Private sector holds the Key to the economy

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By Nelson Musau

The 2012/13 budget aims at sustaining economic growth by restoring and sustaining macroeconomic stability and focusing on economic policies and structural reforms aimed at facilitating private sector expansion, promoting productivity and building the resilience necessary for employment creation and poverty reduction.

To attain the aforementioned targets, the government projects to spend approximately KShs. 1.46 trillion. Kenya has to navigate the terrain of unfavorable weather conditions, relatively unstable macroeconomic climate laced with double digit inflation and high interest rates, anemic economic growth, lingering elections and cross the turbulent waters of unstable international market experienced in 2011/12 to realize the fruits of the investment.

Indubitably, the quest to sustain economic growth through expansion of the private sector is a noble idea that resonates with the spirit of the constitution and the drift of the new economic order. But of great interest is the level of our increased projected expenditure, the sources of financing and the inclusion of the private sector in Kenya’s development agenda.

Of the projected expenditure, 70% entails non-discretionary expenditures which consist of statutory obligations and salaries for constitutional offices. The remaining 30% will be directed towards development expenditure expected to be principally sourced through borrowing. The budget presents a deficit of KShs. 279 billion.
 
For Kenya to attain a stable macroeconomic climate and realize the Vision 2030 dream, the above trend has to be reversed. Going forward, Kenya must adopt a balanced budget at worst to accelerate growth. The first step is to cut on non-priority expenditure. Maintenance and operations of ministries and departments entailing printing, hospitality supplies and services, foreign travel and subsistence costs, purchase of motor vehicles, office furniture and other equipment, amongst other unjustified expenditure must be reduced. Article 201 of the constitution which advocates for prudence and responsibility in expenditure of public money should be entrenched as one of the guiding principles.

Notwithstanding the cut on unnecessary recurrent expenditure, financing the budget and fast tracking the development agenda remains imperative for the economy. Treasury heavily relies on tax revenue and borrowing for financing which have serious ramifications such as constrained tax base as well as crowding out of investors due to increased domestic borrowing. Kenya has a complex tax code which defies the international best practices culminating into poor tax collection hence tax reforms are incessantly beckoning. The tax system ought to be improved by rationalizing the existing tax incentives, expanding the tax base and removing irrational tax exemptions. The Minister has made an attempt on this by revoking erstwhile exemptions for the privileged state officers under the Income Tax Act and the Customs and Excise Act. Despite the tax reforms, the economy needs also to register significant economic growth if the tax revenue is to increase.
 
The other source of solace is borrowing. A debt sustainability analysis for Kenya in late 2011 based on the International Monetary Fund (IMF) frameworks shows that the economy faces a low risk of external debt distress. However, the public debt to GDP ratio which currently stands at approximately 51% is not sustainable. If the economy turns to debt financing, the pursuit to ensure long term debt sustainability will be compromised. Over reliance on debt is detrimental in the quest of a sustainable debt level which might destabilize the macroeconomic climate thus crowding out the private sector investment.

The proverbial silver lining is visible in the government’s realization that the private sector holds the key to revolutionizing the economy. More than ever before, the privatization program as well as the enactment of Public-Private Partnership (PPP) Bill has to be accelerated. The PPP will create a convivial environment for private participation in the provision of public services through investment of capital, managerial skills and technology. 

However, for the economy to realize the full benefits of the PPP, a number of issues must be addressed. Political, policy and institutional and technological framework must be set up to define the necessary and desirable levels of collaboration between the public and private partners. In such a partnership, non-traditional partners are expected to coalesce hence the risks of collusion; co-option and conflict of interest remain inevitable. Such risks must be acknowledged and managed at the earliest time possible.

The private sector participation must also be managed to ensure that the corporates strengthen and supplement the efforts of the government without assuming the roles of the government. Roles and boundaries will also have to be drawn between the private and public partners. In a nutshell, all the issues that impede private sector players from transacting with the government must be addressed while the private sector must be ready to take the economy to the next level. In this partnership, Kenya needs not re-invent the wheel as lessons can be drawn from economies like India, Thailand and closer home, South Africa. The private-public partnership initiative has therefore to be embraced as the mustard seed that should find fertile ground to germinate and transcend the Kenyan economy to new heights.

The writer is a tax consultant with EY. Email: nelson.musau@ke.ey.com. Views expressed are not necessarily those of EY.