Kenya in 2020: higher taxes, higher debt, more referendums

The East African nation with a population of 47 million began the 2020s facing a multitude of challenges, many of its own making over the last decade, and others due to regional and international events.

The main challenge is Kenya’s economy which has slowed significantly despite — some might argue because of — massive investments in infrastructure development.

In his address, televised from his official residence in the coastal city of Mombasa, Kenyatta outlined a plan to shift gears, reshuffle his cabinet, get rid of several non-performing Cabinet Secretaries, and address specific economic and political issues.

Seek ye first the economic kingdom

“I want the economy to be more important focus than politics,” Kenyatta said at the beginning of his address. [Read the full speech.]

• Kenyatta confirmed Ukur Yattani, appointed acting finance minister last July after his predecessor was arrested and prosecuted for economic crimes, as the country’s new Cabinet Secretary for Treasury.
• In the seven months since he took over, Yattani has provided what appears to be a more accurate report of the health of Kenya’s economy. He now has the daunting task of steadying the ship and balancing a growing macroeconomic downturn with debt repayments and missed revenue targets.

Kenyatta said the country’s two-tier governments had paid 70% of outstanding bills to suppliers and contractors in the last two months, and that infrastructure bills would be paid in early 2020, in time for an infrastructure bond of Shs 150 billion.

The plan, he said, is to increase the circulation of money in the struggling economy.

Last November, Kenyatta expended significant political capital to push the country’s legislature to remove a 2016 interest rate cap. “The removal of the interest rate cap in November last year will facilitate the availability of more credit to businesses which will, in turn, increase the circulation of money,” he said in his speech.

• Although small businesses account for more than 80% of businesses in Kenya, they only contribute to 30% of the GDP. But even that low contribution masks the reality that they provide the highest proportion of employment in the country.
• Kenyatta said the fintech product Stawi, a partnership between the country’s central bank and five commercial banks, will loan amounts between Ksh 30k and Ksh 250k, at an annual interest rate of 9%.
• Kenyatta also pointed out that the government would set up Biashara Centres, as a “huduma [centres] type of one-stop-shop to provide business development services under one roof”. Huduma Centres, launched by Kenyatta at the start of his first term, provide National Government Services from one single location.

What was missing

While Kenyatta made his address from Mombasa, he left out how he plans to revive the coastal city’s economy, devastated by his primary infrastructure project, the Standard Gauge Railway.

• His administration’s decision to force freighters to use the new railway has dampened the city’s economy, leaving it with just tourism as a primary economic activity.
• Since early 2019, the city has seen repeated protests by freighters, port workers, and human rights activists over the microeconomic consequences of the central government’s decision.
• Just a day before Kenyatta’s speech, for example, several protestors were arrested in what one media house called “anti-SGR” protests.

Also missing were any tax breaks for the country’s struggling businesses. With looming debt repayments, a ballooning wage bill, and revenue target misses, the country has doubled down on tax collection, which will undoubtedly affect measures to improve the business climate.

• A week before Kenyatta’s speech, his administration introduced a new 3% “patriotism tax” on small businesses.
• A new 15% presumptive tax also came into effect on 1 January.
  Even measures such as the fintech product will be affected by taxes on mobile money, which increased the cost of using MPESA and other similar services.

Another significant gap was transparency in the government’s deals.

While asking Kenyans to hold him and other leaders accountable for their promises, Kenyatta did not address his promise to share publicly the SGR contract between Kenya and the Chinese. The opaqueness and secrecy of such deals, pundits argue, presents a potential danger to the country’s economic prospects in the short term and the long term, especially as the infrastructure loans become due.

The day the locusts came

To fix agriculture, one of Kenya’s primary economic pillars and source of wage employment, President Kenyatta fired his Cabinet Secretary, and set out a plan to get rid of cartels in the coffee and tea sectors.

Kenyatta replaced CS Mwangi Kiunjuri with Peter Munya, a former county governor who says he is “on leave” from politics.

• Kiunjuri’s tenure as agriculture minister was fraught with protests over his handling of this critical sector, and his firing did not come as a shock to anyone, including himself.
• Days before his firing, Kiunjuri asked Kenyans to crowdsource information about an ongoing desert locust invasion by sharing images with the government.
• The work of managing the locust invasion now falls on the new CS’s immediate to-do list, as the swarms have already invaded ten counties (and counting) since they moved into Kenya from southern Ethiopia in late December.
• Left unmanaged, the invasion threatens Kenya’s food security, and economy, in the short and medium term.
• Coupled with ongoing rains, unusual in the country in January, which are already destroying maize and other critical food supplies, the East African country could be heading into a period of famine.

As part of his reform of the key coffee and tea sectors, which have faced multiple challenges that have left farmers broke, Kenyatta said he would restructure the tea body, and that “no one who is not a registered tea grower is allowed to sell it”. He also set out new rules to boost value-addition to increase the country’s income from its exports.

• In the coffee sector, where cartel behaviour and low prices over decades has led farmers to cut their coffee trees, Kenyatta said his government would be launching a Shs. 3 billion revolving fund to “cushion farmers from delayed payments and enable them to access finances to meet their daily cash flow requirements”.
• Under its new Cabinet Secretary, the agriculture ministry will also build cold storage for potato, banana, and rice farmers in three towns, and buy excess rice to sell to disciplined forces, prisons services, and boarding schools.

Kenyatta also imposed a “16% VAT on milk products that have originated from outside the EAC” in a bid to stem the “incursion of powdered milk which is smuggled into Kenya from outside our Eastern Africa Region”.

He also promised to invest in the government’s creamery so it can “purchase excess milk from farmers to convert it into powder milk for future use”.

Why this will be a challenge

Kenyatta also directed the country’s intelligence service to investigate and identify cartels and hand the information to investigators and prosecutors. It is unlikely, however, that anything short of radical changes to the coffee and tea sectors will revitalise the agricultural sector.

• Cartel behaviour in the country’s agricultural sectors is deeply rooted, as an October 2019 investigative series into the tea sector, published by the Daily Nation, showed.

On the milk sector, Moses Kuria, the legislator of Kenyatta’s home constituency, responded, “The only problem is Lato Milk, which comes from Uganda and Kenyan milk processors who moved to Uganda due to the low cost of production, process the milk, and re-export it to Kenya.”

Milk is particularly controversial for Kenyatta, because the Kenyatta family is heavily invested in the sector and runs the biggest milk processor in the country.

• Since Uhuru Kenyatta’s ascension to power in 2013, Brookside Dairies, under the watchful eye of his younger brother Muhoho Kenyatta, has acquired almost all its competitors in the country, building a near monopoly.
• It is likely that any moves to protect the country’s milk sector will undoubtedly be seen as a move to protect his family’s financial interests.

Also missing is how the Kenyatta administration plans to bring down the cost of food. For example, on the same day as his televised address, the country’s energy regulator announced an increase in the price of fuel.

In late 2018, the IMF arm-twisted Kenyatta into introducing a new tax on fuel products, which, combined with the US-Iran conflict, will most likely lead to even higher fuel prices.

Taking into account the weighted average cost of imported refined petroleum products, the changes in the maximum allowed petroleum pump prices in Nairobi are as follows: Super Petrol, Diesel and Kerosene increases by KShs.0.70, KShs.0.54, and KShs.1.64 per litre respectively. ^DC pic.twitter.com/X81KAiyTNx

— Energy and Petroleum Regulatory Authority (@EPRA_Ke) January 14, 2020

The price of fuel is directly linked to the cost of food, and a new tax on petroleum products

Entertainment, Health, and Corruption

In a bid to ease complaints about how royalties for creative works were paid, Kenyatta said digital platforms run by private companies would be eliminated because they sit “outside the collection management organisations,” and payments of royalties would be managed centrally.

• “It is estimated that the new system will see an increase in collections [of royalties] from a previous Ksh 200m per year to an estimated Ksh 2 billion per year, a tenfold increase.”

In health, one of Kenyatta’s second-term primary projects, the President switched his Cabinet Secretaries, appointing Kibaki-era minister, Mutahi Kagwe.

• Kagwe served as a senator between 2013 and 2017 and was in charge of communications when Kenya launched East Africa’s first fibre optic project, and MPESA (during Kibaki’s second term).
• To help start him off, Kenyatta halted a new raft of rules imposed by the national insurer.

Kenyatta also addressed his war on corruption, which has seen many senior and former Kenyan politicians prosecuted for economic crimes. He called on the Judiciary, whose head complained about being forced into impractical austerity just a few months ago, to support him in the fight, saying his efforts had led to deterrence.

• “It is a shame on our country that we prosecuted a case against drug traffickers and we could not get a conviction and within a year of them being arraigned in the United States they have been jailed for no less than 25 years,” Kenyatta said, referring to the Akasha case, where former drug lords confessed to bribing judges and other government officials in Kenya.
• The prosecutions, whose subjects include the Nairobi Governor, have made it easier to fight corruption because “instead of dealing with corruption after it has happened, our fight against corruption has ensured that we fight it at source”.

Security conspicuously missing

Despite more than five terror attacks by Somali militant group Al Shabaab on Kenyan soil, including one on a critical US base in the country, Kenyatta did not address the country’s security.

The attacks have frozen education in some parts of Northern Kenya, as the militant group targets teachers and other professionals, in addition to targeting communication masts and security forces.

Is a referendum on the way?

“It is time for a new consensus,” Kenyatta said during his address.

His former rival, and now primary political partner, Raila Odinga, has been traversing the country, campaigning for a referendum before the end of the year. Kenyatta’s deputy, William Ruto, and his allies have voiced their opposition to the referendum and the Building Bridges Initiative (BBI), a direct result of Kenyatta and Odinga’s detente in early 2018.

• Kenyatta and Odinga hope the referendum and other reforms will provide this new national consensus, which will be built on the tenets and issues addressed in the wide-ranging report.
• “The BBI process is inclusive, it should spell the end of ethnic majoritarianism,” Kenyatta said.
• While Kenyatta and Odinga try to reshape the country’s social and political direction, the Deputy President is increasingly critical of the process, and has termed it “a waste of public funds”.

“It appears it is more and more Raila and Uhuru in one camp and the deputy president struggling to fit in,” a Nairobi-based academic told Reuters.

After ascending to power together, the relationship between Kenyatta and his deputy is now all but dead. With a ruling party in shambles, and Kenyatta and Odinga now close allies, a referendum could provide Ruto with a way out.

It would be a repeat of the last such exercise in 2010, where he led the primary opposition against the new constitution.

• Ruto’s test elections in Odinga’s former constituency in Nairobi ended in defeat, and he has since been on the backfoot, trying to build a working campaign structure, while keeping his position as the country’s second most powerful man.
• His allies have been arrested and harassed, in a situation a Nairobi paper headlined as: “Strange times as Jubilee party opposes itself.” The now former CS, Mwangi Kiunjuri, is a close Ruto ally and is seen as a likely running mate in 2022.

While Kenyatta and Odinga move forward on the BBI, despite Ruto’s opposition, the deputy president’s allies have become the country’s informal opposition.

Kenyan political exile and Odinga’s friend-then-foe then foe-then-friend, Miguna Miguna, has received support for his predicament from what would have been, just two years ago, unlikely quarters.

• For example, Senate Majority Leader, and close Ruto ally Kipchumba Murkomen, accused Odinga of cutting a deal for himself, “and despite Miguna helping him to commit treason …. he has allowed Miguna to suffer27”.

Will Kenyatta’s plans for 2020 work?

Kenyatta’s administration has not achieved much of what it set out to do, however, the dynamics are different now the economy is spiralling out of control. It is likely he will push for reforms and expend as much political capital as he needs to — he is almost done with his second term — but his rift with Deputy President Ruto may slow him down.

• Ruto’s allies hold nearly all the senior positions in the country’s legislature, which will be crucial to any significant reforms. In the short-term, the legislature not only needs to change several laws, but it also needs to approve Kenyatta’s changes to his Cabinet.
• Most of the reforms, particularly to the agricultural sector, may be seen as Kenyatta’s solutions to his Central Kenya base, which could push the coast, for example, into Ruto’s sphere of influence.

In his speech, Kenyatta made as many significant promises and changes as he left out.

He made similar attempts in the past, as an editorial in the country’s oldest newspaper noted on the day after the speech, “it is easy to excuse the feeling of cynicism; that he is doing too little, too late”.