Mbadi has misread Kenya’s economic mess

Public interest was heavily focused on the Finance Minister, especially since this was the day when consumer price increases were announced and felt.

Today, nothing is surprising on Budget Day.

The dismantling of the command economy and the entire regime of price controls is one factor. However, the main reason the budget speech no longer delivers surprises is the new system established by the 2010 Constitution, which requires the Finance Minister to present all budget documents to the National Assembly by April.

The Budget Policy Statement was published many months ago, and the so-called MTEF (Medium-Term Expenditure Framework) process and “sector hearings” have also diminished the element of surprise in the annual budget speech.

As a reporter in those past days, you felt that Budget Day genuinely mattered because the speech was a key part of the nation’s economic management.

The Finance Minister would clearly outline spending and revenue-raising decisions that would be central to economic policy throughout the succeeding financial year.

The budget provided a clear roadmap of what the economic environment would look like in the following year.

Today, we are witnessing the erosion of the annual budget’s political and economic significance. Multiple unplanned supplementary budgets have disrupted predictability and forward planning in the budget process.

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Furthermore, the National Treasury retains the power to implement budget cuts and effect reallocations across ministry votes during the financial year.

The availability of cash flow also largely depends on the discretion of a small group of bureaucrats responsible for the timing and amounts of government disbursements, adding further unpredictability to budget execution.

Thus, Finance Cabinet Secretary (CS) John Mbadi was walking a tightrope as he presented this year’s annual budget on Thursday.

Essentially, he was crafting his plans in the context of serious economic challenges, including a substantial burden of external and domestic debt servicing, falling revenues, high expenditure demands, and restricted access to international capital markets.

Mr Mbadi had very few tools at his disposal to direct the economy as he deemed appropriate.

After last year’s protests over the Finance Bill, he had to write this year’s budget with a keen awareness of the widespread fear that his proposed measures might provoke negative reactions from the public. In his speech, he emphasized that the budget had been crafted with the objective of easing tax burdens on citizens.

How credible is this budget? Is it feasible for him to reduce the budget deficit to 2.7 percent in the medium term? The CS claimed that this year’s budget, for the first time, had reduced revenue projections to more realistic levels.

He noted that inflation was down, the budget deficit was decreasing, the exchange rate was stable, bank lending rates were trending downward, and the country’s foreign exchange reserves had reached an all-time high of $10 billion.

However, Mr Mbadi’s assessment of Kenya’s economic decline lacks credibility.

The reality is that, given the rising debt service obligations, economic management in the coming months will continue to involve desperate measures to avoid a sovereign debt default.

Expect more short-term measures in the new financial year, including delays in exchequer releases to county governments, arrears in pension payments, delays in exchequer releases to constitutional offices, and continued reliance on the Central Bank’s overdraft facility. Anticipate that the government will keep prioritising payments to foreign bondholders over domestic obligations.

We should also expect renewed activity and increased reliance on privatisation for quick fiscal revenues. Recently, officials have resorted to another desperate tactic for raising capital: pledging future revenues and cash flows to secure loans.

This was done a few months ago by securitising part of the petroleum fuel levy in a transaction arranged by Cairo-headquartered Afreximbank and the Trade Development Bank based in Bujumbura.

Currently, the plan is to execute another securitisation deal in which the government intends to pledge cash flows from the railway development fund to a consortium of lenders.

The funds will be used to finance the government’s portion of the SGR extension project, which is being implemented with a consortium of Chinese construction companies under a Public-Private Partnership deal.

The writer is a former Managing Editor for The EastAfrican.