Kenyan economy could be headed the Ghanaian way

Opinion and Analysis

President Uhuru Kenyatta (left) with his deputy William Ruto at a past event: The presidency spent close to Sh1 billion on new vehicles up to June. PHOTO | FILE 

By George Bodo

In Summary

• Loss of public funds and poor fiscal discipline has set Nairobi on Accra’s ruinous path.

The Ghanaian cedi has now been classified as one of the world’s worst performing currencies this year. And officially, Africa’s worst performing currency.

The Cedi has frighteningly depreciated by 58 per cent since the year begun and by 97 per cent if stretched back to the beginning of 2013.

The Kenya shilling on the other hand seems to be on a good run and has only depreciated by a marginal two per cent since the beginning of the year and looks poised to be more stable in the second half of 2014.

But the problems bedeviling the Ghanaian cedi and its economy in general are purely structural and are very similar to Kenya’s current economic situation.

First, Ghana is dealing with a fundamental problem of non-existent production. The country’s exports have significantly declined to the extent the ability to generate foreign exchange has been severely impaired.

And the problem is that the country’s policymakers have been slow to enact policies to attract and encourage domestic production and Ghana is now an import-dependent economy.

These are similar deficiencies Kenya has been dealing with for a long time and could also be headed the Ghana way. In fact, between 2008 and 2013 Kenya’s total imports have grown by 84 per cent compared to just 47 per cent growth in exports (and of big concern is the fact that up to 95 per cent of Kenya’s imports are the non-productive home use goods).

Second is the fiscal indiscipline. Ghana’s public sector wage bill currently stands at 70 per cent of total government revenues. Kenya is also currently having its own battles with the wage bill.

While Ghana’s tax revenues stayed constant at some 18 per cent of gross domestic product (GDP) between 2011 and 2013, expenditures rose from 20 per cent of GDP in 2011 to 27 per cent at the end of 2013.

This has resulted in double-digit fiscal deficits, 12 per cent of GDP in 2012 and 11 per cent last year.

To finance these deficits, Ghana has had to tap the international debt markets twice, borrowing $1.5 billion (Sh132.4 billion) via Eurobonds at an average cost of 8.25 per cent.

This increase in Ghana’s debt has placed a major burden on its public finances to the extent that interest payments in 2013 alone were more than twice Ghana’s oil revenues.

And as if that is not enough, interest payments this year will be four times the country’s oil revenues. So now the benefit of Ghana’s oil discovery has been compromised by the increase in borrowings.

Back home, Kenya just borrowed $2 billion (Sh176.5 billion) from international debt markets to help bridge its budget deficit.

At the close of fiscal year 2013/2014, Kenya’s interest payments on debts were nearly 15 per cent of government revenues and now this could rise to 20 per cent in the current 2014/2015 fiscal year. And Kenya still plans to borrow more dollars from the debt market.

Finally, Ghana is suffering from a manifestation of the ‘people risk’. This is about not having the right people to take bold steps in formulating the right policies to help bring the economy out of the woods.

That also helps explain why the IMF has stepped in. There’s a general lack of high quality policy formulation in Kenya too.

So while Ghana is already paying for the ‘national sins’ it started committing about five years ago, and especially sins that entail fiscal indiscipline and pilferage of government revenues, Kenya has already started committing the same national sins.

There are high chances that, if bold policies are not adopted, then the Kenya shilling’s future performance is also at stake.