Jaindi Kisero
1 January 2010
Nairobi — The most urgent challenge to finance minister Uhuru Kenyatta as the country enters the new year will be how to speed up the rolling out of the ambitious Sh22 billion ($ 300 million) economic stimulus package unveiled in this financial year's budget last June.
On Wednesday this week, and as the new year closed in, the Treasury put out tenders for the largest batch of public projects to be funded by the stimulus package -- construction and building of hundreds of schools throughout the country -- a good number of them through labour intensive projects.
The floating of tenders by the Treasury aptly illustrated the slow pace at which the whole stimulus package programme is being implemented. With half of the financial year already covered, Mr Kenyatta will in the coming months be facing intense pressure to disburse the funds to the largest number of projects as possible within the current financial year.
Clearly, the minister's greatest challenge will be how to overcome cumbersome procurement procedures. How to expand capacities of implementing ministries to turn around these projects quickly will also be a major challenge to the Treasury.
Considering that the distance between the time a tender for a project is floated and when the actual spending of the money starts is usually long -- the evidence so far would appear to suggest that some of the stimulus package money will not be spent within the current financial year.
If this happens, it will be a major blot on Mr Kenyatta's stewardship of the Treasury because the whole fiscal strategy for moving the economy out of the prevailing economic downturn is largely predicated on the success of the stimulus programme.
Indeed, the current growth projections of 3.5 per cent for the year 2010 are to a large extent based on the assumption that the fiscal stimulus plan will precipitate activity that will spur more activity in the broader macro-economy, thus kick-starting growth.
The centrepiece of the stimulus package are huge spending plans in the education and health sectors whose budgets were increased to 35 per cent of recurrent spending. Another major component of the stimulus plan is heavy spending on infrastructure which will now account for 38 per cent of all development spending.
Also significant in the plan is a Sh7.6 billion budgetary allocation for social safety nets, most of which were allocated to the so-called Kazi Kwa Vijana projects. And the big question is -- will the experiment work and where is the money going to come from?
Expansionary
According to the plan, it will all come from aggressive borrowing from the domestic market. Technically, the strategy the government is implementing is what is known in economic jargon as "expansionary spending."
The theoretical assumption is that when you throw more money at projects within an economy, you stimulate aggregate demand within the economy -- and therefore spur growth. What are the risks? If the stimulus plan does not succeed, the government will end up with more debts in its books in the coming year.
More debts mean more borrowing and new pressures on interest rates and prices within the economy. Fortunately for the government borrowing levels have been low. Indeed, Kenya has only managed to try this "expansionary spending" experiment because the level of public debt has remained relatively low.
In the last ten years, public debt has shrunk from a level of 60 per cent of GDP to 43 per cent. When the downturn came, the government had the space to borrow more aggressively from the domestic markets -- and at the same time protect the ambitious spending programmes for roads, free education and health -- which it had all along maintained throughout the tenure of the President Kibaki's administration.
As things stand, Kenya is going into the new year with one of the largest budget deficits in its history -- projected at 6.6 per cent of GDP in the current financial year. The challenge for the government in this new year will be to fight to make sure that it returns to lower fiscal deficits by 2011.
How the money is borrowed is also going to be critical. In the Moi years, such large borrowings caused a massive domestic debt overhang that condemned the economy into a protracted period of high interest rates. This time round borrowing has so far been implemented prudently. In a departure from past practice, the Central Bank of Kenya has been borrowing money mainly through long term infrastructure bonds.
The government has been able to issue debt at single-digit levels and still afford to finance the ambitious stimulus package. This is the trend the monetary authority is likely to maintain in the new year because it has allowed the government to finance the budget deficit at low costs.
On the monetary policy side, the challenge for the Central Bank will be how to kick-start more lending into the economy by the commercial banking system. Taking a cue from the fiscal stimulus plan, CBK has also been implementing monetary stimulus or "quantitative easing" as it is known in economic jargon.
The Central Bank Rate -- which is the rate at which CBK lends to commercial banks -- was reduced by 175 base points, bringing it to 7 per cent. The cash ratio has also been reduced from 6 per cent in 2008 to 4.5 per cent in 2009. With the government borrowing aggressively under the stimulus plan, private sector credit was going to suffer the crowding up effect. Lending rates were also bound to trend upwards.
Interest rates
By reducing the cash ratio and through using the Central Bank rate to signal to commercial banks that interest rates should remain low, the Central Bank has managed monetary policy fairly successfully. The problem, however is that despite the Central Bank's attempts to kick-start lending of money through quantitative easing, the banks have not been lending enough.
The governor of the Central Bank, Prof Njuguna Ndung'u has been rendered a voice crying in the wilderness pleading with the banks to bring lending rates down. This year, the monetary authority may be compelled to try new ideas. The country is going into a new year with a relatively stable banking sector. At 9 per cent, the share of non performing loans in commercial banks has dropped drastically considering that it was at a level 19.3 per cent in 2006.
Although tourism arrivals from traditional source markets have been on a downward trend, arrivals from Russia, the Middle East and China continue to grow. The World Bank projected the economy will grow by 3.5 per cent in 2010.
But with manufacturing expected for the first time to reap from a fully fledged East African Customs Union -- depending on how its implementation succeeds and if the country gets good rains -- the new year will have provided the conditions that will spur the economy to the pre-2008 growth levels.