From what I read on my friends’ and foes' facebook status on Thursday, 06/11, it seems most Kenyans were happy with Uhuru's budget. Some praised it because there was no tax increment on alcoholic beverages, others because mitumba will be more affordable, my girlfriend (!) because of cheaper body care products. I will not claim to have read the budget; I might not even read it. But there is one thing for sure: Hon Uhuru has nothing to offer, his budget is a reminiscent of other blind (maybe myopic?) 'mwananchi friendly' budgets before. Don't expect to see anything like "to stimulate growth and protect jobs, reduce poverty, enhance food security and protect the poor." Not in a grand scheme as he might have framed it to appear. If anything, expect a worse economic environment in Kenya.
Hon Uhuru tells us that we should spend Kshs866 billion in the year 2009/2010, up from about Kshs673 billion in 2008/2009 (government figures at www.treasury.go.ke). This is indeed very generous of him. In his budget, among other great projects, he seeks to build primary and secondary schools in every constituency and even hire teachers for them. I am a staunch proponent of education--and proper education for that matter--and I would wish we spent even more on that. He seeks to build and equip health facilities in each constituency. I would like to be part of a healthy population and I fully support this move. He seeks to invest more in judiciary system and security (under this, my chief and sub-chief will be riding motor-bikes in my bushy village). I believe in justice and human rights for the people and I back this development. But how are we going to get money to fund this lavish and 'mwananchi-oriented' budget? This is now where I renounce Uhuru's Budget.
Hon Uhuru acknowledges in his budget speech that our public debt is going to peak to 44.5% of GDP in 2009/2010. As of June 2009, our public debt stands at kshs893 billion. Hon Uhuru is striving to increase (instead of decreasing?) it by kshs109 billion, and that is if the economy grows by or more than 3%. Mark you, a few weeks before Hon Uhuru read his budget he had just received kshs33 billion and about kshs17 billion from the World Bank and IMF respectively. I dont know whether the two loans are included in the kshs893 billion debt or the kshs109 billion to be borrowed this year or in none of the above. Hon Uhuru knows. But of course he tells us we should be happy because after all the debt will be “declining thereafter." How it will be declining, he doesn’t tell us.
Hon Uhuru mentions two sources of money to fund his budget: international donors and domestic financial institutions. Let's look at them. International donors: while "stimulating" the economy is vitally important, it is imprudent to run back to international donors to borrow. I would hate to dwell on effects of reliance on international donors--and by this I mean IMF, World Bank or specific governments of, especially, developed world, instead I would recommend Dambisa Moyo's Dead Aid. (I will return to this--Kenya and the rest of the world--in my subsequent postings.)
The other source of funds, he says, will be domestic from domestic financial institutions. By this he means borrowing from local banks, stock market etc. Hon Uhuru is an economist and he knows well the effects of government borrowing mercilessly from domestic financial institutions. These are the same institutions from which other local investors borrow to fund local investments (and of course with all these tax cuts, more local investors will be hoping to run to banks, etc to borrow.) Increased (domestic) demand for loanable fund (kshs 408 billion in 2008/2009), reduced or constant national saving (kshs311 billion), send interest rates skyrocketing. Of course high interests rates mean that the cost of borrowing goes high too. People get de-incentivized to invest domestically. Hon Uhuru acknowledges that investment is an important component of economy but he fails to notice how malignant government borrowing is on investment.
Maybe let go the question of borrowing and funding the budget. Let's assume a scenario where Hon Uhuru, through his renowned expertise in economic, accounting and local and international networking matters, gets all the kshs870 billion to fund the budget and shore up the economy. Let's go with his word that most of the monies is 'devolved' to constituencies in form of CDF. Two question: Is Kenya's Central bank in a stable and independent position to handle inflationary effects this quantity of money would cause? Are there institutions at either constituency or national level to ensure transparency and accountability in handling these CDF monies? My answer: negative. I doubt the capability of CBK in handling large amounts of money in the economy. Results from fiscal changes in the past 7 seven years attest to this. In my village we used to buy a 500g loaf of bread at kshs18, in 2002, before CDF was introduced. Now we buy a 400g loaf bread at kshs 32. It is lighter yet more expensive. I blame it on the increase of money supply (CDF) and inability of CBK to regulate inflation rates that ensued. On members of parliament handling CDF money, I think our dailies have served us well on feeding us with news on embezzled funds in many constituencies.
The bottom line here is that Uhuru's budget is well intentioned but, at best, it ignores or downplays effects of excessive budget deficit and government borrowing and, at worst, it promotes embezzlement of public funds and makes lives of an average Kenyans even more miserable.
Hon Uhuru tells us that we should spend Kshs866 billion in the year 2009/2010, up from about Kshs673 billion in 2008/2009 (government figures at www.treasury.go.ke). This is indeed very generous of him. In his budget, among other great projects, he seeks to build primary and secondary schools in every constituency and even hire teachers for them. I am a staunch proponent of education--and proper education for that matter--and I would wish we spent even more on that. He seeks to build and equip health facilities in each constituency. I would like to be part of a healthy population and I fully support this move. He seeks to invest more in judiciary system and security (under this, my chief and sub-chief will be riding motor-bikes in my bushy village). I believe in justice and human rights for the people and I back this development. But how are we going to get money to fund this lavish and 'mwananchi-oriented' budget? This is now where I renounce Uhuru's Budget.
Hon Uhuru acknowledges in his budget speech that our public debt is going to peak to 44.5% of GDP in 2009/2010. As of June 2009, our public debt stands at kshs893 billion. Hon Uhuru is striving to increase (instead of decreasing?) it by kshs109 billion, and that is if the economy grows by or more than 3%. Mark you, a few weeks before Hon Uhuru read his budget he had just received kshs33 billion and about kshs17 billion from the World Bank and IMF respectively. I dont know whether the two loans are included in the kshs893 billion debt or the kshs109 billion to be borrowed this year or in none of the above. Hon Uhuru knows. But of course he tells us we should be happy because after all the debt will be “declining thereafter." How it will be declining, he doesn’t tell us.
Hon Uhuru mentions two sources of money to fund his budget: international donors and domestic financial institutions. Let's look at them. International donors: while "stimulating" the economy is vitally important, it is imprudent to run back to international donors to borrow. I would hate to dwell on effects of reliance on international donors--and by this I mean IMF, World Bank or specific governments of, especially, developed world, instead I would recommend Dambisa Moyo's Dead Aid. (I will return to this--Kenya and the rest of the world--in my subsequent postings.)
The other source of funds, he says, will be domestic from domestic financial institutions. By this he means borrowing from local banks, stock market etc. Hon Uhuru is an economist and he knows well the effects of government borrowing mercilessly from domestic financial institutions. These are the same institutions from which other local investors borrow to fund local investments (and of course with all these tax cuts, more local investors will be hoping to run to banks, etc to borrow.) Increased (domestic) demand for loanable fund (kshs 408 billion in 2008/2009), reduced or constant national saving (kshs311 billion), send interest rates skyrocketing. Of course high interests rates mean that the cost of borrowing goes high too. People get de-incentivized to invest domestically. Hon Uhuru acknowledges that investment is an important component of economy but he fails to notice how malignant government borrowing is on investment.
Maybe let go the question of borrowing and funding the budget. Let's assume a scenario where Hon Uhuru, through his renowned expertise in economic, accounting and local and international networking matters, gets all the kshs870 billion to fund the budget and shore up the economy. Let's go with his word that most of the monies is 'devolved' to constituencies in form of CDF. Two question: Is Kenya's Central bank in a stable and independent position to handle inflationary effects this quantity of money would cause? Are there institutions at either constituency or national level to ensure transparency and accountability in handling these CDF monies? My answer: negative. I doubt the capability of CBK in handling large amounts of money in the economy. Results from fiscal changes in the past 7 seven years attest to this. In my village we used to buy a 500g loaf of bread at kshs18, in 2002, before CDF was introduced. Now we buy a 400g loaf bread at kshs 32. It is lighter yet more expensive. I blame it on the increase of money supply (CDF) and inability of CBK to regulate inflation rates that ensued. On members of parliament handling CDF money, I think our dailies have served us well on feeding us with news on embezzled funds in many constituencies.
The bottom line here is that Uhuru's budget is well intentioned but, at best, it ignores or downplays effects of excessive budget deficit and government borrowing and, at worst, it promotes embezzlement of public funds and makes lives of an average Kenyans even more miserable.
Uganda seems to be following suit. The belief that a lot of money is a guarantor of economic success. Worse, borrowed money. http://www.economist.com/agenda/displaystory.cfm?story_id=13891595
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