E A Country Budgets: Can We Afford the Stimulus?

Published on 16th June 2009

As a norm each month of June, the three East African countries (Kenya, Uganda and Tanzania) simultaneously read their budgets for the coming fiscal year. The budgets harped on respective governments’ plans to navigate the harsh economic recession that has hit the region and the world at large. Key to note was the emphasis of each government giving a stimulus plan to help their economies achieve growth.

 

Although the global financial crisis and the consequent recession have seen the global economic growth contract by 1.3% in 2009, analysts project that the world economy will grow by 1.9% in 2010 due expected reversal of the adverse effect of the recession. Sub-Saharan Africa’s gross domestic product (GDP) is however expected to slow down to 2.4% from 5.7% in 2008.

 

In East Africa, Kenya registered a GDP growth of 1.7% compared to 7.1% in the prior fiscal year. Similarly, Uganda’s GDP growth during the year 2008/2009 dropped to 7.0% from 8.3% the previous year. Only Tanzania showed some improvement with its GDP growing by 7.4% in 2008/2009 from 7.1% the previous year.

 

With the stimulus package in mind, the three East African countries have increased their budgets despite the harsh economic realities. In Kenya, East Africa’s largest economy, government spending in the year through June 2010 is set to increase by 14.7%, while Tanzania plans to lift expenditure by 32%. Uganda’s expenditure is set to increase by 14%. All this has been done with the blessing of the International Monetary Fund (IMF)

 

While studying Economics at university, I learnt that an economy is like a household (that is, a household best illustrates a perfect unit of the entire Economy.) Using the basic principle that a household uses, the government (as the head of the household) is supposed to ensure growth of the economy. It beats logic that at a time when the economy is facing tough financial times, the government should increase expenditure (albeit on borrowed money) instead of cutting on costs. This increases the government’s deficit levels and may cause bigger problems further down the line e.g. an increase in interest rates.

 

The cost of running bloated governments in East Africa, especially Kenya’s coalition government, has been a big cause of concern. In spite of the fact that Finance Ministers of the three East African countries did not raise taxes effectively, they neither reduced them nor addressed pressing issues like soaring food prices and the general increase in the cost of living for the citizens. There were no specific measures to create jobs, arrest runaway inflation and tap into the huge human capital pool swirling in the informal sector.

 

A closer look at the stimulus packages announced in the budgets indicates that the monies allocated to the specific activities may end up in personal coffers rather than ‘stimulating’ the intended sectors. In Kenya, despite fears that the Constituency Development Fund (CDF) framework was weak and grossly inefficient, Treasury maintained that it was the best platform to channel Ksh.50 billion or US$665 million of the economic stimulus. Other means of channeling the stimulus include the questionable Kenya Airports Authority (KAA) that has been granted direct access to airports revenue with no clear structures to oversee its spending.

 

A lot of internal borrowing was mentioned in the budget readings, with Kenya and Uganda expecting to finance its deficit by borrowing over Ksh.109 billion or US$1.4 billion and Ush.214 billion or US$102 million from the local market. However a big chunk of the government expenditures, especially those associated to development expenditures such as infrastructure building, have been financed by donor aid. 33% of the Uganda budget or Ush.2.5 trillion is donor financed, while Kenya’s 17.4% and Tanzania’s 33.4% are externally financed.

 

As much as East Africa’s economies need to be cushioned from the adverse effects of the global recession, it’s clear that our governments cannot afford a stimulus plan like the one witnessed in developed countries. Lack of a productive capacity in our economies has literally turned us into ‘beggars for aid’ at the mercies of the external financers.

 

Throwing big monies to inefficient (if not corrupt well connected) firms in the name of a stimulus plan is not the way to go for our countries. Perhaps a more sober look at the issue would be to improve on our agricultural sustainability and build the necessary infrastructures needed to enable a productive and efficient East Africa.

 

 


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