Given that the 2027 General Election is already on the horizon, National Treasury Cabinet Secretary John Mbadi's strategies for macroeconomic stability in 2025 should factor in potential shocks as politicians make advance preparations for the elections.
Simply defined, macroeconomic stability refers to a state of the economy in which there are minimal fluctuations in fundamental indicators like inflation, interest rates and Gross Domestic Product (GDP) growth.
It is an indication of a balanced relationship between domestic demand, production, savings, investments, and the balance of payments. Macroeconomic stability ultimately creates a predictable environment for sustainable economic growth, thus cushioning the economy from large swings or crises.
The need for macroeconomic stability cannot be overemphasised. It encourages investors to commit their capital because of the confidence they have in the economy.
Equally, macroeconomic stability creates economic conditions that favour long-term growth. In addition, it reduces uncertainty, which alleviates the wait-and-see posture of investors as businesses and households can make informed decisions with less volatility in key economic variables.
A key activity that is likely to cause shocks in the Kenyan economy in the not-too-distant future is the August 2027 General Election. Highly competitive elections tend to introduce huge amounts of cash into the economy, which ultimately put strong upward pressure on inflation.
A surge in inflation causes prices of goods and services to spike. Where income levels remain constant, and disposable incomes are significantly constricted, consumers respond to inflationary trends by cutting down on non-essential consumption, and transferring some amounts to purchase essential goods and services. Consumers watch helplessly as their welfare is eroded by inflation.
Kenya is likely to see a repeat of the unprecedented macroeconomic instability of the dark years of 1992 and 1993. Kenya returned to multi-party democracy in December 1991 after about three decades of Kanu domination, and the opposition was allowed to participate in the elections held in December 1992. Kanu, upon realising that its stranglehold on power was being threatened by the marauding Forum for Restoration of Democracy (Ford), resorted to printing money to bribe voters.
By the time the elections were over, inflation had spiked to over 70 per cent, with prices of goods and services way beyond the reach of ordinary citizens. Basic requirements such as foodstuffs, healthcare, transport, clothing and education were simply unaffordable for most Kenyans. They were literally surviving by the skin of their teeth.
The inflation spiralled to the next elections in 1997, making Kenya’s situation desperate. The country lost its international creditworthiness, and was shunned by development partners and global financial institutions, including the World Bank and International Monetary Fund (IMF).
As the country achieved the dubious distinction of near-collapse, citizens literally struggled to remain financially afloat, with most of them becoming destitute.
It took the Narc administration under President Mwai Kibaki to revitalise the economy and return it to the global financial system, 10 years after the destabilising 1992 elections.
There is every sign that the 2027 presidential poll is going to be a cut-throat race. The drums of war are already beating from the Mount Kenya region due to a broken pre-election pact that President William Ruto and the Gikuyu, Embu and Meru Association (Gema) are said to have signed.
Owing to its proximity to power, unfettered access to state resources through crony capitalism and other channels for a whopping thirty five years, the Gema communities have the strongest financial muscle in the country. They will not hesitate to open their purses to reclaim the presidency.
The Ruto-led government is likely to respond to the Gema onslaught by printing currency notes to oil its campaign machinery. The result will probably be a repeat of the painful experience of post-1992 general elections.
Mr Mbadi has the duty to skilfully navigate this murky economic terrain that will soon confront him. To save the country from the bad experiences of the past, the CS has to draw the most potent strategies from his macroeconomic arsenal. The country cannot afford a sharp increase in volumes of money in circulation without a corresponding increase in production of goods and services.
One way to minimise the impact of the expected increase in the volume of money supply towards 2027 is to deliberately redirect substantial amounts from the national budget to the key productive sectors of the economy such as agriculture, manufacturing, tourism, services (including finance), and technology.
The objective of this strategy would be to not only grow the country’s GDP, but also strengthen the capacity of the economy to increase its production of goods and services to absorb the excess liquidity that is likely to be injected by politicians.
Such a strategy would have at least three benefits to the economy. First, it would provide more goods and services to the economy, thus enhancing the welfare of citizens.
Second, these being the largest contributors to the economy, and employing the most people in the country, strengthening them would create more jobs, and improve the country’s effective demand. Third, inflation would be maintained within reasonable levels.
Inflation is currently maintained at a reasonable level of below 3 per cent, although it is expected to grow slightly due to increased expenditures during the festive period of December and January. Stable prices are crucial for economic stability, as high inflation creates uncertainty for businesses and consumers.
Another aspect of the macroeconomic management that should have Mr Mbadi burn the midnight oil is the manner in which public debt has been handled over the years.
The Office of the Auditor-General (OAG) has repeatedly reported its frustration in trying to access the external debt register at the National Treasury, raising doubts about the exact amount of debt that Kenya owes its offshore lenders.
The OAG has gone further to point out that the absence of a debt register could be a pointer to a more disturbing possibility—that taxpayers have for years been repaying odious debts. Simply put, odious debts are sovereign debts that government officials obtain from development partners or lending institutions for budget support, but end up in private bank accounts, or debts that have already been repaid in full.
The OAG has repeatedly sounded the alarm that huge chunks of Kenya’s external debt could not be traced in the economy. So, it is possible that Kenyans are burdened with fictitious loan repayments that are lining people’s pockets.
In December 2023, Kenya overshot its previous Sh10 trillion debt ceiling. To remedy the situation and allow the government to obtain additional offshore financing for its ambitious budget, the National Assembly put aside the defined debt ceiling, and replaced it with a flexible debt anchor of 55 per cent of GDP. This act of imprudence by the National Assembly opened up the country to be saddled by additional offshore debts.
The danger that the National Assembly has put the country into is to allow the government, with its insatiable appetite for foreign funds, to borrow more and more. In the process, Kenya is likely to sink deeper and deeper into debt.
On August 23, 2024, S&P Global Ratings downgraded Kenya’s long-term sovereign credit rating to “B-” due to the country’s weaker fiscal and debt trajectory.
Kenya’s credit rating is now approaching junk territory, making it extremely difficult for the country to access offshore debt at concessionary interest rates.
By and large, the offshore debt options open to Kenya are very expensive syndicated loans that reflect the country’s perceived high risk of non-repayment of loans on schedule.
Equally critical is domestic borrowing, which often leads to high interest rates and “crowding out” of the private sector.
When interest rates on sovereign instruments such as treasury bills and bonds are higher than the interest rates that financial institutions can pay on deposits, the private sector is denied business as investors prefer to save their money with the government.
Fiscal policy and administration is another crucial area for Mr Mbadi to pay close attention to in 2025. Kenyans are already feeling overburdened with numerous taxes and levies. In fact, it was the rejection of the Finance Bill 202 by the Gen Z in June 2024 that gave Mr Mbadi his current job. It must, therefore, not be lost on him that the same Gen Z who gave him the job can take it away if he does not live up to the expectations of Kenyans by reducing their tax burden.
Yet, rather surprisingly, Kenya’s tax to GDP ratio, currently estimated at about 16.2 per cent, falls far below the Organization for Economic Cooperation and Development (OECD) recommended average of about 30 per cent. In essence, according to OECD, Kenya’s economy is capable of generating almost twice the amount of ordinary revenue (customs duty, corporation tax, personal income tax, value added tax and excise tax) that it currently does.
The fact that ordinary Kenyan taxpayers, whose taxes are collected at source, are already feeling the pinch of over-taxation can only mean that there is monumental undertaxation in other sectors of the economy.
To bring equity into the economy, Mr Mbadi must support the Kenya Revenue Authority’s capacity building intiatives to deter tax evasion and avoidance through information exchange, intelligence gathering, upskilling and making malfeasance expensive and painful.
In addition, Mr Mbadi must bring to an end budgeted corruption that gobbles up about one-third of Kenya’s national budget. A good approach would be to fully adopt the Zero-Based Budgeting (ZBB) method that requires the spending agency to justify every expense for a new period or year, starting from zero. ZBB is different from traditional budgeting, which uses historical spending patterns to prepare budgets.
Last but not least, Mr Mbadi must strive to introduce reasonable austerity measures that aim to curtail unnecessary public expenditures without compromising service delivery to citizens.
