Tomorrow, Treasury Cabinet secretary Henry Rotich will present the 2016/17 financial estimates amidst a slew of proposals that failed to take off from last year’s budget.
As he read the statement last year, the CS outlined key reforms that would have been implemented in the last 12 months. But while most of the policy and sector reforms he proposed have taken off, some of the key initiatives have fallen flat or not had the impact they were expected to have on the economy.
Most of the initiatives were let down by uncooperative private sector, but others failed because of internal government disagreements or because Treasury changed the goal posts.
One of the key proposals that failed because of internal government wrangling is the reform targeted at the financial sector.
Last year, Rotich had proposed to raise banking capitalisation to Sh5 billion as a measure to make the sector stronger. This would have been implemented in three years up to 2018.
But the proposal, which was contained in the Finance Bill 2016, immediately attracted opposition from Central Bank of Kenya (CBK) Governor Patrick Njoroge who disparaged it as old-fashioned.
Njoroge told the National Assembly to strike the proposal out because it was not the best way to regulate banks.
“We have discussed minimum capital with the Treasury. It is an old proposal that was first made in 2013. Some banks have had different proposals but the CBK is quite uncomfortable with it,” he told National Assembly’s Finance, Planning and Trade committee.
The proposal would have forced mid-tier banks and small banks to shore up capital and avoid possibilities of liquidity crisis.
In what appears like a case of one’s actions returning to haunt him, a few months later three mid-tier banks ran into problems, with Imperial Bank falling just a few days after Njoroge had appeared before the parliamentary committee.
Dubai Bank was also put under receivership and subsequent liquidation, while Chase Bank was temporarily closed following a run by depositors.
On monetary policy, Rotich, who was taking cue from President Uhuru Kenyatta and his Deputy William Ruto—who publicly called for a drop in interest rates—outlined various measures to drive the charges down.
A key proposal was to contain the fiscal deficit and adopt alternative sources of funding such as the Eurobond, which would ensure the government did not crowd out the private sector from the credit market.
Again, none of these initiatives took off as CBK had other ideas. From about the same time he was making the proposals, the regulator’s Monetary Policy Committee was more concerned with pulling down inflation to a single digit in line with the East Africa Community guidelines.
The committee adopted a tight policy, setting the Central Bank Rate at above 11 per cent, only easing it last month. The move saw interest rates on government securities shoot through the roof, with 90-day Treasury bill peaking at a high of 22 per cent.
The impact of was a sharp increase in commercial banks’ lending rates, mass defaulting by borrowers and a drop in government revenue.
One of the alternative government funding initiatives Rotich outlined was the M-Akiba bonds where Treasury would borrow directly from the citizens. In the bond, Kenyans would be in a position to lend as little as Sh3,000 to government and earn a fixed interest.
The programme was to have been implemented in collaboration with mobile phone service providers but one year later, with Treasury still watching the high interest regime maintained by CBK, it is yet to be launched in spite of its potential to ease the government cash crunch.
But it is the resistance by private sector on Rotich’s initiatives that is outstanding.
The fight by private sector on government efforts to shore up its revenue at a time that Kenya Revenue Authority (KRA) has missed targets for consecutive years, is not new but it has gone up in the last three years.
For example, in 2014, Rotich reintroduced a five per cent capital gains tax on any asset transfer. This was aimed at plugging the budget deficit that has been expanding in the recent past.
But stock brokerages and investment banks flatly refused to implement the tax—in insisting that revenue collection is not their business and the government had to look for another way of collecting the tax.
That was the last Treasury would speak about the new tax until it was scrapped in last year’s budget and replaced with a 0.3 per cent levy on the value of shares sold.
Private sector players led by banks have also chocked the government’s innovative infrastructure financing programme through public-private partnership.
In the road annuity programme, private sector players are expected to construct roads through financing from commercial lenders, who then get reimbursement from the government.
The project did not take off as contractors quoted figures above the government ceiling, partly due to high interest rates charged by banks, while Rotich had budgeted for a Sh5 billion guarantee to the programme.
In fact, it has taken a whole year for the government to sign the first project under the annuity programme. Even then, it is for a small part of the planned 10,000 kilometres.
The 91-kilometre project in Kajiado county will be built by Intex Construction Company under the supervision of Kenya Rural Roads Authority.