How to Manage the Cost of Living – The Experts’ View

When the National Dialogue Committee retreated to Elementaita a couple of weeks ago, there was heated debate on the cost of living. The Azimio Coalition insisted that lack of progress on this issue was a deal breaker. It was the reason Kenyans went to the streets.  The Kenya Kwanza side insisted, however, that as the team in office, controlling inflation was their policy choice to make. Ultimately, both sides had to face the stark reality.

The relief on food prices brought about by the long rains had bottomed out at 6.7% inflation in August. Now all sectors are showing price increases.  Inflation inched up to 6.8% in September, and 6.9% in October.  Clearly a compromise was necessary. And one was found. Invite experts.  

The list of invitees to the Tuesday roundtable included the Society for International Development (SID), The Institute of Economic Affairs, The Controller of Budget, The Auditor General, The Parliamentary Budget Office, The National Treasury, and State Departments for Housing, and Energy. 

The Orange Democratic Movement (ODM) rejected to the invitation of the World Bank and IMF, issuing a public rebuke.  The KK team did not seem to mind the rejection.  And perhaps with good reason, for if the policy choices are theirs to make, how would the appearance of the World Bank and IMF at the talks be taken?

Treasury on its part, pushed forward their participation to next Monday, claiming to be held up with the King’s visit.  It was a lame and ill thought excuse – the interests of Kenyans trump and king.  Likely they needed time to get executive direction.

The experts were invited to suggest ideas on how to manage the cost of living. What have they said so far?  Provide basic relief to citizens, reduce taxes, eliminate waste and corruption, reduce expenditure and borrowing, stimulate production. We examine each briefly.

IEA made a strong case for providing basic relief to the citizens especially the bottom 25%. They provided labor market data to show that real wages have not recovered to pre-covid levels. In addition, the inflation effects are not uniform across income bands.  Citizens with low incomes suffer more from inflation, because they are spending more than 40% of their income on food.  Just a day’s taxation – 8 billion shillings – would be enough to provide the necessary relief.

IEA argued to the infamous housing levy, now a tax, is a poor policy choice. School infrastructure has a better return on investment. After all, there are 15 million young people in schools, compared to the 250,000 houses that the levy will supposedly provide annually. 

In the plenary, it emerged that the levy is now a tax, and that paying it does not in any way guarantee you a house. Many in the room gasped in surprise. Haiya! Isn’t that obtaining under false pretense someone chimed in.

The experts pointed out that the taxation in finance act 2023, and medium-term expenditure framework is unsustainable. They pointed out that beyond a certain point, increasing taxes results in lower collections, citing the example of the lower collections in the fuel levy, and the lower than expected total first quarter collections by the KRA.

They were emphatic that the current high interest rates will continue to hurt production, while fueling faster growth in debt service.  This year interest payment on public debt will be 775 billion shillings.

The experts presented data on the purchasing managers index and the CEO survey to demonstrate that business confidence remains low.  Coupled with the fact that incomes have not fully recovered from covid, they urged for a stimulus program. They pointed out that the stimulus program by the Jubilee administration was too small and insufficient.  A bigger intervention is required.  For this to succeed, it must be coupled with interest rates.

They called for better fiscal discipline, pointing out that there are plenty of opportunities to streamline and reduce the budget. First, there are state departments with overlapping functions, and duplication county functions. For instance, coordination of international development partnerships is a function in both the Deputy President’s docket and the Ministry of Foreign Affairs.  The Treasury also has a fully-fledged external resources department! 

Regional development authorities duplicate county functions and should be scrapped altogether. Semi-Autonomous Government Agencies (Sagas) account for 40% recurrent expenditure. One Saga has 150 million recurrent, to implement 30 million shillings in development budget.

But it is the padding of the budget, and parliament’s blind eye to this practice, that hogged the media attention. The Controller gave the example of her own salary, budgeted at 3 times the actual amount.

All this is reason to worry.  A weak parliament poses a great risk to public finance management. One of talks co-chairs was chair of the budget committee during the previous administration. He claimed that his committee acted under duress in framing the previous budgets.  Yet the 2010 Constitution gave the national assembly power it is not using, and in a bizarre twist, sometime giving it away as happened in the Privatization Act 2023.

A dramatic demonstration of parliament’s weakness is the huge difference between the resource figures in budget policy statement (BPS), the budget estimates as passed, and actual expenditure.  The whole point of the BPS is to establish the resource envelope within which budgets must, by law, to be contained.  That is why it is approved first and earlier in the budget cycle in January/February.  It is only after its approval that the budget estimates can be prepared.

But the experts demonstrated with data, parliament routinely approves budgets larger than the resource envelope of the BPS, completely undermining itself and compromising the budget process. 

Further, both levels of government exaggerate the revenues they can realistically collect. This allows them to have larger budgets, but with hidden deficits.  As a result, the stock of pending bills is now in excess of 751 billion shillings.

The executive’s “firm grip” on parliament is a terrible, not good, thing!