Kenya: Budgetary Blindness: Is Kenya's Fiscal Stimulus a Typo?

Thursday, 04 June 2009

Coffee break grumblings at the recent EuroFinance workshop showed that businesses in Kenya are under pressure from both the global crisis and Kenya’s domestic issues. Uhuru Kenyatta, in his opening speech, confidently spoke of the Kenyan government’s firm intention to help business – but not just anti-corruption campaigners Mars Group are wondering if resources for a fiscal stimulus are being sidetracked by ‘typos’ and similar mishaps.    Uhuru Kenyatta probably should have been nervous when he was asked to give the inaugural address last week at East Africa's first EuroFinance conference on corporate treasury management and risk. May 2009 has been a particularly trying time for the minister, following allegations by the Mars Group that his office, Kenya's Ministry of Finance, misplaced KES10.76bn when presenting the supplementary budgets to parliament, not once, but twice in one month. Kenyatta has refused to speak to the press about the matter, claiming the misplacement was a computer-generated “typo” that his staff were now working diligently to repair. But as he took the podium to address East Africa's top business leaders - the conference was co-sponsored by Barclays, Standard Chartered Bank and Citi Bank, with guest speakers from Gulf Energy and Nakumatt, and even a few reps from Dubai in the crowd -, Kenyatta was as slick as ever. His speech soared between patriotic maxims (“ask yourself: what it is I can contribute”) and IMF talking points (“we have to jealously safeguard our macroeconomic stability”). Between these sweet nothings, his message was that the Kenyan government was here to help business – the country's “front line” of defense – to weather the quintuplet crises that brought economic growth in 2008 to a grinding 1.7% slowdown after the 7.1% in 2007: drought, high energy costs, low commodity prices, post election violence and the global recession. The government has committed itself to an expansionary fiscal policy, Kenyatta said, to boost domestic demand and create jobs, with a focus on key sectors to encourage growth: roads, water, energy and other important public works. The Central Bank of Kenya was working on liquidity, and the regulatory reform unit at the Ministry of Finance has promised to make business licensing easier. The goal is a 3% growth rate in 2009. Partnership in Crisis The question, of course, remains whether businesses in Kenya can trust the government to hold up its end of this get-out-of-the-crisis-alive partnership. Business could certainly use the help, as was evidenced by the murmurs floating around the EuroFinance conference. The purpose of the two-day seminar was to explore how companies can optimise their dwindling cash flows and restructure their corporate investment and management models to mitigate heightened risks. It was very well attended. An anonymous electronic survey conducted of the 150 or so people in the audience on day one found overwhelming agreement (between 60 and 80%) that: the amount of spare cash in corporate treasuries is in decline; corporate cash flows are becoming harder to forecast (a number one concern for business execs); corporate treasuries are revising how to cost and manage working capital; credit conditions are tightening; lack of funding is keeping companies from pursuing good opportunities; the global economic stimulus has been insufficient; trade financing is increasingly difficult to find; invoices are being paid later; lenders are pricing risk too conservatively; ratings agencies have lost considerable credibility; opportunities for affordable buyouts are up, while the fear of takeover is substantial; 86% said that by mid-2009, the global crisis will have significantly impacted their business. The survey also found that leaders have more confidence in the global economy than they did six months ago. This was backed by a presentation from Jeff Gable of South African Absa Capital that focused largely on “green shoots”. Thanks to a coordinated global monetary and fiscal policy response, “deterioration is slowing,” Gable said. Emerging Asia has turned the corner, with employment rates, exports, business confidence and industrial production on the rise. Unfortunately, around that corner is a very long recovery that will not see big growth or the solid global demand of the past return anytime soon (USD1.2trn lost global output is simply “not going to come back”). Adan Mohamed, Barclays Kenya Managing Director, summarised what this all means for East Africa : despite strong, well capitalised financial institutions and ample forex reserves, the financial crisis has hit the region through two main channels: trade and financial flows. Commodity prices on major exports like tea and coffee are drastically down (although tea authorities in Kenya say, ironically, that the drought has reduced supply and pushed prices up, leaving the industry overall not so worse for wear); stock markets across Africa are straggling, FDI, remittances and aid flows are all way down, along with tourism, which will soon begin to deplete those ample forex reserves. Inflation is at about 20% in Kenya (down from over 30% last year, but still horribly high), currencies are under pressure, food prices are ridiculous – and so what is the government doing about it? Inconsistent Response “I can say this now that the minister has gone,” Mohamed said only somewhat playfully: The lack of consistency of thought and response to the crisis in Kenya and Uganda is “worrying”. “Governments are major players in these economies,” he said, and the crisis has greatly limited their room to manoeuvre. Not that they were manoeuvring all that well to begin with: “The cost of doing business in these economies continues to be high and make business less competitive,” Mohamed said. “These are problems we've always encountered, but the crisis makes it much worse.” Mohamed stopped short of any very harsh criticism of the government in Kenya or Uganda – he thinks companies need to hunker down and “be prepared to challenge their business models”, look for innovative opportunities and hope that natural resource exploration (e.g. oil, mining and electricity generation) will give the economy a long-term boost. At least in public, business leaders in Kenya are often hesitant to ask the really difficult questions about the effect of government policy on profits and opportunity. Unfortunately, while the state has always been a big player in East African economics, the questions have never been quite so pressing as they are now. The rest of the world has looked desperately to government intervention since the onset of the financial crisis to stabilise economies, provide financial liquidity and get employment and demand flowing again. What will the Kenyan government, responsible for the region's economic hub, do to catch up? Where is the Stimulus Money? The answer to that question may lie, at least in principle, in the budget debacle that Mr Kenyatta appears to be somewhat breezily brushing off. As corporations seek out new forms of responsible treasury management and push to optimise every last penny, it seems reasonable to expect that the government should be doing the same, rather than “misplacing” USD135m. The issue is certainly bigger than a typo. A forensic audit - the first of its kind in Kenya , which has been recommended by the joint budget-finance committee to go back through three years worth of Treasury books to determine where money has or has not been misplaced, misappropriated, stolen, etc. – will reveal the truth about Uhuru's supplementary budgets. But anti-corruption campaigners Mars Group has also pointed to all kinds of general waste and mismanagement in federal coffers. This is no surprise coming from the same Treasury that brought you Anglo Leasing, a scandal that saw several hundred million dollars in public money signed away to phony international contractors. Mars says the government has paid out over KES200m this year for the KenRen fertiliser plant that was never built. The Nation also reported this week that the government may be paying millions of shillings in salary to some 20,000 “ghost teachers” who cannot be accounted for. Amidst these discrepancies, Mars estimates that 80% of the Kenyan budget goes to recurrent government overhead expenditure, leaving only 20% for development project spending. Donor Dependence and Fiscal Responsibility 20% only go so far, so in order to follow through on its Madaraka Day promises of 300,000 new jobs and multi-billion-shilling infrastructure projects, the government will be turning to the World Bank. Three days after the budget debacle was brought out in parliament, on 8 May 2009, the Bank approved a USD413m loan to Kenya , signed at the Treasury by Kenyatta himself. Three weeks later, the IMF approved a loan to the Central Bank of Kenya of USD209m to bolster the country's declining balance of payments. The Mars Group is rightly questioning this recourse to foreign assistance: If the Finance Ministry took the time to corral the billions of shillings floating around unaccounted for in the budget, the group argues, that money could provide a hefty, debt-free economic stimulus, with benefits to business all around. With a thorough examination of the budget, “we are confident we could identify KES200bn (USD2.5b) in questionable expenditures,” says Mars Group CEO, Mwalimu Mati. Without proper oversight, the government is happy to take that extra money – because money is quite fungible – that it didn't have to spend on its own stimulus or development projects and put it into new Mercedes' instead. This raises the question of how parliament can be doing its watchdog job better. While a few MPs decried the limited amount of time (one day) they had to actually read the flawed supplementary budgets that Kenyatta resubmitted in May 2009 before passing them, less of a fight was put up than has been voiced in the past by parliamentarians wanting more of a say in how the budget is written.  It also begs the question of how the IMF – which maintains a permanent staff in the Kenyan Treasury – can start pulling a little more of its newfound post-crisis weight. It seems slightly backwards when private consultants are pointing out the billions missing, while the IMF shells out USD209m with few questions asked. Overall, the principle is clear: a government that spends more time whining about the inferred political attacks against Kenyatta's presidential ambitions than seriously attempting to fix a very flawed and wasteful budget is not the kind of partner that can be trusted to launch and manage efficient crisis recovery programs. Business leaders have said that they appreciate the already effective government efforts to improve infrastructure throughout the country. But efficiency is the key word here: the programmes may happen, they might even achieve the 3% target growth goal, but they will fall far short of what they could be with some serious commitment to responsible financial management. In Kenyatta's own words: “Policies are only as good as the people who implement them.” Share this article with others: Comments (0) Subscribe to this comment's feed Write comment Show/Hide comment form Name Email Title Comment smaller | bigger Subscribe via email (Registered users only) I have read and agree to the Terms of Usage. Add Comment