President William Ruto inherited an economy struggling with debt, inflation, unemployment and national pessimism. The International Monetary Fund (IMF) has also added to its pain: it recently called on Kenya to broaden its tax base and remove the fuel subsidy.
Broadening the tax base will mean bringing more “scammers” – the basic support base of Ruto’s informal workers – into the tax net. This could annoy his political supporters. Removing fuel subsidies will raise prices and lead to further inflation, something Ruto has campaigned against. The latest fuel price revision, which resulted in high fuel prices, shows that Ruto is serious about removing subsidies.
Ruto has made the economy the main focus of his campaign, promising Kenyans a radical transformation if he wins. But in politics, promises and reality are two different things. Implementing a manifesto will require money and new economic structures, and will even meet resistance from defenders of the status quo.
Some decisions to straighten out the economy can be taken immediately, others later. One reality that Ruto has to face is that it takes time for most economic policy actions to make a noticeable difference.
This lag can be a political problem, especially when an election is based on high expectations and high promises. For example, lowering taxes on goods and services does not immediately translate into lower consumer prices because old inventory must be sold first. Also, employers rarely raise or lower wages just because there is inflation or a change in market conditions.
Similarly, the fall in interest rates does not lead to an immediate revival of economic activity. Businesses and consumers take time to decide how much to borrow and whether to invest or consume to create demand.
But voters want instant results because they voted instantly! Explaining the lag to ordinary voters should be every politician’s starting point, using language and a tone that doesn’t make it sound like an excuse.
Based on Ruto’s preference for bottom-up economics, the manifesto, and the inaugural speech, here are five areas he should focus on first (in no order of merit) to revive the economy.
Agriculture. In his manifesto, Ruto prioritized five sectors, starting with agriculture. Other sectors include micro, small and medium enterprises; housing and settlement; health and the digital highway; and the creative economy. The prioritization of agriculture is not accidental by chance; Ruto was formerly Minister of Agriculture. Many voters live from agriculture. And a hungry nation is an angry nation. Ruto must balance interests along the value chain, from farmers to consumers.
Agricultural productivity has been the main challenge due to land fragmentation. Improving productivity takes time; from seed production to logistics and even increasing consumer purchasing power. Subsidies are the simplest option to deal with rising food prices. But recent maize subsidies have shown why they are not the best solution. Flour prices never dropped much and there were shortages. Are the cheaper fertilizers promised by President Ruto subsidized? Increasing competition and efficiency along the value chain is a better option. Agriculture passes the bottom-up test because many citizens at the bottom of the pyramid would benefit.
Micro, small and medium enterprises or the “hustler economy”. The new administration has promised this segment a fund of 50 billion shillings ($500 million) a year. Funding sources and allocation mechanisms have yet to be announced. It is expected to draw inspiration from the Uwezo Fund, which was created by the outgoing administration in 2014 to help young people, women and people with disabilities obtain finance for entrepreneurship. Its results are mixed, with low loan utilization and high default rates.
Housing and settlement. Addressing the housing shortage, especially in urban areas, is another bottom-up initiative that would benefit many citizens. A curious proposal in Ruto’s manifesto is to increase mortgage accounts to 1,000,000, without giving a clear timetable. This is a very bold move as the country currently has only 30,000 mortgage accounts out of a population of 54 million.
The proposal suggests that market forces rather than government will drive the housing market. But interest rates need to come down so that more citizens can pay the mortgages. To drive down interest rates, Kenya needs more banks to stimulate competition. The current number of banks is not competitive enough to lower interest rates and manage this growth.
Health care. A healthy nation is a productive nation. A national insurance system free from waste and nepotism could easily fund health care in Kenya. It is a very young nation. Many Kenyans are not covered by health insurance. Around 80% of Kenyans are in the informal sector and affordable health care is beyond their reach. Social security coverage is generally low in the informal economy: 75.7 per cent of enterprises do not pay contributions for their workers to the National Social Security Fund and the National Hospital Insurance Fund.
Digital highway and creative economy. It appeals to young people and Kenya has a head start. The country needs to move beyond social media to real work like gaming, outsourcing, software engineering and artificial intelligence. Will Ruto return the tablets to schools?
These sectors closely mirror the Big Four agenda of the last government, where Ruto served as vice president. Some are borrowed from Vision 2030, the late President Mwai Kibaki’s national strategy.
Kenyans and others will watch how Ruto’s economy will differ from that of former presidents Jomo Kenyatta, Daniel arap Moi, Mwai Kibaki and Uhuru Kenyatta.
[XN Iraki, associate professor at the faculty of Business and Management Sciences, University of Nairobi, wrote this article for theconversation.com]