an off the books deficit, only worse. They fuel nonperforming loans and staff layoff. They are contributing to the massive layoffs reported recently by the Federation of Kenya Employers (FKE). They result in firm bankruptcies. They did not feature in the rosy picture being painted last Tuesday.
Neither did the depreciation of the Kenya shilling. The CBK had at first tried to justify the rapid depreciation of the shilling as the market finding its right level, invoking a longstanding IMF argument that the shilling was overvalued. The argument has always been based on our persistent trade deficit. We import more than we export. However, the balance of payments is often positive. The investment flows and remittances are usually more than the trade deficit.
But after a 28 percent depreciation, even the CBK changed tune. The slide was now seen as undermining the “strong” fiscal consolidation efforts by government. Well in plain English, the external debt service has increased by the same magnitude that the shilling has fallen! The huge increase in the base rate to 12.5 per cent is in part an effort to stem the shilling’s depreciation. It is following a script from 2011, the last time the shilling was in such significant trouble. It remains to be seen if the medicine will work again.
Are we out of debt distress as the regime insisted? Certainly not! Debt distress is when the amount of debt service is increasing at a pace that strains your cash flow. It is also when the market is unwilling to finance you. This happens when they can see that your cash flow cannot support the borrowing you are asking for.
As is evident, and as the CS Treasury recently admitted before parliament, debt service is now equivalent to about 70 per cent of tax collections. And the depreciation of the shilling is making things worse. In addition, the rollover of domestic debt is taking place at higher interest rates.
As has generally been the case, the government was in the market this week to borrow Sh24 billion. The split of the offer was the normal Sh4 billion in 91 day, and Sh10 billion in each of six months and one-year treasury bills. The outcome followed the pattern firmly established over the last 12 months. The market prefers to lend to the government for the shortest period possible. Even with the high interest rate of 15.83 percent, the one-year bill attracted only 6.29 per cent subscription! Of the Sh10 billion it needed government could only raise Sh629 million.
To claim that we are out of debt distress is, quite literally, fiction.
