Kenya: Excessive Red Tape Compounds Economic Malaise

Kenya’s growth slowed down in 2011, largely as a result of high import costs and bad weather, but it has also emerged that the country’s ministries failed to utilise their budgetary allocations, thus accentuating rising prices and adding to low productivity.

Unfavourable weather conditions, low exports, high imports and high oil and food prices have been cited as the main culprits holding back the gains made by the promising Kenyan economy. In addition, however, the inability to spend budgetary allocations has also had a negative effect on growth.

“As a result of these multiple shocks, real GDP is estimated to have grown by about 4.5% in 2011 down from an earlier projection of 5.1%,” Joseph Kinyua, the Permanent Secretary in the Ministry of Finance, told the annual banking and finance conference in Nairobi. While launching the country’s Economic Survey 2012 report, Kenya’s Minister for Planning, National Development and Vision 2030, Wycliffe Oparanya, confirmed what had been generally accepted, when he alluded to these elements and the weakening of the Kenyan shilling in the foreign exchange market in explaining Kenya’s economic deceleration from 5.8% in 2010 to 4.4% in 2011.

“The drop in agriculture, which contributes a quarter of our GDP, inflicted the biggest dent on the economy,” Mugo Kibati, Kenya Vision 2030 director, says. “We need to move away from rain-fed to irrigated farming and we need to bolster our value addition.”

Indeed, agriculture and the manufacturing sector performed well below the previous year. Agriculture grew at 6.4% in 2010, and only managed a paltry 1.5% in 2011 despite the government’s interventions in subsidising fertiliser and other farm inputs.

Wholesale and retail trade, mining, financial intermediation, education and construction, quarrying, hotels and restaurants are some of the sectors that performed well in a depressed environment. The manufacturing sector, on the other hand, grew by 4.5% in 2010 but in 2011 expanded by only 3.3%. In addition to expensive fuel costs, manufacturers added unreliable power supply as a key deterrent to their performance.

“This is a very worrying time for the manufacturing sector, which has seen decreased demand in the last quarter, as Kenyans come face to face with the reality of high prices which have eroded their purchasing power,” says Betty Maina, CEO of Kenya Association of Manufacturers (KAM). “Unfortunately, to cushion themselves against increased costs of production, manufacturers have no option but to pass some of the costs to consumers through increased prices.”

Transport and communications, which have been key economic growth areas that had boosted Kenya’s economy previously, performed dismally this time. The sector recorded a real value added growth of 4.5% as compared to 2010’s 5.9% growth.

Inability to spend allocations

But Kenya’s top economists are still holding their heads up and promising the economy will rebound before the end of the year.

“Going forward, real GDP growth is expected to rebound at about 5.3% in 2012 and rise further in the medium term, barring further shocks to the economy,” Kinyua says. The World Bank, on its part, supports the forecast that, in 2012, the Kenyan economy will record a 5.0% GDP growth even though it is yet to balance its books in readiness for an economic takeoff.

According to the World Bank’s Country Director, Johannes Zutt, the Kenyan government should take advantage of regional integration, where it is a dominant player, to boost its investments and to rebalance its economy. “Kenya’s per capita income has exceeded $800 for the first time and Kenyans have an opportunity to enjoy better standards of living as the economy progresses towards middle income status in the coming years,” says Zutt. But while much blame is placed on a weak shilling, expensive oil and an unbalanced export-import regime, it is now emerging that key ministries and state agencies failed to spend the billions allocated to them in the national budget.

According to the Office of the Controller of Budget, (OCoB), a constitutional office created by Kenya’s much-touted new constitution, more than half of the funds allocated to key government ministries are yet to be spent nine months into the year, thus denying the Kenyan economy an effective impetus to stimulate economic growth.

Indeed, these new revelations contained in OCoB’s Budget Implementation Review Report 2011–2012 indicate that ministries and departments had only spent 44% – which translates to $6.10bn – allocated to them by the end of the nine months. The remaining 66% is instead lying idle at the exchequer, slowing down economic growth and stifling both the quality and the quantity of public services. This lull in spending is blamed largely on a public contracting regime that is considered to be heavy in bureaucracy and has contributed largely to the government’s failure to meet its expenditure target projections of 75%.

“The Office of the Controller of Budget has noted from the expenditure analysis that some of the ministries, departments and agencies have only partially absorbed the resources available to them,” OCoBs report says. “A major concern as this non-utilisation of resources results in non-provision of goods and services to the public.”

Key ministries found wanting in public expenditure include local government, which spent 5.1%; Planning National Development and Vision 2030 used 6.7%; Public Service (14.9%); Independent Elections and Boundaries Commission (16.3%); Transport (25.8%); Housing (33.9%), Water and Irrigation (43.4%); Youth Affairs and Sports (45.7%; and Higher Education (48.5%).

The top spenders were National Security, which used 80.60% of its allotted share, followed by Special Programmes, which spent 70.80%.

According to Agnes Odhiambo, the Controller of Budget, the blame lies squarely in understaffing and slow recruitment procedures, whose ripple effect has weakened the ministries and state agencies in spending their share of monies in the exchequer. In other words, the Kenyan government is not only understaffed but lacks the capacity to spend.

Private sector alarmed

This has alarmed the private sector players, who see the government’s inability to spend putting a serious strain on the economy by increasing the high costs of doing business in Kenya. Private sector players point out that of the Kshs221.4bn ($2.6bn) earmarked for the development of infrastructure in terms of ports, railways, roads, electrification and telecommunications networks, only 38% had been used by the ninth month. Despite this, in the 2012/2013 budget, allocation for infrastructure has been increased to $3.2bn.

That this state of affairs has seriously undermined Kenya’s economic performance is not in doubt. This is a disappointment to the East African Community (EAC), where the ripple effect of Kenya’s booming economy rubs off on its neighbours. Incidentally, the World Bank report acknowledges that the EAC is one of the fastest-growing regions in the world, growing at a rate of 5.8% in the last 10 years and registering the second highest growth of any economic bloc.

Kenya’s Finance Minister Njeru Githae said, “Kenya and the EAC region can ill afford the high costs associated with delays occasioned by weighbridges and road blocks along the Northern Corridor which serves our land-locked neighbouring countries of Uganda, Rwanda, and DRC. To facilitate trade and position Mombasa as a regional port ,the government will review relevant regulations and guidelines to ensure that by December 2012, all weighbridges are relocated to ports of entry and all road blocks are either removed or reduced to a bare minimum.” Wolfgang Fengler, the World Bank’s Lead Economist for Kenya, shares those sentiments: “Deepening Kenya’s intra-EAC trade would help reduce its widening current account deficit, cushion it against global turbulence and open the economy to more FDI. Increased trade in the region will contribute to food security, develop regional production chains, in food and manufacturing and open up new markets in services.”

Despite its inability to spend allocated resources, the Kenyan government has unleashed a $17bn budget, equal to the combined budgets of Tanzania, Uganda and Rwanda. Should this situation prevail, the long-term casualty will be Kenya’s ambitious Vision 2030 agenda, which seeks to make this nation a middle-income country by the year 2030.