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DEBT AND TAXES: Kenya is living large on borrowed money

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DEBT AND TAXES: Kenya is living large on borrowed money
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Kenya’s fiscal policy – the means by which the government adjusts its spending levels, revenue generation and collection, and debt to monitor and influence the economy- has been a defining feature of the current administration. The three have been characterised by almost consistent features and trends.

Some background information is useful. Kenya has had an annual growth rate of about 5.46 percent from 2004 until 2016. Initially, the economy was slated to grow at around 6 percent in 2017 but this has since been revised to 5 percent. According to Genghis Capital, it will actually be between 4.25- 4.75 percent due to the drought-induced contraction in agriculture, the negative effects of the interest rate cap on the financial sector and the prolonged electioneering period. The Government thinks the economy will grow by over 6 percent next year though the World Bank projects a lower rebound to 5.8 percent in 2018 and 6.1 percent in 2019.

Kenya’s economy is primarily services driven and according to the Kenya National Bureau of Statistics (KNBS), under the Kenyatta administration, growth has largely been on the back of government spending on infrastructure projects such as the Standard Gauge Railway (SGR), the expansion of the road network as well as electricity generation and transmission projects. Other significant contributors to growth include a resurgent tourism industry and growth in information and communication, real estate and transport and storage.

Over the past 6 years, government spending has grown at an average of 14.7 percent, yet revenue growth has only increased by 12.7 percent. Under the current administration, spending has gone up by two-thirds, from Sh1.6 trillion in 2013/14 to Sh2.64 trillion in 2017/18.

Back to fiscal policy, we will address each component separately: expenditure, revenue generation and collection, and borrowing.

EXPENDITURE

Over the past 6 years, government spending has grown at an average of 14.7 percent, yet revenue growth has only increased by 12.7 percent. Under the current administration, spending has gone up by two-thirds, from Sh1.6 trillion in 2013/14 to Sh2.64 trillion in 2017/18. While some of this can be explained by inflation reducing the value of money, there is a consistent trend of notable increases in government spending.

Public spending as a % of GDP

(Source: Institute of Economic Affairs)

 

A fundamental problem in analysing fiscal policy at both national and county levels is determining the intended recurrent vs development budgets and comparing these to the actual expenditure pattern. The image below from the Institute of Economic Affairs Kenya (IEA) details this for the National Government:

Share of Recurrent and Development Budgets in Total MDA Budget.
(Source: Institute of Economic Affairs)

Overall, two key trends are clear, the first of which is that the national budget is still geared towards recurrent spending. Indeed, as the Treasury itself has admitted in the past, recurrent expenditure is reaching unsustainable levels.

There are several factors behind this aggressive growth in expenditure, the first of which is devolution. In 2010 Kenyans enacted a new constitution, which established a bicameral Parliament and 47 county governments. At the beginning of the implementation of devolution, a parliamentary report indicated that it would cost at least Sh36 billion to set up. Prior to devolution, it cost Sh6.6 billion per year to run Parliament, but that figure is expected to rise to Sh14.3 billion. The Parliamentary Budget Office has also stated that it will cost Sh21.75 billion annually to run the 47 county assemblies. Thus, while welcome, the reality is that devolution is expensive.

At the beginning of the implementation of devolution, a parliamentary report indicated that it would cost at least Sh36 billion to set up. Prior to devolution it cost Sh6.6 billion per year to run Parliament, but that figure is expected to rise to Sh14.3 billion. The Parliamentary Budget Office has also stated that it will cost Sh21.75 billion annually to run the 47 county assemblies. Thus while welcome, the reality is that devolution is expensive.

Linked to the point above is the public wage bill which, according to the Salaries and Remuneration Commission (SRC), has ballooned from Sh465 billion when the Kenyatta administration took over to Sh627 billion in the 2015/2016 financial year, an annual average growth of 9 per cent. SRC’s projections show that it will be Sh676 billion in 2016/2017. Earlier this year, the International Monetary Fund (IMF) raised concerns, stating that Kenya is among countries that exhibit large increases in the wage bill, particularly in the run-up to elections. IMF is of the view that given Kenya’s rising debt levels (more on this later) the decision to increase spending on public sector wages is a concern as less funds are left over for economically productive development expenditure. The SRC pooh-poohed the IMF’s concerns, stating that wages were actually falling as a proportion of GDP: from 10.3 per cent in 2012/2013 to 9.5 per cent in 2015/2016.

A second factor behind the growth in expenditure, which the government has been eager to finger as the primary reason, has been the investment in infrastructure. According to the Capital Markets Authority (CMA), Kenya’s current estimated infrastructure funding gap is USD 2-3 billion per year over the next 10 years. To address this, government has allocated nearly a third of total budget expenditure to infrastructure between the 2016/17 and 2019/20 financial years.

The World Bank makes the point that the infrastructure investment drive in Kenya needs to be done in a way that is both efficient and sustainable. With such a robust commitment, key questions must be asked. For example, is Kenya investing in the right infrastructure? The Brookings Institution makes the point that a push for more infrastructure only raises economic growth and people’s well-being if the focus is on quality and impact, rather than quantity and volume. Has Kenya fallen short here? Has the government conducted an audit of infrastructure investment and the development it has engendered thus far? Has there been an audit of its quality? How efficient is our investment? Without an answer to these questions, the country risks wasting resources on aggressive infrastructure expenditure that generates no real benefits for its people.

Indeed, the link between infrastructure and economic growth is more tenuous than previously assumed. According to the London School of Economics, most recent studies on infrastructure’s contribution to growth tend to find smaller effects than those reported in earlier studies; this is linked to improvements in methodological approaches. Kenya, therefore, shouldn’t assume that infrastructure investment and development will automatically lead to significant improvements in economic growth. It is time for a fundamental rethink of the scale, nature and efficiency of the government’s spending on infrastructure.

Kenya, therefore, shouldn’t assume that infrastructure investment and development will automatically lead to significant improvements in economic growth. It is time for a fundamental rethink of the scale, nature and efficiency of the government’s spending on infrastructure.

The final issue regarding expenditure is linked to the mismanagement of public funds at both national and county levels. At the national level, allegations of corruption and financial mismanagement are legion and include: the National Youth Service (NYS) affair where the Auditor General stated a loss of Sh1.9 billion; Sh5.2 billion misappropriated at the Ministry of health according to an in-house audit report; mobile clinics valued at Sh1.4 million each being sold to the government at more than 7 times the price then abandoned in an NYS yard; inflated rig charges at the Geothermal Development Company (GDC) in which the Ethics and Anti-Corruption Commission (EACC) found the tender committee culpable and six managers were sent on compulsory leave.

At county level, there are rising concerns with expenditure considering that the national government has sent to the counties more than Sh1 trillion since their establishment in 2013. Research by the International Budget Partnership Kenya (IBPK) reveals that county governments are not making available fiscal documents required by the Public Financial Management Act (PFMA). Only about 20 percent of key budget documents, including fiscal expenditure documents, meant to be online had been uploaded. Indeed, IBPK reports that in some cases, budget allocations are based on lists of projects drawn up by Members of County Assemblies (MCAs). There is no clarity on the criteria governing such allocations, and even less clarity on how county funds are actually spent. There is a distinct air of mischief informing this laxity. It is not a secret that the first iteration of devolution revealed how much autonomy county governments have in the planning and use of funds they receive and generate. This lack of transparency seems to be aimed at facilitating a culture of financial mismanagement and corruption at the county level in an environment where, frankly, no one is holding them accountable.

Further, county governments see themselves as expenditure units, not development units. This needs to change. Rather than concentrating on how much they have to spend, they ought to focus on the development dividends they are responsible for generating. Without this fundamental shift in thinking, county governments will continue to be like spoilt children, forever crying over what they are owed, but with nothing to show for the development they ought to deliver.

For example, 16 firms listed on the Nairobi Stock Exchange issued profit warnings in 2016, which meant less corporation tax could be collected. Additionally, the 7000 jobs lost to downsizing and shuttering of firms, mainly in the banking sector, reduced Pay As You Earn receipts.

The greatest concern beyond the moral question of the financial mismanagement of the public funds of a poor African country, is the issue of how corruption affects spending efficiency. As will be explained later, Kenya is getting into significant debt, particularly to finance development expenditure. If such debt is not being used as efficiently as possible and instead funds are stolen or dubiously spent, the country will be saddled with onerous debt without he means – the improvements in economic performance that were to come from debt financed development projects – to pay it.

Given the factors detailed above, there are several broad changes that ought to be made. At national level, the first recommendation is for government to commit more money to development expenditure and put more effort into actually absorbing the allocations given to the docket.

Secondly, the national government ought to be more consistent in the manner in which it presents data and should make it easier to track planned versus actual expenditure, particularly across the recurrent and development dockets.

Thirdly, large allocations to infrastructure projects need to be audited and a determination made on the effectiveness of the allocations, how funds can be better spent and recommendations on how to improve efficiency.

Finally, national government has to clamp down on financial mismanagement and prosecute and punish culpable officials. Without this, the government’s commitment to ending corruption will be seen as insincere and ineffective.

At county level, there are several issues that ought to be addressed the first of which is that there needs to be a very clear hierarchy of accountability for county expenditure. Governors and the County Ministers of Finance must be held accountable for their spending and individuals need to be punished if found guilty of corruption.

Secondly, counties must comply with the PFMA and provide breakdowns of their expenditure which includes a delineation between recurrent and development expenditure.

Thirdly, the principle of fiscal discipline should carry considerable weight when national government makes county allocations such that responsible use of resources is rewarded and poor performers are punished.

Finally, a citizen-led effort to create a ranking of county governments according to fiscal transparency with a focus on expenditure would likely create pressure on county governments to adhere to their legal obligations. Included in the ranking should be how well they comply with PFMA stipulations, with the top and bottom performers widely publicised.

REVENUE GENERATION AND COLLECTION

Kenya Revenue Authority (KRA) has been falling short of its revenue targets for some time. For example, in 2016/17 total collection stood at Sh1.365 trillion representing a performance rate of 95.4 percent, and a shortfall of Sh66.64 billion- a significant number. In the first four months of this fiscal year, KRA has already fallen behind by Sh40 billion. There are questions as to why revenue collection consistently underperforms. I am of the view that KRA is given unrealistic targets, more informed by aggressive increases in government expenditure and oblivious to the serious constraints that mute tax collection.

Without this fundamental shift in thinking, county governments will continue to be like spoilt children, forever crying over what they are owed, but with nothing to show for the development they ought to deliver.

Revenue generation targets tend to be revised upwards over the course of the year. KRA’s original revenue target for the 2016/17 was Sh1.415 trillion which was later revised to Sh1.431 trillion, an increase of KES 16.24 billion. This is a concern because motivations behind the increases in targets are not clear. Do they perhaps stem from a realisation in Treasury that it cannot raise as much as anticipated in borrowing?

The second constraint is that the macroeconomic environment informs the extent to which revenues deviate from targets. For example, it is estimated that a 1 percent reduction in GDP growth reduces revenue by Sh13.4 billion and as noted earlier, this has been something of a tough year. A similar increase in inflation also requires that revenue targets be raised by Sh13 billion.

This is linked to sectoral issues which can affect the ability of KRA to collect tax. For example, 16 firms listed on the Nairobi Stock Exchange issued profit warnings in 2016 –a rising trend since 2013– which meant less corporation tax could be collected. Additionally, the 7000 jobs lost to downsizing and shuttering of firms, mainly in the banking sector, reduced Pay As You Earn receipts.

Third, government policy decisions, particularly those related to tax policy, affect the ability to generate revenue. For example, the non-implementation of changes to specific excise rates in 2016/17 reduced revenues by nearly Sh5 billion. Additionally, the duty-free importation of essential foods (maize, milk, sugar) led to a revenue loss of over Sh4 billion in the fourth quarter of the same financial year. Indeed, it is estimated that government policy decisions cost it Sh13 billion in lost revenue that entire year. The government tends to shoot itself in the foot in other ways too. For example, delays in remitting income tax from public institutions costs it Sh823 million.

Finally, revenue generation and collection in Kenya like the rest of Africa is negatively affected by illicit financial flows from the country. According to the UN, Africa loses more than US$50 billion through illicit financial outflows per year. Companies evade and avoid tax by shifting profits to low tax locations, claiming large allowable deductions, carrying losses forward indefinitely, and using transfer pricing.

The main reason why consistent subpar revenue collection is worrying is because the national treasury continues to construct budgets based on the unrealistic targets. For example, revenue generated was meant to play a bigger role in the current budget, financing 60.7 percent of the overall deficit and 58.7 percent of the development expenditure. Since it appears as though targets will again not be met, government will have to borrow more than anticipated.

 

There ought to be fundamental rethink of revenue generation and collection in order to effect a sustained increase. There are several factors to address, the first of which is improvements in the business environment that increase profits and thus taxable revenue. A key component that is often ignored here is the environment for the informal economy. Current assessments largely ignore the sector in which 90 percent of employed Kenyans earn a living. More ought to be done to make informal businesses more profitable.

At the same time, the government ought to seek to expand the revenue base by encouraging the formalisation of these businesses. Concerted efforts must be undertaken to pilot schemes that remove barriers to – and create incentives for – formalisation, particularly of larger businesses that easily evade tax yet are robust enough to consistently pay.

As recommended by the Africa Progress Report 2013, alongside demanding the highest standards of propriety and disclosure from their government, Kenyans should push citizens of the developed world to demand similar standards from their governments and companies.

Finally, Kenya needs to work on curbing illicit financial outflows. The UN makes the point that G8 leaders have committed to the 2013 Lough Erne Declaration, a 10-point statement calling for an overhaul of corporate transparency rules. Among other things, the declaration urges tax authorities to automatically share information to fight evasion. It states that poor countries should have the information and capacity to collect the taxes owed to them. Kenya should join other African countries in lobbying rich countries to enact stricter laws against tax evasion. As recommended by the Africa Progress Report 2013, alongside demanding the highest standards of propriety and disclosure from their government, Kenyans should push citizens of the developed world to demand similar standards from their governments and companies.

BORROWING AND DEBT

In 2013, the Jubilee administration inherited a debt of Sh1.7 trillion after a decade of the Kibaki government. Less than 5 years later, that has ballooned by nearly 250 percent to Sh4.4 trillion. This year’s borrowing has been particularly aggressive. The Central Bank of Kenya (CBK) says that the government is borrowing an average of Sh86 billion per month, the highest level since the bank started listing public debt in 1999, and over Sh30 billion more than the monthly averages of 2015 and 2016.

Despite this, it seems the government’s debt appetite won’t wane any time soon. The Treasury recently announced that it is seeking to issue another Eurobond, which could be used to repay the outstanding US$750 million syndicated loan the government raised in 2015 and which came due in October. What seems to be clear is that given expanding expenditure and subpar revenue collection, borrowing from both foreign and domestic sources will continue to grow. Further, as a Bloomberg analyst points out, Kenya has among the highest debt levels in sub-Saharan Africa, partly a result of having neither the commodity revenue sources of Nigeria and Angola nor the budget support from donor countries enjoyed by neighbouring Tanzania and Uganda.

Before looking at the specific features of Kenya’s debt, it is important to state that debt itself is not necessarily a problem. If used wisely, it can fund investment into activities and projects that catalyse economic development, GDP growth and growth in per capita incomes. Concerns only start being raised when the pattern of debt accrual and servicing seems headed in an unsustainable direction. If expenditure is growing in the context of muted revenue generation, that creates momentum for more debt than cannot be sustainably serviced. Further, if debt is not used efficiently and linked to increases in productivity and GDP growth, it also saddles countries with burdensome repayments. At the moment, Kenya is on the cusp where the government can either take decisive action to put the country on a better debt path, or continue with current trends that are edging the country closer to an unsustainable position.

 

The IEA points out that as of June 2012, total public debt was composed of 52.9 percent domestic debt and 47.1 percent external debt. However, the share of external debt has been steadily growing and recent statistics show that today the situation is reversed, with external debt taking up more than half (52.3 percent) of total debt.

The National Treasury Report 2015 indicates that the external debt stock for Kenya is composed of multilateral debt (54.7 percent), bilateral debt (27.1 percent), export credits (1.5 percent), commercial banks (0.6 percent) and International Sovereign Bonds (16.1 percent). As the IEA points out, a large part of the external debt remains concessional (i.e. on terms substantially more generous than market loans) and mainly from multilateral creditors; however, the share of concessional loans has been falling over the last three years which means external debt is becoming ever more expensive for the country.

There are several factors affecting the composition of debt, the first of which is Treasury’s desire to reduce domestic borrowing in order to release domestic credit for the private sector. This was a major reason given for issuing the Eurobond. As shown by the statistics above, he government has stayed true to this intent in some ways. However, the cap on interest rates introduced last year, has perversely facilitated government’ ability to raise domestic debt as banks, reluctant to lend to the general public due to profit margin and risk concerns, have more aggressively pursued government securities. The attractiveness of government debt is thus pushing the domestic private sector out of the domestic debt market, which contradicts government’s original intent.

The Central Bank of Kenya (CBK) notes that the government is borrowing an average of Sh86 billion per month, the highest level since the bank started listing public debt in 1999, and over Sh30 billion more than the monthly averages of 2015 and 2016.

It is important to note that, as reported in The Standard, World Bank data indicates that the average grace period on repaying new external debt has shrunk by half in the last four years. On average, in 2013, the country was given 8.2 years before starting to repay loans. This had reduced to 4.6 years by 2016. Shorter grace periods reduce the government’s room for flexibility and could be an indicator of jittery lenders keen on getting their money back as soon as possible. Indeed, Bank of America Merrill Lynch notes that Kenyan debt underperforms its peers as evidenced by the fact that yield premiums over U.S. debt have not narrowed as much as those of other sub-Saharan debt. In short, Kenya is seen as riskier to lend to than other African countries.

Informed by the expansion in borrowing, Kenya’s fiscal deficit has also grown. Its ratio to GDP has widened significantly from 6.4 percent in 2013/14 to 10.4 percent in 2016/17. The IEA points out that the large increase in deficit partly reflected the financing of the first phase of Standard Gauge Railway (SGR) project.

Fiscal deficit as a percentage of GDP

Fiscal deficit as a percentage of GDP
(source: IEA)

The government is targeting a fiscal deficit of 5.9 percent of GDP, in the 2018/19 fiscal year, down from an estimated 7.3 percent this fiscal year. Others however do not expect this will be met. Genghis Capital thinks Kenya’s budget deficit for this fiscal year will likely reach 8 percent of GDP. Further, the government doesn’t always hit its fiscal deficit projections. Indeed, according to Cytonn Investments, in the 2016/2017 fiscal year, the government’s deficit actually widened to 8.3 percent of GDP, some way above its revised target of 6.9 percent. In any case, despite the efforts it may be making to reduce the deficit, current government targets and performance are still higher than its own preferred ceiling of 5 percent.

 

The IEA points out that as the amount of debt held increased, the cost of debt has also gone up with debt servicing increasing from about Sh19 billion in 1990 to Sh400 billion by the end of 2015. A larger component of debt servicing emanates from servicing of domestic debt, but since the proportion of domestic and external debt to GDP are almost at par, it may indicate that it is costlier to service the former.

Debt service 1980 – 2016, KES billions

Debt service 1980 – 2016, KES billions
(Source: IEA)

There are growing concerns as to how much revenue is being committed to servicing debt. In the first nine months of the 2015/16 financial year, the government spent four out of every 10 shillings it collected as tax to settle debts. In April, the IMF estimated Kenya’s debt-service to revenue-ratio at 34.7 percent against a threshold of 30 percent, and a report in the Business Daily pointed out that in the last fiscal year, the country spent more money to settle debt (Sh435.7 billion) than it did to finance development (Sh394.2 billion). If more and more revenue has to be locked into servicing debt, government will either have to ramp down spending on development (given the relatively fixed burden of recurrent expenditure) or borrow even more, none of which is good.

The IEA also notes that the ratio of debt to GDP rose from 40.7 percent in 2012 to 56.4 percent in June, which merited a ranking of 78 out of 138 countries on the World Economic Forum’s Global Competitiveness Index.

Government Budget and Public Debt as % of GDP

Government Budget and Public Debt as % of GDP
(Source: IEA); GDP is for full year (FY) and measured in thousands; * Provisional estimates

As borrowing continues to grow aggressively, it will lead to higher imbalances that will raise concerns about sustainability.

Views differ on whether Kenya’s debt is sustainable. Some are of the view that given the massive gaps in key sectors such as energy and transport infrastructure, the country must continue to do everything possible to finance and address the gaps and that debt accrued now will pay off in the long term. Kenya remains below the World Bank’s debt-to-GDP ratio ceiling (or tipping point) of 64 percent. The IMF, in its review of Kenya a year ago, said Kenya’s risk of external debt distress remains low but notes there is need for reduction in the deficit over the medium term. While the IMF has raised concerns about Kenya’s public debt, it is below what they view as the applicable ceiling for Kenya – 74 percent of GDP.

The IEA points out that as the amount of debt held increased, the cost of debt has also gone up with debt servicing increasing from about Sh19 billion in 1990 to Sh400 billion by the end of 2015.

Others, however, are of the view that a debt-to-GDP ratio beyond 40 percent for developing and emerging economies is dangerous. The IMF itself envisages fiscal consolidation that targets a 3.7 percent of GDP deficit by 2018/19 (compared to the government’s own target of 5.9 percent) which it says is critical to maintaining a low risk of debt distress while preserving fiscal space for development priorities.

I disagree with the Treasury’s assertions that the national debt is manageable and that there is headroom for more. Kenya’s debt is only manageable if decisive action is taken to reduce expenditure, boost revenue collection and reduce borrowing. If this does not happen within the next three years, the country will start feeling the effects of debt distress.

The credit rating agency Moody’s has already raised concerns about the country’s accumulating debt. Indeed, the agency is currently assessing whether it needs to downgrade the country’s credit rating from the current B1 status on grounds of its weakening ability to repay debt. Moody argues that unless a decisive policy response is introduced, the upward trajectory in government debt will see the debt-to-GDP ratio surpass the 60 percent mark by June 2018, pushing financing costs for the private sector even higher. Its assessment points to the fact that in the latest fiscal year, the government spent 19 percent of its revenues on interest payments alone, up from 10.7 percent five years ago. It notes that persistent, large, primary deficits and high borrowing costs continue to drive government indebtedness ever higher. Further, government liquidity pressures risk, the danger that the government may not have enough readily available cash to settle its immediate and short-term obligations, is rising in the face of increasingly large financing needs.

Another credit rating agency, Fitch, has also indicated that it could downgrade Kenya’s rating due to its debt position. Fitch noted that the country was spending a larger proportion of its revenue on paying debt compared to its economic peers such as Uganda, Rwanda and Ghana.

Fitch gave Kenya a B+ rating, with a negative outlook. These credit ratings are important as a fall in rating will mean any new foreign debt taken on by the country will be more expensive.

 

There are several broad strategies Kenya can use to better manage its debt the first of which is to aggressively reduce expenditure. Government must implement austerity budgets and limit unnecessary expenditure. I also think here should be a fundamental downward review of salaries of those in government. While those of technocrats such as Cabinet and Permanent Secretaries as well as professionals such teachers and doctors should remain attractive, there are far too many people in elected office on overly generous terms, and the related wage bill is not sustainable for a relatively poor African country.

Secondly, government needs to improve its recurrent vs development expenditure allocations. As elucidated before, year after year, more money is allocated to recurrent expenditure which is not economically productive. A reduction in recurrent expenditure is crucial and this can be partially addressed by a downward review in wages as explained above. The IEA points out that although in relative terms the proportion of recurrent expenditure to GDP has slightly declined while that of development expenditure has nearly doubled from 5.7 percent of GDP in 2007/8 to 11.0 percent in 2016/17, recurrent expenditure still remains comparatively high.

In April this year, the IMF estimated Kenya’s debt-service to revenue-ratio at 34.7 percent against a threshold of 30 percent, and a report in the Business Daily pointed out that in the 2016/17 fiscal year, the country spent more money to settle debt (Sh435.7 billion) than it did to finance development (Sh394.2 billion).

Development expenditure should be prioritised by considering projects which bring immediate returns to the economy. More money must be committed to spurring the growth required to pay debts, if Kenya is to avoid a repayment crisis.

Thirdly, government has to create strategies to ensure more development expenditure is absorbed. A November 2017 report by Controller of Budget showed the use of development funds for the financial year ending in June was at 70 percent, the highest since 2013. While this is good news and higher than the 66 per cent rate recorded in the previous year, it is not good enough. Indeed, the organisation Development Initiatives notes that the 2017/18 fiscal year actually saw a decline in total allocations to development spending by 12.3 percent, as a result of lower absorption of development spending by ministries in 2016/17. The problem is at both national and county levels. As Price Waterhouse Coopers points out, if the entire amount allocated is not being absorbed, it defeats the purpose of the budget especially around development expenditure. Given that the country is getting into a great deal of debt for development expenditure, it is crucial that absorption rates in this docket increase in order to spur economic growth.

Fourthly, government needs to better track how the debt which is financing the development docket, is being used. Given concerns with financial mismanagement of public funds at both national and county levels, it is crucial that the debt spending is meticulously tracked. This is because financial mismanagement of debt funds poses the dangerous risk of pushing the country into debt unsustainability as money is pocketed rather spent to generate growth.

 

CONCLUSION

This article has elucidated Kenya’s fiscal policy and position in terms of expenditure, revenue generation and debt accrual. It is important that the country reduces expenditure, increases revenue generation and better manages debt spending to put the country on a more sustainable fiscal path. We are in a position where Kenya’s fiscal health can be dramatically improved by taking decisive action as per the recommendations herein. It is my hope that the government takes the required action to improve the country’s fiscal path so that fiscal policy plays the positive and important role it can in driving the country’s development.

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Anzetse Were is a Kenyan development economist, researcher, and analyst. She blogs at https://anzetsewere.wordpress.com

Politics

Kenya Chooses Its Next Chief Justice

The search for Kenya’s next Chief Justice that commenced Monday will seek to replace Justice David Maraga, who retired early this year, has captured the attention of the nation.

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Kenya Chooses Its Next Chief Justice
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Since Monday, the 12th of April 2021, interviews to replace retired Chief Justice David Maraga for the post of the most important jurist in Kenya and the president of the Supreme Court have been underway.

The Judiciary is one of the three State organs established under Chapter 10, Article 159 of the Constitution of Kenya. It establishes the Judiciary as an independent custodian of justice in Kenya. Its primary role is to exercise judicial authority given to it, by the people of Kenya.

The institution is mandated to deliver justice in line with the Constitution and other laws. It is expected to resolve disputes in a just manner with a view to protecting the rights and liberties of all, thereby facilitating the attainment of the ideal rule of law.

The man or woman who will take up this mantle will lead the Judiciary at a time when its independence and leadership will be paramount for the nation. He or she will be selected by the Judicial Service Commission in a competitive process.

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IMF and SAPs 2.0: The Four Horsemen of the Apocalypse are Riding into Town

Stabilisation, liberalisation, deregulation, and privatisation: what do these four pillars of structural adjustment augur for Kenya’s beleaguered public health sector?

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IMF and SAPs 2.0: The Four Horsemen of the Apocalypse are Riding into Town
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The International Monetary Fund’s announcement on the 2nd of April 2020 that it had approved a US$ 2.3 billion loan for Kenya prompted David Ndii to spell it out to young #KOT (Kenyans on Twitter) that “the loan Kenya has taken is called a structural adjustment loan (SAPs). It comes with austerity (tax raises, spending cuts, downsizing) to keep Kenya creditworthy so that we can continue borrowing and servicing debt”, adding that the “IMF is not here for fun. Ask older people.” With this last quip, Ndii was referring to the economic hardship visited on Kenyans under the structural adjustment programmes of the 80s and 90s.

Well, I’m old enough to remember; except that I was not in the country. I had left home, left the country, leaving behind parents who were still working, still putting my siblings through school. Parents with permanent and pensionable jobs, who were still paying the mortgage on their modest “maisonette” in a middle class Nairobi neighbourhood.

In those pre-Internet, pre-WhatsApp days, much use was made of the post office and I have kept the piles of aerogramme letters that used to bring me news of home. In those letters my parents said nothing of the deteriorating economic situation, unwilling to burden me with worries about which I could do nothing, keeping body and soul together being just about all I could manage in that foreign land where I had gone to further my education.

My brother Tony’s letters should have warned me that all was not well back home but he wrote so hilariously about the status conferred on those men who could afford second-hand underwear from America, complete with stars and stripes, that the sub-text went right over my head. I came back home for the first time after five years — having left college and found a first job — to find parents that had visibly aged beyond their years and a home that was palpably less well-off financially than when I had left. I’m a Kicomi girl and something in me rebelled against second-hand clothes, second-hand things. It seemed that in my absence Kenya had regressed to the time before independence, the years of hope and optimism wiped away by the neoliberal designs of the Bretton Woods twins. I remember wanting to flee; I wanted to go back to not knowing, to finding my family exactly as I had left it — seemingly thriving, happy, hopeful.

Now, after eight years of irresponsible government borrowing, it appears that I am to experience the effects of a Structural Adjustment Programme first-hand, and I wonder how things could possibly be worse than they already are.

When speaking to Nancy* a couple of weeks back about the COVID-19 situation at the Nyahururu County Referral Hospital in Laikipia County, she brought up the issue of pregnant women having to share beds in the maternity ward yet — quite apart from the fact that this arrangement is unacceptable whichever way you look at it — patients admitted to the ward are not routinely tested for COVID-19.

Nancy told me that candidates for emergency caesarean sections or surgery for ectopic and intra-abdominal pregnancies must wait their turn at the door to the operating theatre. Construction of a new maternity wing, complete with its own operating theatre, has ground to a halt because, rumour has it, the contractor has not been paid. The 120-bed facility should have been completed in mid-2020 to ease congestion at the Nyahururu hospital whose catchment area for referrals includes large swathes of both Nyandarua and Laikipia counties because of its geographical location.

According to Nancy, vital medicine used to prevent excessive bleeding in newly delivered mothers has not been available at her hospital since January; patients have to buy the medication themselves. This issue was also raised on Twitter by Dr Mercy Korir who, referring to the Nanyuki Teaching and Referral Hospital — the only other major hospital in Laikipia County — said that lack of emergency medication in the maternity ward was putting the lives of mothers at risk. Judging by the responses to that tweet, this dire situation is not peculiar to the Nanyuki hospital; how much worse is it going to get under the imminent SAP?

Kenya was among the first countries to sign on for a SAP in 1980 when commodity prices went through the floor and the 1973 oil crisis hit, bringing to a painful halt a post-independence decade of sustained growth and prosperity. The country was to remain under one form of structural adjustment or another from then on until 1996.

Damaris Parsitau, who has written about the impact of Structural Adjustment Programmes on women’s health in Kenya, already reported in her 2008 study that, “at Nakuru District Hospital in Kenya, for example, expectant mothers are required to buy gloves, surgical blades, disinfectants and syringes in preparation for childbirth”. It would appear that not much has changed since then.

The constitution of the World Health Organisation states that “the enjoyment of the highest attainable standard of health is one of the fundamental rights of every human being without distinction of race, religion, political belief, economic or social condition” and that “governments have a responsibility for the health of their peoples which can be fulfilled only by the provision of adequate health and social measures.”

The WHO should have added gender as a discrimination criteria. Parsitau notes that “compared to men, women in Kenya have less access to medical care, are more likely to be malnourished, poor, and illiterate, and even work longer and harder. The situation exacerbates women’s reproductive role, which increases their vulnerability to morbidity and mortality.”

With economic decline in the 80s, and the implementation of structural adjustment measures that resulted in cutbacks in funding and the introduction of cost sharing in a sector where from independence the government had borne the cost of providing free healthcare, the effects were inevitably felt most by the poor, the majority of who — in Kenya as in the rest of the world — are women.

A more recent review of studies carried out on the effect of SAPs on child and maternal health published in 2017 finds that “in their current form, structural adjustment programmes are incongruous with achieving SDGs [Sustainable Development Goals] 3.1 and 3.2, which stipulate reductions in neonatal, under-5, and maternal mortality rates. It is telling that even the IMF’s Independent Evaluation Office, in assessing the performance of structural adjustment loans, noted that ‘outcomes such as maternal and infant mortality rates have generally not improved.’”

The review also says that “adjustment programmes commonly promote decentralisation of health systems [which] may produce a more fractious and unequal implementation of services — including those for child and maternal health — nationally. Furthermore, lack of co-ordination in decentralised systems can hinder efforts to combat major disease outbreaks”. Well, we are in the throes of a devastating global pandemic which has brought this observation into sharp relief. According to the Ministry of Health, as of the 6th of April, 325,592 people had been vaccinated against COVID-19. Of those, 33 per cent were in Nairobi County, which accounts for just 9.2 per cent of the country’s total population of 47,564,296 people.

The Constitution of Kenya 2010 provides the legal framework for a rights-based approach to health and is the basis for the rollout of Universal Health Coverage (UHC) that was announced by President Uhuru Kenyatta on 12 December 2018 — with the customary fanfare — as part of the “Big Four Agenda” to be fulfilled before his departure in 2022.

However, a KEMRI-Wellcome Trust policy brief states that UHC is still some distance to achieving 100 per cent population coverage and recommends that “the Kenyan government should increase public financing of the health sector. Specifically, the level of public funding for healthcare in Kenya should double, if the threshold (5% of GDP) … is to be reached” and that “Kenya should reorient its health financing strategy away from a focus on contributory, voluntary health insurance, and instead recognize that increased tax funding is critical.”

These recommendations, it would seem to me, run counter to the conditionalities habitually imposed by the IMF and it is therefore not clear how the government will deliver UHC nation-wide by next year if this latest SAP is accompanied by budgetary cutbacks in the healthcare sector.

With the coronavirus graft scandal and the disappearance of medical supplies donated by Jack Ma still fresh on their minds, Kenyans are not inclined to believe that the IMF billions will indeed go to “support[ing] the next phase of the authorities’ COVID-19 response and their plan to reduce debt vulnerabilities while safeguarding resources to protect vulnerable groups”, as the IMF has claimed.

#KOT have — with outrage, with humour, vociferously — rejected this latest loan, tweeting the IMF in their hundreds and inundating the organisation’s Facebook page with demands that the IMF rescind its decision. An online petition had garnered more than 200,000 signatures within days of the IMF’s announcement. Whether the IMF will review its decision is moot. The prevailing economic climate is such that we are damned if we do take the loan, and damned if we don’t.

Structural adjustment supposedly “encourages countries to become economically self-sufficient by creating an environment that is friendly to innovation, investment and growth”, but the recidivist nature of the programmes suggests that either the Kenyan government is a recalcitrant pupil or SAPs simply don’t work. I would say it is both.

But the Kenyan government has not just been a recalcitrant pupil; it has also been a consistently profligate one. While SAPs do indeed provide for “safeguarding resources to protect vulnerable groups”, political choices are made that sacrifice the welfare of the ordinary Kenyan at the altar of grandiose infrastructure projects, based on the fiction peddled by international financial institutions that infrastructure-led growth can generate enough income to service debt. And when resources are not being wasted on “legacy” projects, they are embezzled on a scale that literally boggles the mind. We can no longer speak of runaway corruption; a new lexicon is required to describe this phenomenon which pervades every facet of our lives and which has rendered the years of sacrifice our parents endured meaningless and put us in debt bondage for many more generations to come. David Ndii long warned us that this moment was coming. It is here.

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East Africa: A ‘Hotbed of Terror’

African states are involved in the War on Terror more than we think. They’re surrounded by an eco-system of the war industry.

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East Africa: A ‘Hotbed of Terror’
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In late January, reports circulated on social media about a suspected US drone strike in southern Somalia, in the Al-Shabaab controlled Ma’moodow town in Bakool province. Debate quickly ensued on Twitter about whether the newly installed Biden administration was responsible for this strike, which was reported to have occurred at 10 p.m. local time on January 29th, 2021.

Southern Somalia has been the target of an unprecedented escalation of US drone strikes in the last several years, with approximately 900 to 1,000 people killed between 2016 and 2019. According to the nonprofit group Airwars, which monitors and assesses civilian harm from airpower-dominated international military actions, “it was under the Obama administration that a significant US drone and airstrike campaign began,” coupled with the deployment of Special Operations forces inside the country.

Soon after Donald Trump took office in 2017, he signed a directive designating parts of Somalia “areas of active hostilities.” While the US never formally declared war in Somalia, Trump effectively instituted war-zone targeting rules by expanding the discretionary authority of the military to conduct airstrikes and raids. Thus the debate over the January 29 strike largely hinged on the question of whether President Joe Biden was upholding Trump’s “flexible” approach to drone warfare―one that sanctioned more airstrikes in Somalia in the first seven months of 2020 than were carried out during the administrations of George W. Bush and Barack Obama, combined.

In the days following the January 29 strike, the US Military’s Africa Command (AFRICOM) denied responsibility, claiming that the last US military action in Somalia occurred on January 19, the last full day of the Trump presidency. Responding to an inquiry from Airwars, AFRICOM’s public affairs team announced:

We are aware of the reporting. US Africa Command was not involved in the Jan. 29 action referenced below. US Africa Command last strike was conducted on Jan. 19. Our policy of acknowledging all airstrikes by either press release or response to query has not changed.

In early March, The New York Times reported that the Biden administration had in fact imposed temporary limits on the Trump-era directives, thereby constraining drone strikes outside of “conventional battlefield zones.” In practice, this means that the US military and the CIA now require White House permission to pursue terror suspects in places like Somalia and Yemen where the US is not “officially” at war. This does not necessarily reflect a permanent change in policy, but rather a stopgap measure while the Biden administration develops “its own policy and procedures for counterterrorism kill-or-capture operations outside war zones.”

If we take AFRICOM at its word about January 29th, this provokes the question of who was behind that particular strike. Following AFRICOM’s denial of responsibility, analysts at Airwars concluded that the strike was likely carried out by forces from the African Union peacekeeping mission in Somali (AMISOM) or by Ethiopian troops, as it occurred soon after Al-Shabaab fighters had ambushed a contingent of Ethiopian troops in the area. If indeed the military of an African state is responsible for the bombing, what does this mean for our analysis of the security assemblages that sustain the US’s war-making apparatus in Africa?

Thanks to the work of scholars, activists, and investigative journalists, we have a growing understanding of what AFRICOM operations look like in practice. Maps of logistics hubs, forward operating sites, cooperative security locations, and contingency locations―from Mali and Niger to Kenya and Djibouti―capture the infrastructures that facilitate militarism and war on a global scale. Yet what the events of January 29th suggest is that AFRICOM is situated within, and often reliant upon, less scrutinized war-making infrastructures that, like those of the United States, claim to operate in the name of security.

A careful examination of the geographies of the US’s so-called war on terror in East Africa points not to one unified structure in the form of AFRICOM, but to multiple, interconnected geopolitical projects. Inspired by the abolitionist thought of Ruth Wilson Gilmore, who cautions activists against focusing exclusively on any one site of violent exception like the prison, I am interested in the relational geographies that sustain the imperial war-making infrastructure in Africa today. Just as the modern prison is “a central but by no means singularly defining institution of carceral geography,” AFRICOM is a fundamental but by no means singularly defining instrument of war-making in Africa today.

Since the US military’s embarrassing exit from Somalia in 1993, the US has shifted from a boots-on-the ground approach to imperial warfare, instead relying on African militaries, private contractors, clandestine ground operations, and drone strikes. To singularly focus on AFRICOM’s drone warfare is therefore to miss the wider matrix of militarized violence that is at work. As Madiha Tahir reminds us, attack drones are only the most visible element of what she refers to as “distributed empire”—differentially distributed opaque networks of technologies and actors that augment the reach of the war on terror to govern more bodies and spaces. This dispersal of power requires careful consideration of the racialized labor that sustains war-making in Somalia, and of the geographical implications of this labor. The vast array of actors involved in the war against Al-Shabaab has generated political and economic entanglements that extend well beyond the territory of Somalia itself.

Ethiopia was the first African military to intervene in Somalia in December 2006, sending thousands of troops across the border, but it did not do so alone. Ethiopia’s effort was backed by US aerial reconnaissance and satellite surveillance, signaling the entanglement of at least two geopolitical projects. While the US was focused on threats from actors with alleged ties to Al-Qaeda, Ethiopia had its own concerns about irredentism and the potential for its then-rival Eritrea to fund Somali militants that would infiltrate and destabilize Ethiopia. As Ethiopian troops drove Somali militant leaders into exile, more violent factions emerged in their place. In short, the 2006 invasion planted the seeds for the growth of what is now known as Al-Shabaab.

The United Nations soon authorized an African Union peacekeeping operation (AMISOM) to “stabilize” Somalia. What began as a small deployment of 1,650 peacekeepers in 2007 gradually transformed into a number that exceeded 22,000 by 2014. The African Union has emerged as a key subcontractor of migrant military labor in Somalia: troops from Burundi, Djibouti, Ethiopia, Kenya, and Uganda deployed to fight Al-Shabaab are paid significantly higher salaries than they receive back home, and their governments obtain generous military aid packages from the US, UK, and increasingly the European Union in the name of “security.”

But because these are African troops rather than American ones, we hear little of lives lost, or of salaries not paid. The rhetoric of “peacekeeping” makes AMISOM seem something other than what it is in practice—a state-sanctioned, transnational apparatus of violent labor that exploits group-differentiated vulnerability to premature death. (This is also how Gilmore defines racism.)

Meanwhile, Somali analyst Abukar Arman uses the term “predatory capitalism” to describe the hidden economic deals that accompany the so-called stabilization effort, such as “capacity-building” programs for the Somali security apparatus that serve as a cover for oil and gas companies to obtain exploration and drilling rights. Kenya is an important example of a “partner” state that has now become imbricated in this economy of war. Following the Kenya Defense Forces (KDF) invasion of Somalia in October 2011, the African Union’s readiness to incorporate Kenyan troops into AMISOM was a strategic victory for Kenya, as it provided a veneer of legitimacy for maintaining what has amounted to a decade-long military occupation of southern Somalia.

Through carefully constructed discourses of threat that build on colonial-era mappings of alterity in relation to Somalis, the Kenyan political elite have worked to divert attention away from internal troubles and from the economic interests that have shaped its involvement in Somalia. From collusion with Al-Shabaab in the illicit cross-border trade in sugar and charcoal, to pursuing a strategic foothold in offshore oil fields, Kenya is sufficiently ensnared in the business of war that, as Horace Campbell observes, “it is not in the interest of those involved in this business to have peace.”

What began as purportedly targeted interventions spawned increasingly broader projects that expanded across multiple geographies. In the early stages of AMISOM troop deployment, for example, one-third of Mogadishu’s population abandoned the city due to the violence caused by confrontations between the mission and Al-Shabaab forces, with many seeking refuge in Kenya. While the mission’s initial rules of engagement permitted the use of force only when necessary, it gradually assumed an offensive role, engaging in counterinsurgency and counterterror operations.

Rather than weaken Al-Shabaab, the UN Monitoring Group on Somalia observed that offensive military operations exacerbated insecurity. According to the UN, the dislodgment of Al-Shabaab from major urban centers “has prompted its further spread into the broader Horn of Africa region” and resulted in repeated displacements of people from their homes. Meanwhile, targeted operations against individuals with suspected ties to Al-Shabaab are unfolding not only in Somalia itself, but equally in neighboring countries like Kenya, where US-trained Kenyan police employ military tactics of tracking and targeting potential suspects, contributing to what one Kenyan rights group referred to as an “epidemic” of extrajudicial killings and disappearances.

Finally, the fact that some of AMISOM’s troop-contributing states have conducted their own aerial assaults against Al-Shabaab in Somalia demands further attention. A December 2017 United Nations report, for example, alleged that unauthorized Kenyan airstrikes had contributed to at least 40 civilian deaths in a 22-month period between 2015 and 2017. In May 2020, senior military officials in the Somali National Army accused the Kenyan military of indiscriminately bombing pastoralists in the Gedo region, where the KDF reportedly conducted over 50 airstrikes in a two week period. And in January 2021, one week prior to the January 29 strike that Airwars ascribed to Ethiopia, Uganda employed its own fleet of helicopter gunships to launch a simultaneous ground and air assault in southern Somalia, contributing to the deaths—according to the Ugandan military—of 189 people, allegedly all Al-Shabaab fighters.

While each of the governments in question are formally allies of the US, their actions are not reducible to US directives. War making in Somalia relies on contingent and fluid alliances that evolve over time, as each set of actors evaluates and reevaluates their interests. The ability of Ethiopia, Kenya, and Uganda to maintain their own war-making projects requires the active or tacit collaboration of various actors at the national level, including politicians who sanction the purchase of military hardware, political and business elite who glorify militarized masculinities and femininities, media houses that censor the brutalities of war, logistics companies that facilitate the movement of supplies, and the troops themselves, whose morale and faith in their mission must be sustained.

As the Biden administration seeks to restore the image of the United States abroad, it is possible that AFRICOM will gradually assume a backseat role in counterterror operations in Somalia. Officially, at least, US troops have been withdrawn and repositioned in Kenya and Djibouti, while African troops remain on the ground in Somalia. Relying more heavily on its partners in the region would enable the US to offset the public scrutiny and liability that comes with its own direct involvement.

But if our focus is exclusively on the US, then we succumb to its tactics of invisibility and invincibility, and we fail to reckon with the reality that the East African warscape is a terrain shaped by interconnected modes of power. The necessary struggle to abolish AFRICOM requires that we recognize its entanglement in and reliance upon other war-making assemblages, and that we distribute our activism accordingly. Recounting that resistance itself has long been framed as “terrorism,” we would do well to learn from those across the continent who, in various ways over the years, have pushed back, often at a heavy price.

This post is from a partnership between Africa Is a Country and The Elephant. We will be publishing a series of posts from their site once a week.
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