Eliminating Kenya’s fiscal deficit 

The best thing that Kenya could do right now is to eliminate the twin deficits which are the fiscal and current account deficits. PHOTO | SHUTTERSTOCK

Global macroeconomic conditions have worsened over the past three years. It started with the Covid-19 pandemic in 2020 and 2021, which led to higher inflation due to disrupted supply chains and negatively affected incomes in the service sector.

As the global economy was recovering, the Russia-Ukraine war started in February 2022 resulting in higher prices of food, fuel, and fertiliser. In March 2022, the US Federal Reserve Bank began hiking interest rates and has continued to do so. This has led to a stronger US Dollar and higher borrowing costs.

Now it seems that there could be further conflict in the Middle East, which could negatively affect global economic conditions. All the while, adverse weather conditions (floods and droughts) linked to climate change continue to negatively hit economic conditions across the world.

The Kenyan economy operates an open current account, and its budget is partly funded by external debt. This means that the country is closely linked to global economic factors.

Energy inflation in Kenya is up on higher global fuel prices and rising borrowing costs for Kenya Power. Food inflation has risen due to adverse weather conditions, rising fuel costs, and higher import prices of key commodities. 

As the Fed Reserve hikes rates, the Kenya shilling continues to weaken against the greenback resulting in higher costs of imports. Higher global interest rates are causing challenges in funding the budget and repaying the country’s Eurobonds.

The government hopes to resolve these challenges by increasing expenditure and for that it, it needs more taxes. However, higher taxes are likely to negatively impact economic growth which in turn will impact tax collections. This week, the government announced that it had missed its revenue (tax) target by Sh79 billion. 

Kenya does not have to suffer the same economic challenges as the rest of the world. Wise decision-making during this period could insulate the Kenyan economy from global challenges. In fact, Kenya could thrive during this period and its influence could grow around the world.

The best thing that Kenya could do right now is to eliminate the twin deficits which are the fiscal and current account deficits. In fact, if the twin deficits were to turn into surpluses, the Kenyan economy could become one of the strongest in Africa over the next 10 years. This article will focus on the fiscal deficit.

The fiscal deficit refers to the difference between what the government earns, in the form of taxes, versus what it pays out in expenditure. The fact that Kenya spends more than it earns means that it must keep borrowing and thus, rising debt levels. However, if Kenya were to spend less than it earns, it would be able to save and pay off the debt.

There are two broad ways in which eliminating the fiscal deficit can be done: by increasing taxes (the government’s salary) or by reducing the size of our budget (reducing the government’s expenses). When an employee (the government) approaches an employer (Kenyans) for a salary increase when the organisation (the economy) is not performing well, they are likely to be denied and asked to wait until the organisation recovers.

In such a situation, the next best option is for the employee to tighten its belt (reduce spending). This is the current situation in the country.

The focus should be on reducing expenditure, which has several benefits to the economy. First, a smaller budget is likely to result in lower corruption. Lean budgets would mean less funds to steal as they would be more closely monitored. Even if corruption takes place, the cash value will be smaller than what Kenya has witnessed in the past. 

Kamau is an equity strategist and researcher, email: [email protected]