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June 2004

Mwiraria strives to balance budget

Kenya’s Finance minister David Mwiraria presented his second Budget mid this month, hoping, not for the first time, to achieve the holy-grail 4.5 per cent growth. Given that the rate has not been achieved in the last eight years, and that last year growth was a disappointing 1.8 per cent, the minister’s over optimism cannot be gainsaid.
Deremo Maiko

Economic growth has only improved marginally since the Narc government threw out the corrupt Kanu regime in January 2003. Treasury has gone out of its way through the Budget in trying to change things. And nowhere was this more visible than in the tax measures where neither individuals nor corporates had much to complain about.

It has become clear to the government that the best way ahead is to put money in people’s pockets, or desist from picking the same. First notable measure in this direction was the expansion of the tax-exempt bracket under pay-as-you-earn (PAYE) to $141, which is likely to release thousands of millions into the economy.

But whereas this will understandably increase the purchasing power with possible multiplier effect, that this category is not yet primed for the sorely needed saving is not to be discounted. The strategy for increasing the purchasing power of the common man is particularly timely given the current oil surge that has hit kerosene consumers and motorists at six.

Another effort to put money in Kenyans’ pockets was phasing out of liquefied petroleum gas (LPG) value-added tax (VAT) and reduction in carbonated soft-drink excise tax by 5 per cent. It is clear that neither of these is likely to resonate with the very common man who has little use for the relative luxury. But the soda measure is likely to appease bottling firm Coca-Cola that has recently cut its labour force and all but threatened to withdraw from the domestic market as a result of the said high taxation. The waiver of VAT on gas is in good part meant to reduce dependence on forest-consuming wood fuel, an eventuality which is unlikely to be easily achieved.

All said and done, the financial markets will note Mwiraria’s effort at releasing more money to the domestic investors/consumers and reducing the cost of the same. While the bank cash ratio was not changed form 6 per cent where it was put­from10­in the previous Budget, that the Government promised to halve the stock of short-term borrowing from Sh40 billion (US$506 million) is notable in itself. Whether this is achievable will depend on donor funding, some US$4.1 billion of which has been promised since late last year.

Treasury this time round was hoping on a balanced budget. Before the end of this month, it will grow clear whether donors are willing to oblige the Government and help toward the same. Bretton Woods sources, however, are very optimistic with the World Bank said to be itching to release some US$207 million for the road reconstruction programme. That mild claims of corruption have emerged is likely to be a factor, but a complete fall-out is unexpected.

The government, by suspending Finance PS Joseph Magari over the Sh2.7 billion (US$59 million) passport system scandal, has shown it is ready to act on the vice. Significantly, the ongoing Goldenberg Scandal has all but resolved the mystery of the biggest corruption case in the country’s history.

For some 20,000 Civil Servants faced with retrenchment though, the money issue is still thorny. With over 40,000 having been sacked under the programme aimed at reducing recurrent expenditure, it has grown clear that poverty awaits the new candidates. Most are said to die after a few months, underscoring the inhumanness of the Bretton Woods solutions for the Third World. So much for reducing poverty.

Nevertheless, no one doubts the need for reducing the wage bill which consumes about 80 per cent of the Government expenditure. But what makes skeptics so certain that growth is unlikely to match the 5 per cent averaged by neighbouring Uganda and Tanzania? First, the wrangling in the fragile ruling Narc Coalition appears to be interfering with the very core of economic reform programme. For instance, rubble rousers within the coalition have accused one wing of sabotaging the road reconstruction programme just because the minister in charge is power contender Mr Raila Odinga.

That the claims appear fanciful to serious observers is not the matter. But the signal sent to potential investors faced with a tattered road network is the issue. It is all about political certainty. Investors despite initial positive noises and overwhelming confidence have largely kept off. Roads, and housing falling under the same docket are an issue. It is obvious that as long as this sector is not up and walking, the rest of the economy should lag behind.

The sector has enormous potential in employment and raw material consumption: even enough to create more than the 500,000 jobs annually, promised by politicians. If a third of what has been promised is implemented, the chances of reaching the said growth are high.

Another impediment remains the travel alerts issued by the US over travel in the eastern Africa countries. The said terror factor­including expensive oil­may continue to affect both tourism and all other sectors. In the short term, revenue fall due to the free trade agreements with East African Community and Common Markets for Eastern and Southern Africa [COMESA] will be a factor.

In summary, the economic foundation has been laid through reforms in the judiciary, streamlining of tendering and reduction of the corruption factor. It is now for the politicians to foster the requisite stability for the economy to start firing from all cylinders, and lay down the backbone infrastructure. After the current financial year, it will become apparent whether Narc can be relied upon to deliver or not. Otherwise it will prove to be the revolution that never worked.

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