In 2023, Kenya witnessed a radical shift in fiscal policies, targeting taxation, public spending, government operations, and public debt management. These changes aimed to address a widening fiscal deficit, exacerbated by low tax yields, escalating debt service obligations, and economic challenges such as low productivity, high unemployment, and a cost-of-living crisis. A confluence of geopolitical shocks, financial market constraints, climate crises, global inflation, and internal mismanagement in public finance contributed to the economic turmoil.
From 2013 to 2022, the government maintained an average budget deficit to GDP ratio of -6.8%, primarily funding infrastructure projects through both domestic and foreign debt. Consequently, the public debt to GDP ratio surged from 44% in 2013 to an estimated 73% in 2023. The debt servicing ratio climbed from 36% in 2013/14 to an estimated 75% in 2023/2024 fiscal year.
While 53% of the Kshs. 10.5 trillion public debt is in foreign currency, tax yields, represented by tax revenue/GDP, dwindled from 16.2% in 2013 to 14.1% in 2023. The repercussions are evident as 77% of the current fiscal year’s ordinary revenue is allocated to debt service obligations, challenging the government’s ability to refinance debts amid financial market uncertainties.
Key Risks to the Transition:
- Public Resistance: Transitions can evoke public dissent if not managed well, leading to protests, litigations, civil unrest, and tax evasion.
- Lack of Fiscal Discipline: Historical tendencies of government officials mismanaging public funds erode trust, divert resources, and impede progress.
- External Shocks: Global events, as witnessed during the Covid crisis and Russia-Ukraine conflict, pose significant risks to the Kenyan economy.
Business Performance in 2023: Assessing the business environment in 2023 involves interpreting various metrics, with mixed signals from macro indicators. For a nuanced understanding, focusing on signals indicative of business productivity, consumer demand, and disposable incomes is crucial.
Selected Indicators:
- Electricity Production & Consumption: A 0.6% decline in electricity generation and a 3.4% improvement in consumption suggest minimal economic growth.
- Fuel Consumption: Declines in diesel, super, and kerosene consumption signal reduced movements and economic activity.
- Cement Production & Consumption: Stagnation in cement production implies muted investment activities.
- Tourist Arrivals: A 29% increase in tourist arrivals signifies a vibrant tourism sector.
- Food Production: Strong double-digit growth in food production suggests improved disposable incomes and lower inflation.
2024 Outlook: The upswing in food production towards the end of 2023 is anticipated to have positive cascading effects in 2024. Increased food production is expected to lead to lower prices, translating into improved disposable incomes and potentially sparking a rebound in consumer demand. This, in turn, could boost production across industries, particularly in manufacturing and construction.
Opportunities:
- Diversification from Government Reliance: Businesses overly dependent on government-related ventures should explore diversifying into private sectors.
- Innovative Production Models: Rising input costs may prompt local businesses to invest in innovative production models for enhanced competitiveness.
- Global Market Expansion: A depreciating shilling makes locally made products cheaper for overseas clients, creating opportunities for businesses to explore international markets.
- Financial Market Boost: The new privatization policy is poised to inject vigor into financial markets, presenting opportunities for market participants.
- Currency Risk Mitigation: Negotiating alternative trading currencies with overseas suppliers and diversifying sources of inventory can minimize exposure to currency fluctuations.
- Tax Compliance Optimization: Engaging tax professionals can help businesses navigate tax compliance efficiently.
As Kenya undergoes an economic transition, astute businesses that adapt to emerging opportunities stand the best chance of thriving in the dynamic landscape of 2024.
