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What Should Mbadi do? · The Mwango Capital Podcast

• 0:00
  SPEAKER_03: Ladies and gentlemen, thank you very much for your time this evening.
• 0:03
  SPEAKER_03: I know we've asked you to essentially carve time out of your schedule on a very
• 0:06
  SPEAKER_03: late Tuesday night,
• 0:07
  SPEAKER_03: and we certainly don't take your time for granted.
• 0:09
  SPEAKER_03: There's certainly quite a few things you could be doing at this point in time.
• 0:12
  SPEAKER_03: Welcome to this edition of the Mwango Spaces on the 30th of July, pretty much at the start.
• 0:18
  SPEAKER_03: really of the second half of the year.
• 0:20
  SPEAKER_03: It's a cold, rainy night from where we are in the Kenyan capital, Nairobi.
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  SPEAKER_03: And over the next 60 minutes, we'll be asking one question.
• 0:26
  SPEAKER_03: Assuming he is confirmed as Kenya's next finance minister, we'll be asking, what should John Badi do?
• 0:33
  SPEAKER_03: Now,
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  SPEAKER_03: granted,
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  SPEAKER_03: the political analysts among us will argue that,
• 0:35
  SPEAKER_03: look,
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  SPEAKER_03: the Member Parliament for Super South
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  SPEAKER_03: has been handed a metaphorical poison challenge with limited control of making a
• 0:42
  SPEAKER_03: wholesale rewrite of Kenya's fiscal policy and being able to implement it properly.
• 0:47
  SPEAKER_03: And they very well could be entirely right.
• 0:49
  SPEAKER_03: But let's park that aside for the moment.
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  SPEAKER_03: For the purpose of this conversation,
• 0:52
  SPEAKER_03: we're assuming he does have complete freedom of maneuver,
• 0:57
  SPEAKER_03: even if that means killing off pet ideas held by the country's top civil servants,
• 1:01
  SPEAKER_03: like the housing program,
• 1:02
  SPEAKER_03: for example.
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  SPEAKER_03: So to help you explore this idea in detail, I'm joined by the economist Stephanie Kimani.
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  SPEAKER_03: We also have Cecilia Gutt, who's an economist at IC Group.
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  SPEAKER_03: And then later on in the session, we'll be joined as well by Ruth Kendergaard.
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  SPEAKER_03: She's the head of research at the Institute of Public Finance, and they are also partly
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  SPEAKER_03: uh sponsoring the conversation that we're having tonight as always a quick reminder
• 1:24
  SPEAKER_03: just as we start the lines and the dms are open so if you have questions ideas
• 1:29
  SPEAKER_03: you'd like us to cover to explore please send them in response to the pinned tweet
• 1:32
  SPEAKER_03: on mongol capital's account or send it to their dm as well um i'm going to start
• 1:38
  SPEAKER_03: off with a question to pretty much my panelists at the moment to churchill and to
• 1:42
  SPEAKER_03: stephanie stephanie you get to go first on this one so
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  SPEAKER_03: Some 20 days ago,
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  SPEAKER_03: you know,
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  SPEAKER_03: we had an entirely different cabinet in place,
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  SPEAKER_03: but now there have been proposed changes at Treasury,
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  SPEAKER_03: as you mentioned,
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  SPEAKER_03: at the very start of the hour.
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  SPEAKER_03: From where you sit,
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  SPEAKER_03: what are the top three things that you'd like John Baddy to do if he is confirmed
• 2:00
  SPEAKER_03: as Kenya's finance minister after Professor Njogodandomo?
• 2:03
  SPEAKER_03: Stephanie, let's start with you, then Churchill.
• 2:05
  SPEAKER_01: Okay.
• 2:05
  SPEAKER_01: Thank you, Rema.
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  SPEAKER_01: So what should Mbade do?
• 2:08
  SPEAKER_01: I just like that phrase a lot.
• 2:10
  SPEAKER_01: In terms of what he needs to do,
• 2:11
  SPEAKER_01: we just need to understand where we are at as a country and what is indeed,
• 2:17
  SPEAKER_01: can I say,
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  SPEAKER_01: wrong in the first place?
• 2:19
  SPEAKER_01: And top of mind,
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  SPEAKER_01: and this has been a conversation throughout the past couple of months,
• 2:23
  SPEAKER_01: even years,
• 2:24
  SPEAKER_01: but it's been quite heavy in the past couple of months,
• 2:26
  SPEAKER_01: is in terms of Kenya's mounting public
• 2:29
  SPEAKER_01: debt.
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  SPEAKER_01: And we also need to appreciate that his predecessor,
• 2:33
  SPEAKER_01: Professor Ndomo,
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  SPEAKER_01: did have quite a bit of ambitious revenue targets as part of his performance
• 2:39
  SPEAKER_01: contract and as well had a target to curb unsustainable borrowing.
• 2:44
  SPEAKER_01: However,
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  SPEAKER_01: Given the current economic climate,
• 2:47
  SPEAKER_01: which has been deteriorating since the start of the year,
• 2:50
  SPEAKER_01: it has been very difficult to be able to implement this.
• 2:53
  SPEAKER_01: So in my opinion, what Mbadi should do first is focus on fiscal policy management.
• 2:59
  SPEAKER_01: It is the obvious thing to do at the moment.
• 3:02
  SPEAKER_01: Just to focus on fiscal policy management,
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  SPEAKER_01: and this will be number one in terms of the allocation of budget resources to
• 3:08
  SPEAKER_01: critical sectors.
• 3:09
  SPEAKER_01: I'm actually quite disappointed that we didn't see this before,
• 3:12
  SPEAKER_01: and we've seen cuts in healthcare,
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  SPEAKER_01: education,
• 3:15
  SPEAKER_01: as well as development spending.
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  SPEAKER_01: But I would suggest he seeks to look at that first,
• 3:21
  SPEAKER_01: where he's able to look at the efficient allocation of budget resources towards
• 3:24
  SPEAKER_01: those sectors.
• 3:25
  SPEAKER_01: Those critical sectors.
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  SPEAKER_01: This is in a way as to stimulate economic growth as well as overall improve the
• 3:32
  SPEAKER_01: delivery of public services in whatever shape and form.
• 3:35
  SPEAKER_01: You can also look at implementing sustainable debt management strategies.
• 3:40
  SPEAKER_01: ensure that public debt,
• 3:42
  SPEAKER_01: this public debt that everyone has been talking about,
• 3:45
  SPEAKER_01: remains within manageable and sustainable levels,
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  SPEAKER_01: as well as preventing excessive borrowing and overall,
• 3:52
  SPEAKER_01: which has impacted obviously our interest expense,
• 3:54
  SPEAKER_01: which is quite a big chunk of our expenditure.
• 3:57
  SPEAKER_01: And this will overall help maintain the fiscal health and government finances.
• 4:01
  SPEAKER_01: But this, in my opinion, is more of a long-term solution.
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  SPEAKER_01: So it will take time for him to implement.
• 4:07
  SPEAKER_01: Now,
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  SPEAKER_01: on the revenue side,
• 4:08
  SPEAKER_01: like I mentioned,
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  SPEAKER_01: Professor Ndungu did have quite a bit of ambitious revenue targets in his
• 4:13
  SPEAKER_01: performance contract,
• 4:14
  SPEAKER_01: but I believe this will still remain the case.
• 4:16
  SPEAKER_01: However,
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  SPEAKER_01: instead of looking at introducing new taxes and increasing tax rates,
• 4:21
  SPEAKER_01: I would suggest he focuses on just enhancing that tax rate.
• 4:25
  SPEAKER_01: tax collection mechanism, as well as broadening the tax base so as to increase government revenues.
• 4:31
  SPEAKER_01: Broadening the government tax base in this case is based on the use of digital tax
• 4:36
  SPEAKER_01: systems just to minimize tax evasion,
• 4:39
  SPEAKER_01: as well as optimize the compliance in overall taxes,
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  SPEAKER_01: tax collection and remittance.
• 4:44
  SPEAKER_01: So those are the thoughts I have in mind so far.
• 4:46
  SPEAKER_01: Thanks.
• 4:47
  SPEAKER_03: Indeed, and we'll certainly get into the weeds of the specific policy issues a bit later.
• 4:51
  SPEAKER_03: But Churchill, I want to come to you.
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  SPEAKER_03: Your top three things,
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  SPEAKER_03: what's on your wish list for John Batty to do for the Member of Parliament for
• 4:57
  SPEAKER_03: Super South to implement,
• 4:58
  SPEAKER_03: assuming he's confirmed as Kenya's next finance minister?
• 5:02
  SPEAKER_02: Thanks, Rama.
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  SPEAKER_02: Something you said earlier on that basically is a poison chalice.
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  SPEAKER_02: And I'm reminded of a quote that Yanis Varoufakis put in his book, Adults in the Room.
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  SPEAKER_02: I have often used this quote a number of times.
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  SPEAKER_02: The happy task of a finance minister is to package a shock as an event.
• 5:20
  SPEAKER_02: So basically, this really...
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  SPEAKER_02: encapsulates what lies ahead for Honorable Mbade,
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  SPEAKER_02: and more so that he's an opposition allied MP coming in to implement the government policy.
• 5:32
  SPEAKER_02: So it's quite a task that he will face, assuming that he gets past the vetting stage.
• 5:38
  SPEAKER_02: But top three that will want him to implement, one, around communication,
• 5:44
  SPEAKER_02: What my sense is, is that this perception, I mean, perception creates everything.
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  SPEAKER_02: And if they can communicate clearly some of the ideas,
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  SPEAKER_02: some of the policies in a timely manner,
• 5:54
  SPEAKER_02: at least it may be able to reduce some of the perceptions that we are seeing,
• 5:58
  SPEAKER_02: even in these online streets and also to the public.
• 6:01
  SPEAKER_02: Case in point, issues such as external debt register.
• 6:04
  SPEAKER_02: I mean, it just came the other day for a register that is as of the end of June last year.
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  SPEAKER_02: So 13 months down the line is when we're getting something as mundane as an external debt register.
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  SPEAKER_02: So that's an area that they may need to improve even going forward.
• 6:20
  SPEAKER_02: And also from a selfish perspective, even having engagements with the investing community.
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  SPEAKER_02: The other second idea is
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  SPEAKER_02: probably is now to look at addressing the long-standing what you call domestic
• 6:31
  SPEAKER_02: arrears or pending bills has been a funny issue so basically that speaks to budget
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  SPEAKER_02: execution and how as to how this event occurred in the past place i know that
• 6:42
  SPEAKER_02: there's a pending bills verification committee that is doing some work and of that
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  SPEAKER_02: i think the report should be
• 6:49
  SPEAKER_02: right about September.
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  SPEAKER_02: So that will be one of the things in his interest as he settles into office.
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  SPEAKER_02: And finally,
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  SPEAKER_02: looking at his history,
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  SPEAKER_02: basically in parliament,
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  SPEAKER_02: he's taken some key roles within some of the committees,
• 7:02
  SPEAKER_02: budget and appropriation committee,
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  SPEAKER_02: I think he's been a member,
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  SPEAKER_02: and also his public accounts committee.
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  SPEAKER_02: And that sort of looked at the whole spectrum of budget from budget formulation.
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  SPEAKER_02: That's where the budget and appropriation committee
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  SPEAKER_02: interact with the public, and all the way to public audit committee.
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  SPEAKER_02: So he's had a whole range of the whole budget from touch to finish and even after the audit.
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  SPEAKER_02: So based on the learnings that he has had as a politician and also as a member of
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  SPEAKER_02: some of these critical committees,
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  SPEAKER_02: we now want him to sort of improve the gaps that they saw as the house in the event
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  SPEAKER_02: that he becomes a minister.
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  SPEAKER_03: Let me pause at this point.
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  SPEAKER_03: Indeed.
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  SPEAKER_03: And Ruth Kandagor,
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  SPEAKER_03: the head of research at the Institute of Public Finance is with us on the call as well.
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  SPEAKER_03: What's on your wishlist for potentially Kenya's next finance minister?
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  SPEAKER_03: What would you like to see from John Baddy in terms of policy changes or administrative changes?
• 7:56
  SPEAKER_00: Thank you very much, Roma, and good evening to everyone who is here with us today.
• 8:00
  SPEAKER_00: My wish list,
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  SPEAKER_00: starting from what would fall squarely within his immediate docket within the
• 8:06
  SPEAKER_00: National Treasury,
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  SPEAKER_00: is meaningful reporting.
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  SPEAKER_00: Where we are in Kenya today in terms of participation and in terms of engagement is
• 8:12
  SPEAKER_00: because progressively advocacy efforts and government commitment to transparency
• 8:17
  SPEAKER_00: has really evolved over the years.
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  SPEAKER_00: But we have evolved in terms of producing reports,
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  SPEAKER_00: but the extent to which these reports are comprehensive,
• 8:25
  SPEAKER_00: are accurate and meaningful.
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  SPEAKER_00: They can give information that citizens can actually use this to hold government
• 8:31
  SPEAKER_00: properly accountable is still a question in place.
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  SPEAKER_00: So one of the things I would pick out is a meaningful reporting.
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  SPEAKER_00: Starting from the beginning of the budgeting process,
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  SPEAKER_00: the sector report,
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  SPEAKER_00: and going into the details of the Dutch report,
• 8:42
  SPEAKER_00: meaningful reporting.
• 8:43
  SPEAKER_00: So my second point is calling for independence of key institutions,
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  SPEAKER_00: starting from the Office of the Auditor General,
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  SPEAKER_00: so that this institution is properly made independent,
• 8:51
  SPEAKER_00: is financed independently.
• 8:52
  SPEAKER_00: It doesn't have to beg for a budget from the same institution.
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  SPEAKER_00: It is raising a question on how they spend their money.
• 8:58
  SPEAKER_00: And if possible,
• 8:59
  SPEAKER_00: also moving a step forward to making the PDMO an independent institution so that
• 9:05
  SPEAKER_00: the process of debt contracting,
• 9:06
  SPEAKER_00: debt reporting,
• 9:07
  SPEAKER_00: debt monitoring is also handled independently outside treasury.
• 9:11
  SPEAKER_00: And third but not least,
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  SPEAKER_00: I will call upon the body if he comes in as the next treasury to relook at the
• 9:17
  SPEAKER_00: process of supplementary budgets and especially enhancing transparency and citizen
• 9:22
  SPEAKER_00: engagement in supplementary budgets process.
• 9:24
  SPEAKER_03: Thank you, Stefano.
• 9:25
  SPEAKER_03: We've had this discussion in the past,
• 9:26
  SPEAKER_03: especially on these policy conversations we have on Wanco Capital's account.
• 9:30
  SPEAKER_03: And before we get into full scale,
• 9:32
  SPEAKER_03: you know,
• 9:32
  SPEAKER_03: full blown debt restructuring territory,
• 9:34
  SPEAKER_03: do Kenyan policymakers have alternatives that they can fall back on to essentially
• 9:38
  SPEAKER_03: create a bit of fiscal headroom?
• 9:40
  SPEAKER_03: Because right now,
• 9:41
  SPEAKER_03: five to six shillings out of every 10 is essentially just going into servicing debt,
• 9:45
  SPEAKER_03: which doesn't leave us with a lot of cash to actually do everything else.
• 9:47
  SPEAKER_03: And I know you've made a case for the finance ministry to stop accepting expensive
• 9:51
  SPEAKER_03: bids for debt in the treasury bond auctions.
• 9:54
  SPEAKER_03: But beyond that, what other options do they have?
• 9:57
  SPEAKER_01: OK, thank you, Rama.
• 9:58
  SPEAKER_01: Yes,
• 9:59
  SPEAKER_01: I've made statements and arguments in terms of the central bank accepting expensive
• 10:02
  SPEAKER_01: bids during treasury auctions.
• 10:04
  SPEAKER_01: But in terms of what else can be done, I believe this can be more of a multifaceted approach.
• 10:09
  SPEAKER_01: There are many approaches, but the approaches I'd like to focus on.
• 10:12
  SPEAKER_01: would be number one,
• 10:14
  SPEAKER_01: in terms of expenditure rationalization versus revenue enhancement,
• 10:18
  SPEAKER_01: which has been quite key in the past couple of months,
• 10:21
  SPEAKER_01: since it seems that the current government's approach has seemingly been inclined
• 10:25
  SPEAKER_01: to growing revenues through the introduction of new taxes.
• 10:28
  SPEAKER_01: And my take has always been that broadening the tax base would require closing
• 10:33
  SPEAKER_01: those loopholes,
• 10:34
  SPEAKER_01: as well as reducing tax evasion,
• 10:35
  SPEAKER_01: like I mentioned before.
• 10:36
  SPEAKER_01: But this will also be complemented by enhancing the efficiency of carry,
• 10:41
  SPEAKER_01: and investing in digital services and technology,
• 10:44
  SPEAKER_01: as well as training just to reduce and minimize any kind of leakages.
• 10:48
  SPEAKER_01: And this will hopefully improve collections.
• 10:51
  SPEAKER_01: Now,
• 10:51
  SPEAKER_01: as I said before,
• 10:52
  SPEAKER_01: I'm not a proponent of the introduction of new taxes or increasing tax rates,
• 10:57
  SPEAKER_01: given that even currently the country is experiencing a cost of living crisis.
• 11:01
  SPEAKER_01: So that is out of the question for me.
• 11:02
  SPEAKER_01: Now,
• 11:03
  SPEAKER_01: in terms of on the expenditure front,
• 11:05
  SPEAKER_01: I will always be a proponent of slashing non-essential government expenditure.
• 11:09
  SPEAKER_01: This is like travel allowances and unnecessary administrative costs,
• 11:13
  SPEAKER_01: which,
• 11:13
  SPEAKER_01: in my opinion,
• 11:14
  SPEAKER_01: will remain crucial in terms of money the expenditure side was for,
• 11:17
  SPEAKER_01: and it's what can be in their control.
• 11:20
  SPEAKER_01: But that said...
• 11:21
  SPEAKER_01: I was pretty dissatisfied,
• 11:23
  SPEAKER_01: and I'm sure all of you were,
• 11:24
  SPEAKER_01: when lawmakers rejected the removal of the office of the first and second lady,
• 11:28
  SPEAKER_01: citing the loss of jobs.
• 11:30
  SPEAKER_01: But there is still an opportunity to drastically slap the allocated budgets for those offices.
• 11:36
  SPEAKER_01: Now, another angle you can take is rationalizing various departments and parastatals.
• 11:41
  SPEAKER_01: I know the president did allude to this a couple of weeks ago,
• 11:44
  SPEAKER_01: that this is what the government is going to be working on.
• 11:46
  SPEAKER_01: And I'm not sure what the timelines are,
• 11:48
  SPEAKER_01: but this would effectively reduce the government's operating costs.
• 11:52
  SPEAKER_01: But he also did mention that despite them rationalizing those departments, as well as
• 11:57
  SPEAKER_01: parasitals and other key government agencies he did mention and i'm not sure if
• 12:01
  SPEAKER_01: everyone picked this that it won't necessarily result in job losses but these these
• 12:06
  SPEAKER_01: individuals will be now moved or absorbed into other departments of parasitals so
• 12:12
  SPEAKER_01: this won't necessarily reduce the overall wage bill but the government is working
• 12:16
  SPEAKER_01: on freezing any new hire so i'm not sure how that will turn out
• 12:19
  SPEAKER_01: Now,
• 12:20
  SPEAKER_01: another angle maybe we can all appreciate is that given the government's
• 12:24
  SPEAKER_01: development spend seems to be the easiest way for the budget to be cut.
• 12:29
  SPEAKER_01: And this has been a historical phenomenon when there's need for budget cuts is
• 12:34
  SPEAKER_01: always the development spend that is cut fast or cut more drastically.
• 12:38
  SPEAKER_01: This provides the government an opportunity just to increase the use of PPPs to
• 12:43
  SPEAKER_01: fund those large infrastructure projects,
• 12:46
  SPEAKER_01: which would at the very least help the government in its development agenda.
• 12:51
  SPEAKER_01: And then lastly, but this is certainly not least, but it would be quite supportive if
• 12:55
  SPEAKER_01: The government is able to improve the overall business environment by implementing
• 13:01
  SPEAKER_01: various reforms,
• 13:02
  SPEAKER_01: which would make it easier to do business in the country,
• 13:04
  SPEAKER_01: as well as attract foreign direct investments,
• 13:06
  SPEAKER_01: as well as even local investors to increase their investment in the country just so
• 13:11
  SPEAKER_01: as to be able to stimulate that economic activity within the country.
• 13:15
  SPEAKER_03: So I'll pause there.
• 13:16
  SPEAKER_03: Thanks.
• 13:16
  SPEAKER_03: Indeed.
• 13:17
  SPEAKER_03: And just to your point,
• 13:18
  SPEAKER_03: Stephanie,
• 13:18
  SPEAKER_03: with respect to the sort of liquidity traps that end up being created in the public
• 13:23
  SPEAKER_03: sector because organizations are essentially sort of trying to tackle the same problem.
• 13:28
  SPEAKER_03: Case in point,
• 13:28
  SPEAKER_03: you've got the Affordable Housing Fund,
• 13:29
  SPEAKER_03: you've got the National Housing Corporation,
• 13:31
  SPEAKER_03: which is
• 13:32
  SPEAKER_03: essentially a pre-colonial entity trying to essentially fix the exact same housing supply problem.
• 13:38
  SPEAKER_03: And we just put some numbers on that particular story.
• 13:40
  SPEAKER_03: The Affordable Housing Fund,
• 13:42
  SPEAKER_03: according to the Budget and Appropriation Committee,
• 13:44
  SPEAKER_03: had about 30 and a half billion shillings in hand by the end of June.
• 13:48
  SPEAKER_03: And their assumption was
• 13:50
  SPEAKER_03: was that at least for the 2024-2025 fiscal year,
• 13:53
  SPEAKER_03: the assumption was that they would be able to essentially collect at least 72 or so
• 13:56
  SPEAKER_03: billion Kenyan shillings for this fiscal year between July 2024 all the way to June
• 14:01
  SPEAKER_03: next year.
• 14:01
  SPEAKER_03: So there's a whole host of redundant government spending and a ton of overlapping
• 14:08
  SPEAKER_03: areas that are essentially just being duplicated left and right.
• 14:11
  SPEAKER_03: But I want to pick up from what you said, right?
• 14:12
  SPEAKER_03: There's still a fair bit of fat left.
• 14:14
  SPEAKER_03: that I think was left on the bone based on what we saw coming up on the budget and
• 14:18
  SPEAKER_03: Appropriations Committee.
• 14:19
  SPEAKER_03: And I want to come to you on this,
• 14:20
  SPEAKER_03: Churchill,
• 14:20
  SPEAKER_03: because you've gone through the supplementary appropriations bill with a fine tooth comb.
• 14:25
  SPEAKER_03: What are your views on the cuts
• 14:27
  SPEAKER_03: that MPs approved and what proverbial fat did they miss?
• 14:30
  SPEAKER_03: Because from my perspective,
• 14:31
  SPEAKER_03: and I'm going to declare my libertarian biases here,
• 14:34
  SPEAKER_03: as far as I'm concerned,
• 14:35
  SPEAKER_03: there's a whole bunch of projects that they could have essentially just cut to the bone.
• 14:38
  SPEAKER_03: And even the argument they were making about,
• 14:40
  SPEAKER_03: oh,
• 14:40
  SPEAKER_03: but you know,
• 14:41
  SPEAKER_03: we're going to entertain job losses with respect to retaining the officers of the
• 14:44
  SPEAKER_03: first and the second lady.
• 14:45
  SPEAKER_03: Take that hit on termination costs in the interim,
• 14:48
  SPEAKER_03: and you're essentially saving money for two,
• 14:50
  SPEAKER_03: three fiscal years.
• 14:51
  SPEAKER_03: down the line.
• 14:52
  SPEAKER_03: So at face value,
• 14:53
  SPEAKER_03: there's a ton of opportunity here to cut costs,
• 14:55
  SPEAKER_03: but clearly they miss quite a few others.
• 14:56
  SPEAKER_03: What are your thoughts?
• 14:57
  SPEAKER_02: Thanks, Rama.
• 14:59
  SPEAKER_02: So,
• 15:00
  SPEAKER_02: I mean,
• 15:00
  SPEAKER_02: we've had a number of numbers being thrown around during this whole two or four weeks,
• 15:05
  SPEAKER_02: such the elementary budget has been with us.
• 15:08
  SPEAKER_02: Initially, the president mentioned cuts around $200 billion.
• 15:12
  SPEAKER_02: What initially saw was cuts around $156 billion,
• 15:15
  SPEAKER_02: and then went to the Budget Committee,
• 15:18
  SPEAKER_02: reducing it to $146 billion.
• 15:20
  SPEAKER_02: And eventually, as it is right now, we have cuts in the order of $199 billion.
• 15:25
  SPEAKER_02: So all these are the cuts to the national government,
• 15:29
  SPEAKER_02: basically the executive,
• 15:30
  SPEAKER_02: judiciary,
• 15:31
  SPEAKER_02: and legislature.
• 15:32
  SPEAKER_02: And it just tells us the complexity in terms of achieving aggressive austerity.
• 15:37
  SPEAKER_02: But by aggressive,
• 15:39
  SPEAKER_02: the impression we had initially was leaning towards the current spending issues
• 15:43
  SPEAKER_02: such as these offices,
• 15:45
  SPEAKER_02: first and second ladies offices,
• 15:48
  SPEAKER_02: domestic,
• 15:48
  SPEAKER_02: foreign travel,
• 15:49
  SPEAKER_02: things like that,
• 15:50
  SPEAKER_02: operations and maintenance.
• 15:52
  SPEAKER_02: But what actually it is right now, we are seeing that the cuts have tilted towards development spending.
• 15:58
  SPEAKER_02: So that just tells us the complexity or uncertainty
• 16:01
  SPEAKER_02: The low hanging fruits,
• 16:03
  SPEAKER_02: whenever they are supplemented,
• 16:04
  SPEAKER_02: and this is something that you've seen over the last couple of years,
• 16:06
  SPEAKER_02: development cuts,
• 16:08
  SPEAKER_02: development spending usually faces the act more than what you see in the recurrent spending.
• 16:13
  SPEAKER_02: So that is not surprising.
• 16:14
  SPEAKER_02: The other bit also that is coming into play is the issue around carryovers.
• 16:18
  SPEAKER_02: Basically,
• 16:19
  SPEAKER_02: the last financial year that ended in June,
• 16:22
  SPEAKER_02: if you look at the target spending,
• 16:24
  SPEAKER_02: this is the national government,
• 16:26
  SPEAKER_02: it's recurrent.
• 16:27
  SPEAKER_02: be it also development.
• 16:29
  SPEAKER_02: And we saw with the actual out-term, the numbers came out like two weeks ago in the Kenya Gazette.
• 16:33
  SPEAKER_02: You can think that there was a shortfall of around 218 billion Kenya shillings.
• 16:37
  SPEAKER_02: So what national treasury prioritized?
• 16:40
  SPEAKER_02: Some of them are carryovers.
• 16:41
  SPEAKER_02: One of them is now basically CDF.
• 16:44
  SPEAKER_02: And to me, I really question the prioritizing of CDF as a carryover.
• 16:49
  SPEAKER_02: against everything else in the sense that initially National Treasury had proposed
• 16:54
  SPEAKER_02: to reduce the initial CDF for this current financial year by around 8 billion shillings.
• 17:00
  SPEAKER_02: But then there was 13 billion shillings carryover, which was now brought in.
• 17:05
  SPEAKER_02: So net worth, we are saying that it's an increase of 5 billion.
• 17:09
  SPEAKER_02: But it's plain obvious that the carryover for CDF is basically
• 17:13
  SPEAKER_02: executive playing or having that lever to the legislative arm,
• 17:19
  SPEAKER_02: at least to be able to implement supplementary.
• 17:21
  SPEAKER_02: But anyway, that is the issue of Cariova.
• 17:24
  SPEAKER_02: There's also some Cariova around pensions to the tune of $3 billion, and which now takes us to the point.
• 17:29
  SPEAKER_02: Remember,
• 17:30
  SPEAKER_02: all along,
• 17:31
  SPEAKER_02: we know that pensions being one of the consolidated fund services items,
• 17:36
  SPEAKER_02: the others being public.
• 17:38
  SPEAKER_02: debt,
• 17:38
  SPEAKER_02: interest and redemptions,
• 17:40
  SPEAKER_02: and also salaries to the constitutional office holders is the first charge in the budget.
• 17:46
  SPEAKER_02: But how come at the end of the last financial year,
• 17:48
  SPEAKER_02: you are not able to pay the pensions as being a first charge item of the budget?
• 17:54
  SPEAKER_02: So that tells us also the fiscal trends that Kenya was in the last financial year.
• 17:59
  SPEAKER_02: To the extent that things such as pensions were not able to pay and hence being
• 18:04
  SPEAKER_02: carried over to this financial year.
• 18:06
  SPEAKER_02: And last but not least, the other carryover is now on county governments.
• 18:09
  SPEAKER_02: These investments, they were short of 30.8 billion in the last financial year.
• 18:14
  SPEAKER_02: So that has also been brought in.
• 18:16
  SPEAKER_02: I find that these kind of issues, the fact that development spending is
• 18:22
  SPEAKER_02: the path of least resistance in terms of supplementary cuts and also the fact that
• 18:27
  SPEAKER_02: there are some carryovers.
• 18:28
  SPEAKER_02: Those are the things that sort of complicates even the metrics that the authorities had initially.
• 18:33
  SPEAKER_02: But that notwithstanding,
• 18:34
  SPEAKER_02: I think if at all austerity to your question around the fact that needs to be cut,
• 18:39
  SPEAKER_02: there are some reforms that you've seen or announcements that you've seen in the
• 18:42
  SPEAKER_02: last couple of weeks,
• 18:43
  SPEAKER_02: which I think has not been penciled in.
• 18:46
  SPEAKER_02: One of them is now the issue around the proposed salary hike.
• 18:50
  SPEAKER_02: that was shelved off to the parliamentarians.
• 18:53
  SPEAKER_02: I don't think they've really penciled that slash in or the halt in salary
• 18:58
  SPEAKER_02: increments to politicians and also to some of the civil service.
• 19:02
  SPEAKER_02: So other than when we see all DACs that you've seen in the last couple of weeks
• 19:06
  SPEAKER_02: also being implemented,
• 19:08
  SPEAKER_02: at least that is an area where the excess fat can be able to be cut.
• 19:13
  SPEAKER_03: Indeed,
• 19:13
  SPEAKER_03: and just to give our audience a flavor of what we're talking about when we're
• 19:16
  SPEAKER_03: saying that,
• 19:16
  SPEAKER_03: you know,
• 19:17
  SPEAKER_03: even CDF spending in and of itself can be pretty questionable in some instances.
• 19:22
  SPEAKER_03: What I have before me on my screen at the moment is a report of the Auditor General
• 19:25
  SPEAKER_03: on the CDF Fund utilization for Super South constituency for the fiscal year ending
• 19:31
  SPEAKER_03: in June 30th,
• 19:32
  2022.
• 19:34
  SPEAKER_03: Apparently about 400,000 shillings was spent on building a pit latrine that had
• 19:39
  SPEAKER_03: three doors instead of the four that were provided for.
• 19:41
  SPEAKER_03: There were visible cracks on the wall and the floor, which essentially made it unsafe for use.
• 19:46
  SPEAKER_03: And I'm not quantity severe,
• 19:47
  SPEAKER_03: but instinctively spending this much money as a better part of $3,500 on building a
• 19:51
  SPEAKER_03: pit latrine seems to be
• 19:55
  SPEAKER_03: an extraordinary amount of cash.
• 19:58
  SPEAKER_03: It suddenly seems to me a bit inflated.
• 19:59
  SPEAKER_03: But of course,
• 20:01
  SPEAKER_03: the Member of Parliament for that specific constituency is the man who's being
• 20:04
  SPEAKER_03: considered to be the next finance minister.
• 20:06
  SPEAKER_03: Ruth,
• 20:06
  SPEAKER_03: I want to come to you on that same question around cutting the fat,
• 20:09
  SPEAKER_03: because evidently there's many places that Pease,
• 20:12
  SPEAKER_03: I think,
• 20:12
  SPEAKER_03: could have really trimmed expenditure,
• 20:14
  SPEAKER_03: but for one reason or another,
• 20:15
  SPEAKER_03: they chose not to.
• 20:16
  SPEAKER_03: What are the places that stood out for you?
• 20:19
  SPEAKER_00: Thank you very much, Roma.
• 20:20
  SPEAKER_00: So as we look at the budget cut,
• 20:22
  SPEAKER_00: top questions goes into the cuts that have featured on what would be considered as
• 20:27
  SPEAKER_00: a social protection programs,
• 20:28
  SPEAKER_00: especially the cuts around health and education.
• 20:31
  SPEAKER_00: Around a time when health financing landscape remains unclear,
• 20:35
  SPEAKER_00: especially because we have seen progressively in the last two years,
• 20:38
  SPEAKER_00: the health sector having significant budget cuts,
• 20:40
  SPEAKER_00: presumably on their planning that the new regulations will take place and therefore
• 20:45
  SPEAKER_00: we should have
• 20:46
  SPEAKER_00: funding from health being recovered or being sourced from the implementation of the new laws.
• 20:50
  SPEAKER_00: And so that puts into limbo how the health services already look like,
• 20:54
  SPEAKER_00: given that this system had already been strangely constrained.
• 20:57
  SPEAKER_00: But something important to monitor,
• 20:58
  SPEAKER_00: if you look at the appropriation bill that was tabled in the floor of the House today,
• 21:02
  SPEAKER_00: while we talk about the budget cuts and as citizens,
• 21:05
  SPEAKER_00: we've been keenly following the budget cuts.
• 21:08
  SPEAKER_00: We also see the rise in targets for some specific state departments and programs,
• 21:13
  SPEAKER_00: the rising targets for the appropriation in aid.
• 21:15
  SPEAKER_00: Previously, we have questioned how government sets its targets for appropriation in aid.
• 21:20
  SPEAKER_00: And,
• 21:20
  SPEAKER_00: you know,
• 21:21
  SPEAKER_00: in the previous years,
• 21:21
  SPEAKER_00: for example,
• 21:22
  SPEAKER_00: last year,
• 21:22
  SPEAKER_00: we saw an increase in the number of fees that were coming in.
• 21:26
  SPEAKER_00: But yet the targets for appropriation in aid actually came down on the initial
• 21:30
  SPEAKER_00: budget that was approved early in the year.
• 21:32
  SPEAKER_00: And so one of the questions you are asking is,
• 21:34
  SPEAKER_00: How come we are seeing an increase in fees,
• 21:36
  SPEAKER_00: so we expect that there'll be more monies collected,
• 21:39
  SPEAKER_00: but essentially now we are seeing a decline in the target set for appropriation aid.
• 21:43
  SPEAKER_00: Now in the appropriation bill,
• 21:45
  SPEAKER_00: we see some increase,
• 21:46
  SPEAKER_00: not only just in reducing the budget cuts,
• 21:47
  SPEAKER_00: but also increasing the targets for some of the sectors.
• 21:50
  SPEAKER_00: And this has not been talked about, and this is something that's important to monitor.
• 21:54
  SPEAKER_00: What does this mean?
• 21:55
  SPEAKER_00: How are these increases meant to be implemented?
• 21:58
  SPEAKER_00: Should we foresee an instance where we will have high charges
• 22:01
  SPEAKER_00: or higher levies and fees charged for services rendered by government?
• 22:06
  SPEAKER_00: Are these increases meant to account for what was not accounted for last year?
• 22:11
  SPEAKER_00: Do we anticipate maybe to see efficiency in the way the process is done?
• 22:14
  SPEAKER_00: So there's a lot of questions lingering around that,
• 22:17
  SPEAKER_00: that calls for all actors to just be keen to see how this works.
• 22:21
  SPEAKER_00: Important to note,
• 22:22
  SPEAKER_00: for example,
• 22:23
  SPEAKER_00: in the State Department for Housing,
• 22:24
  SPEAKER_00: we are seeing an increase in A&E of about $47 billion.
• 22:29
  SPEAKER_00: And so the question is, what do we expect to see out of this?
• 22:32
  SPEAKER_00: Do we expect to see a higher increase in the housing levy?
• 22:34
  SPEAKER_00: Will the implementation of the housing levy at the same rate be improved, be enhanced?
• 22:39
  SPEAKER_00: What exactly is the driver for this kind of revenue?
• 22:42
  SPEAKER_00: Just to add on to what our colleagues have already mentioned,
• 22:44
  SPEAKER_00: the issues around the budget cuts and the budget changes that have been discussed
• 22:49
  SPEAKER_00: but have not been voiced adequately enough,
• 22:51
  SPEAKER_00: that is important for all of us to keep an eye and monitor.
• 22:54
  SPEAKER_00: But also looking at other opportunities,
• 22:56
  SPEAKER_00: other areas that were not mentioned in the budget document,
• 22:59
  SPEAKER_00: in the supplementary budget for cuts and were not tabled,
• 23:01
  SPEAKER_00: that we have been flagging off these issues in the past,
• 23:03
  SPEAKER_00: I think,
• 23:04
  SPEAKER_00: two or three years,
• 23:04
  SPEAKER_00: calling out that there needs to be.
• 23:07
  SPEAKER_00: Some of the issues we've noticed with our state departments and the programs in the
• 23:10
  SPEAKER_00: sectors is there's quite some duplication in functions.
• 23:14
  SPEAKER_00: And the duplications moves not just from the functions, but into the performance indicators set.
• 23:19
  SPEAKER_00: So the sector working groups set up the targets,
• 23:22
  SPEAKER_00: the performance targets against which the budgets are allocated.
• 23:25
  SPEAKER_00: And so when we find that the targets are repetitive,
• 23:28
  SPEAKER_00: the same targets cut across three or four different sectors,
• 23:31
  SPEAKER_00: then it means that all these sectors will be allocated resources to achieve more or
• 23:35
  SPEAKER_00: less the same targets that could have been achieved probably more efficiently by
• 23:39
  SPEAKER_00: one time.
• 23:39
  SPEAKER_00: There's no justification for why we see that kind of duplication.
• 23:42
  SPEAKER_00: And that is something that needs to be looked at.
• 23:44
  SPEAKER_00: It does not come out straight in the budget document.
• 23:47
  SPEAKER_00: It requires some deeper conversation beyond just looking at the budget numbers,
• 23:51
  SPEAKER_00: but into the foundational documents that inform government budgets.
• 23:55
  SPEAKER_00: Thank you.
• 23:55
  SPEAKER_03: Picking up on that tangent,
• 23:56
  SPEAKER_03: actually,
• 23:56
  SPEAKER_03: I want to pick up on something your colleague,
• 23:58
  SPEAKER_03: Veronica,
• 23:59
  SPEAKER_03: Veronica Ndagwa,
• 24:00
  SPEAKER_03: a senior research analyst at Policy and Public Debt at the Institute of Public Finance,
• 24:03
  SPEAKER_03: wrote,
• 24:04
  SPEAKER_03: I believe this was in November,
• 24:05
  SPEAKER_03: middle of November last year.
• 24:06
  SPEAKER_03: And she argued that every year,
• 24:08
  SPEAKER_03: the National Treasury prepares and submits a finance bill containing amendments to
• 24:11
  SPEAKER_03: various tax laws to Parliament.
• 24:13
  SPEAKER_03: In some cases,
• 24:14
  SPEAKER_03: new taxes and taxation rules enacted through the Finance Act have changed or even
• 24:18
  SPEAKER_03: reversed in the subsequent years,
• 24:19
  SPEAKER_03: Finance Act.
• 24:20
  SPEAKER_03: And this is the clincher for me.
• 24:22
  SPEAKER_03: A subset of all of Kenya's tax laws seem to be targeted for nearly constant review, right?
• 24:28
  SPEAKER_03: So unpredictable tax policy has been the absolute bane of enterprises here.
• 24:32
  SPEAKER_03: In fact, EABL, when they were releasing the fully results earlier this morning, they said as much.
• 24:36
  SPEAKER_03: Unpredictable tax policy is deeply, deeply problematic.
• 24:39
  SPEAKER_03: So if we were to essentially sit down and say, look,
• 24:41
  SPEAKER_03: Mr. Mbaddi, this is what we need from you, right?
• 24:44
  SPEAKER_03: Short of killing off unproductive,
• 24:46
  SPEAKER_03: expensive policies like the housing levy,
• 24:49
  SPEAKER_03: the planned increases in the social health insurance fund,
• 24:51
  SPEAKER_03: what else would be your key priority,
• 24:54
  SPEAKER_03: Stephanie,
• 24:55
  SPEAKER_03: in changing tax policy and at least holding those constants between now and 2027?
• 25:01
  SPEAKER_03: Because another finance bill at some point will have to come to the floor of the House.
• 25:04
  SPEAKER_03: So this seems like a crisis that we really shouldn't let go to waste.
• 25:07
  SPEAKER_01: Yes, Rama.
• 25:08
  SPEAKER_01: Just touching on what you just mentioned in terms of the unpredictability of the
• 25:12
  SPEAKER_01: tax strategy,
• 25:13
  SPEAKER_01: just being able for there to be a clear long-term strategy.
• 25:16
  SPEAKER_01: I mean,
• 25:16
  SPEAKER_01: I am not a tax expert,
• 25:18
  SPEAKER_01: but having that clear long-term strategy where you're able to not only be transparent,
• 25:23
  SPEAKER_01: but you're able to communicate well the tax strategy and there's a predictability
• 25:26
  SPEAKER_01: of that tax strategy to me will be quite key.
• 25:29
  SPEAKER_01: as well as just enhancing stakeholder engagement throughout that process.
• 25:34
  SPEAKER_01: But again, the predictability of the tax regime needs to be quite clear.
• 25:39
  SPEAKER_01: So I'll leave that maybe to Ruth to maybe underscore some more items,
• 25:43
  SPEAKER_01: because I'm tax expert,
• 25:45
  SPEAKER_01: so I do not want to take away from the conversation.
• 25:48
  SPEAKER_03: Indeed.
• 25:48
  SPEAKER_03: Ruth, if you want to weigh in, and then we can go to Churchill for his answer.
• 25:51
  SPEAKER_00: Yeah, thank you very much.
• 25:52
  SPEAKER_00: So the argument that my colleague Veronica made and is,
• 25:56
  SPEAKER_00: you know,
• 25:56
  SPEAKER_00: we support her position is that we need to relook at the logic of having a finance
• 26:01
  SPEAKER_00: bill every year and especially from two perspectives.
• 26:03
  SPEAKER_00: So the idea behind the finance bill and as documented as given in the Public
• 26:07
  SPEAKER_00: Finance Management Act and the Constitution is that the finance bill is meant to
• 26:10
  SPEAKER_00: document or outlay the revenue measures which the government will use to generate
• 26:15
  SPEAKER_00: revenues to support the particular budget being tumbled to the floor of the House.
• 26:18
  SPEAKER_00: Now,
• 26:18
  SPEAKER_00: what has been happening in the space over the last three,
• 26:21
  SPEAKER_00: four years,
• 26:21
  SPEAKER_00: actually even longer than that,
• 26:22
  SPEAKER_00: is we find that measures that are introduced in the 2023 finance bill have actually
• 26:27
  SPEAKER_00: now been reverted in the 2024 finance bill.
• 26:30
  SPEAKER_00: Measures that were introduced in 2022 finance bill were reverted in the 2023 finance bill.
• 26:35
  SPEAKER_00: So the predictability really affects business planners.
• 26:39
  SPEAKER_00: Say,
• 26:39
  SPEAKER_00: for instance,
• 26:40
  SPEAKER_00: you are investing in a particular industry,
• 26:42
  SPEAKER_00: in the hoteling industry or in the hospitality industry.
• 26:45
  SPEAKER_00: And the Finance Bill 2023 had given you a particular benefit in terms of tax
• 26:51
  SPEAKER_00: exemptions or subsidized rates for you to put in your investment.
• 26:54
  SPEAKER_00: Now, you look for this good money, billions or millions to invest.
• 26:57
  SPEAKER_00: And just before you finish constructing your hotel,
• 27:00
  SPEAKER_00: you haven't even finished it for you to recover anything.
• 27:02
  SPEAKER_00: The law is changed and the taxes back up.
• 27:05
  SPEAKER_00: So really, it discourages investors and businesses.
• 27:09
  SPEAKER_00: off the radar.
• 27:10
  SPEAKER_00: And one of the easiest and one of the responses we've seen is that a number of
• 27:13
  SPEAKER_00: businesses have really cut back because of the unpredictability of the system.
• 27:17
  SPEAKER_00: Now,
• 27:17
  SPEAKER_00: one of the things that we applaud the government,
• 27:20
  SPEAKER_00: because we have to give the government its flowers for where it's due,
• 27:23
  SPEAKER_00: is the development of the medium-term revenue strategy that was published towards November,
• 27:27
  SPEAKER_00: December last year.
• 27:28
  SPEAKER_00: For the first time, Kenya published a three-year strategy document
• 27:31
  SPEAKER_00: Additionally, last year, the government also published the National Tax Policy.
• 27:34
  SPEAKER_00: These two documents are meant to provide or to address that issue of predictability
• 27:40
  SPEAKER_00: by giving the overlying documents.
• 27:41
  SPEAKER_00: So the National Tax Policy gives the general direction that the government wants to
• 27:46
  SPEAKER_00: take towards the tax reforms.
• 27:47
  SPEAKER_00: For instance,
• 27:48
  SPEAKER_00: saying that the direction on tax exemptions is to now reduce tax exemptions and
• 27:53
  SPEAKER_00: undertake studies.
• 27:54
  SPEAKER_00: Then now, the Medium-Term Revenue Strategy
• 27:57
  SPEAKER_00: has gone into the details,
• 27:58
  SPEAKER_00: especially if you look at the implementation matrix at the end of the medium-term
• 28:01
  SPEAKER_00: revenue strategy.
• 28:02
  SPEAKER_00: It's gone into the details of breaking down how the bigger goals given in the tax
• 28:07
  SPEAKER_00: policy can now be broken down and be implemented by saying that in the financial
• 28:10
  SPEAKER_00: year 2024-25,
• 28:12
  SPEAKER_00: this is going to be done.
• 28:13
  SPEAKER_00: 25-26, we expect this kind of a review.
• 28:15
  SPEAKER_00: 26-27, we expect this kind of an action.
• 28:18
  SPEAKER_00: And so one of the ways we government can really, and Balbadi, if he comes in as the C.S.,
• 28:25
  SPEAKER_00: One of the things that would be top on his desk is to really look at the
• 28:28
  SPEAKER_00: medium-term revenue strategy and put that document to proper implementation so that
• 28:32
  SPEAKER_00: it does not become a shelf document like many others.
• 28:35
  SPEAKER_00: And one of the first things that the revenue strategy calls for is to undertake
• 28:39
  SPEAKER_00: studies so that decisions on tax changes are actually informed
• 28:44
  SPEAKER_00: by evidence,
• 28:45
  SPEAKER_00: by numbers that have been analyzed so that you know that when you raise VAT by 2%,
• 28:50
  SPEAKER_00: essentially you are raising the fees,
• 28:52
  SPEAKER_00: yes,
• 28:52
  SPEAKER_00: but consumption is going down.
• 28:54
  SPEAKER_00: And so ultimately you're not gaining anything at all in terms of additional revenue.
• 28:57
  SPEAKER_00: Or when you lower a certain tax by a certain percentage,
• 29:00
  SPEAKER_00: the intention is to capture more people to pay,
• 29:03
  SPEAKER_00: but you find maybe at the end of the day,
• 29:04
  SPEAKER_00: it could be product,
• 29:05
  SPEAKER_00: could be not productive.
• 29:06
  SPEAKER_00: So it's really important for the MTRS to be implemented and especially starting
• 29:10
  SPEAKER_00: with the studies that have been documented therein.
• 29:13
  SPEAKER_00: to give the evidence and then it becomes easy now for people to monitor and to
• 29:17
  SPEAKER_00: track how government is implementing this.
• 29:19
  SPEAKER_00: Thank you.
• 29:20
  SPEAKER_03: Churchill, do you want to weigh in before I jump on to the question of tax cuts?
• 29:22
  SPEAKER_02: Yeah, I think Ruth has expounded on the issue quite deeply.
• 29:26
  SPEAKER_02: The fact that you have data overarching medium-term revenue strategy just to give us the predictability
• 29:33
  SPEAKER_02: But I think also just to sort of add to that is the fact that on the operational side,
• 29:39
  SPEAKER_02: we have Kenya Revenue Authority and they usually have what they call their
• 29:43
  SPEAKER_02: corporate plan.
• 29:43
  SPEAKER_02: So basically it used to be like three plans in terms of how they would want to
• 29:48
  SPEAKER_02: achieve the revenue targets.
• 29:50
  SPEAKER_02: They do some stock analysis and things like that.
• 29:53
  SPEAKER_02: As it is now, the eighth, the last corporate plan that you have ended in June 2024.
• 29:57
  SPEAKER_02: So you started, it was a three-year plan and it has come to an end.
• 30:01
  SPEAKER_02: Right now, we are keeping an eye on the next sequence.
• 30:04
  SPEAKER_02: So that's the ninth corporate plan, which will be from this month all the way to the last five years.
• 30:11
  SPEAKER_02: So that's like about July, June 2029.
• 30:16
  SPEAKER_02: And with that, you can now be able to see what are even their targets.
• 30:19
  SPEAKER_02: Because it starts from Kenya Revenue Authority having their targets internally,
• 30:23
  SPEAKER_02: what number of taxpayers they would want to bring on board.
• 30:27
  SPEAKER_02: And things around having done a SWOT analysis,
• 30:30
  SPEAKER_02: how they'll be able to meet even the targets internally,
• 30:32
  SPEAKER_02: and which now dovetails into the medium-term revenue strategy.
• 30:36
  SPEAKER_02: So we are keeping an eye on that document just to see what kind of, from an operational level,
• 30:42
  SPEAKER_02: how KRA would want to also achieve the targets that are sort of being preempted within the MTRS.
• 30:49
  SPEAKER_03: Thanks.
• 30:50
  SPEAKER_03: Indeed.
• 30:50
  SPEAKER_03: I just want to pick up on some of the comments that we're getting on the timeline
• 30:54
  SPEAKER_03: at the moment,
• 30:54
  SPEAKER_03: building up on a comment that's coming in from Stella Sokadia.
• 30:58
  SPEAKER_03: And she's arguing that, look,
• 30:59
  SPEAKER_03: There's a clear case here for micromanagement at the national and the county level.
• 31:03
  SPEAKER_03: We need to oversee everything everywhere.
• 31:06
  SPEAKER_03: We have to be asking questions and concerns.
• 31:08
  SPEAKER_03: Otherwise,
• 31:08
  SPEAKER_03: our pockets will be squeezed to the last breath with nothing,
• 31:11
  SPEAKER_03: not even the bare minimum to actually show for it.
• 31:13
  SPEAKER_03: And to essentially connect that to my current obsession, right?
• 31:18
  SPEAKER_03: I think looking back at the way public spending has been taking place in the last decade,
• 31:23
  SPEAKER_03: 10 years,
• 31:24
  SPEAKER_03: for lack of a better word,
• 31:25
  SPEAKER_03: 2013 to date,
• 31:26
  SPEAKER_03: there's an enormous amount of waste in public expenditure that has happened.
• 31:30
  SPEAKER_03: We've just provided one example of the auditories who sell CDF expenditure for the
• 31:35
  SPEAKER_03: fiscal year of 2021-2022.
• 31:37
  SPEAKER_03: In effect, the Kenyan government is failing the Matthew 25-14 test, right?
• 31:40
  SPEAKER_03: If this was a servant
• 31:44
  SPEAKER_03: with three tenants.
• 31:45
  SPEAKER_03: They didn't just go and bury it in the backyard.
• 31:47
  SPEAKER_03: They essentially went out and partied like crazy all over Canon.
• 31:50
  SPEAKER_03: And now they're coming back and saying, look, we want more money.
• 31:52
  SPEAKER_03: My baseline assumption now is that, look, we have a severe income problem.
• 31:56
  SPEAKER_03: Freed incomes across households, across enterprises have been in decline for the last five years.
• 32:01
  SPEAKER_03: And we've seen unpredictable tax policy chasing away
• 32:05
  SPEAKER_03: And my thesis is that there's a strong case to be made for wide-ranging tax cuts if
• 32:12
  SPEAKER_03: domestic consumption and investment are going to be revived.
• 32:16
  SPEAKER_03: And that's a question I want to put to all of you.
• 32:18
  SPEAKER_03: Where can tax cuts be credibly implemented?
• 32:21
  SPEAKER_03: Because I know in some instances,
• 32:22
  SPEAKER_03: the MTRS that I believe Churchill was referring to earlier had sort of hinted that,
• 32:27
  SPEAKER_03: look,
• 32:27
  SPEAKER_03: we're thinking of reducing the VAT rate,
• 32:29
  SPEAKER_03: for example.
• 32:30
  SPEAKER_03: But beyond that, what else can we do?
• 32:33
  SPEAKER_03: Stephanie, then Churchill.
• 32:34
  SPEAKER_01: Okay,
• 32:34
  SPEAKER_01: to me,
• 32:35
  SPEAKER_01: tax cuts tends to be a very delicate matter and there needs to be very careful consideration.
• 32:40
  SPEAKER_01: I believe there's an workspace where I mentioned that the IMF does believe that
• 32:45
  SPEAKER_01: increasing tax rates,
• 32:46
  SPEAKER_01: especially around kind of transactional services,
• 32:48
  SPEAKER_01: helps boost,
• 32:50
  SPEAKER_01: at least in the short term,
• 32:51
  SPEAKER_01: revenue mobilization for the government.
• 32:53
  SPEAKER_01: But there's also been evidence that suggests that reducing this tax rate,
• 32:58
  SPEAKER_01: especially around VAT,
• 32:59
  SPEAKER_01: excess duty,
• 33:00
  SPEAKER_01: albeit in a phased approach,
• 33:03
  SPEAKER_01: during times of economic crisis and complemented by other revenue-enhancing measures,
• 33:09
  SPEAKER_01: such as what I mentioned before,
• 33:11
  SPEAKER_01: improving tax compliance as well as closing tax loopholes,
• 33:14
  SPEAKER_01: does help overall not only just stimulate economic activity,
• 33:18
  SPEAKER_01: but also the government being able to achieve their goals.
• 33:21
  SPEAKER_01: So that's my take on it.
• 33:23
  SPEAKER_01: If there's going to be any tax cuts,
• 33:25
  SPEAKER_01: it should be on the transactional side of things and it should be on a phased
• 33:29
  SPEAKER_01: approach and always continuously monitor just to ensure that whatever measures that
• 33:34
  SPEAKER_01: they are or policies they are implementing are effective.
• 33:37
  SPEAKER_01: But not only that,
• 33:38
  SPEAKER_01: this needs to be complemented by other measures which will strongly help stimulate
• 33:44
  SPEAKER_01: economic activity.
• 33:45
  SPEAKER_01: around minimizing those tax loopholes as well as improving tax compliance.
• 33:50
  SPEAKER_01: So that's my take on it.
• 33:51
  SPEAKER_01: Thanks.
• 33:51
  SPEAKER_03: Churchill, do you want to weigh in on tax cuts?
• 33:54
  SPEAKER_02: I will,
• 33:55
  SPEAKER_02: but I'm going to look at it as some of these levies or some of these hidden pain
• 34:00
  SPEAKER_02: points that you normally have.
• 34:01
  SPEAKER_02: I'm talking about issues such as the road maintenance levy,
• 34:04
  SPEAKER_02: the petroleum development levy,
• 34:08
  SPEAKER_02: affordable housing levy,
• 34:09
  SPEAKER_02: and also the proposed shift social insurance funds,
• 34:12
  SPEAKER_02: which right now has been shelved.
• 34:13
  SPEAKER_02: but at some point we'll have to reckon with them.
• 34:15
  SPEAKER_02: Even as you speak,
• 34:16
  SPEAKER_02: there's the proposal,
• 34:17
  SPEAKER_02: or it's not even a proposal,
• 34:19
  SPEAKER_02: it's been increased,
• 34:20
  SPEAKER_02: the seven shillings increase in the broad maternal slavery to 15 shillings per litre.
• 34:24
  SPEAKER_02: Legal notices have been put out,
• 34:25
  SPEAKER_02: we still haven't seen,
• 34:26
  SPEAKER_02: and I expect that there could be a report by the Committee of Delegated Legislation
• 34:30
  SPEAKER_02: to look at these issues and either to approve it or reject it entirely.
• 34:35
  SPEAKER_02: But the bigger picture here is that there are these small,
• 34:39
  SPEAKER_02: small neighbours here,
• 34:41
  SPEAKER_02: they are in,
• 34:41
  SPEAKER_02: that ostensibly is,
• 34:44
  SPEAKER_02: basically because the fact that they are formed, they are like appropriation in aid.
• 34:48
  SPEAKER_02: So basically these are underlying project that is somewhere to be funded from some of these levels.
• 34:54
  SPEAKER_02: But the governance structures and in terms of the value that you are getting from this,
• 34:59
  SPEAKER_02: we're not seeing them.
• 35:00
  SPEAKER_02: So it's against to be made that some of these
• 35:03
  SPEAKER_02: living needs to be re-looked into.
• 35:05
  SPEAKER_02: Obviously, the government may say, oh, they want to do all this affordable housing.
• 35:09
  SPEAKER_02: And look,
• 35:09
  SPEAKER_02: and even the issue that you have this whole increase in appropriation in aid in
• 35:14
  SPEAKER_02: affordable housing living by about $7 billion.
• 35:17
  SPEAKER_02: $38.5 billion of that is basically...
• 35:20
  SPEAKER_02: Monies that were built sitting in that affordable housing fund because there's no proper factors.
• 35:25
  SPEAKER_02: By it, you're getting employees, employers being billed at the end of the month, 1.5%.
• 35:30
  SPEAKER_02: And then it goes sitting in account and potentially getting invested into treasury bills.
• 35:36
  SPEAKER_02: So...
• 35:37
  SPEAKER_02: Taxpayers need to get value for their monies that justifies some of these levels that are there.
• 35:44
  SPEAKER_02: So even in a smart of the conversation is tax cuts on the main mainstream tax items
• 35:50
  SPEAKER_02: such as corporate income tax and other excess duties.
• 35:54
  SPEAKER_02: But also the hidden pain points are on these small levels that can relatively
• 36:00
  SPEAKER_02: amount to even become a drug on consumption and also investment opportunities in
• 36:07
  SPEAKER_02: the country.
• 36:07
  SPEAKER_03: Indeed.
• 36:08
  SPEAKER_03: And just to illustrate that point with respect to the road maintenance levy,
• 36:11
  SPEAKER_03: I mean,
• 36:11
  SPEAKER_03: it wasn't a costless decision as much as the government tried to frame it that way
• 36:15
  SPEAKER_03: and say,
• 36:15
  SPEAKER_03: look,
• 36:15
  SPEAKER_03: we've lowered the price of diesel and petrol by at least a shilling a litre.
• 36:20
  SPEAKER_03: But if you actually do the math and essentially ask yourself,
• 36:23
  SPEAKER_03: wait,
• 36:24
  SPEAKER_03: hang on a minute,
• 36:24
  SPEAKER_03: if you essentially change the road maintenance levy and you raise it for that seven shillings,
• 36:28
  SPEAKER_03: and you essentially model that based on what we have from consumption data last year,
• 36:32
  SPEAKER_03: it essentially works out to the Kenyan government,
• 36:34
  SPEAKER_03: the roads ministry to be specific,
• 36:37
  SPEAKER_03: taking 3 billion shillings,
• 36:38
  SPEAKER_03: 2.7 to 2.8 billion shillings out of your pocket every month through that decision.
• 36:43
  SPEAKER_03: Now,
• 36:44
  SPEAKER_03: if you essentially look at that across a 12-month window,
• 36:46
  SPEAKER_03: 3 billion coming out of your pocket every month,
• 36:49
  SPEAKER_03: so that's roughly,
• 36:50
  SPEAKER_03: what,
• 36:51
  SPEAKER_03: 36 billion shillings a year in extra spending on the road maintenance levy,
• 36:55
  SPEAKER_03: all else being equal,
• 36:56
  SPEAKER_03: of course.
• 36:57
  SPEAKER_03: Then you've got another 70-something billion shillings coming out of your pocket
• 37:00
  SPEAKER_03: again through the housing levy.
• 37:02
  SPEAKER_03: These numbers add up.
• 37:03
  SPEAKER_03: We're not talking about small change here.
• 37:05
  SPEAKER_00: Ruth,
• 37:06
  SPEAKER_03: I want to give you the last word on this question around tax cuts,
• 37:09
  SPEAKER_03: because I personally think we hit a brick wall,
• 37:12
  SPEAKER_03: right,
• 37:12
  SPEAKER_03: with respect to how much money can be raised in terms of effective tax yield.
• 37:17
  SPEAKER_03: Because we've tried raising marginal rates,
• 37:19
  SPEAKER_03: we've done that on capital gains tax,
• 37:21
  SPEAKER_03: we've done that on income tax,
• 37:22
  SPEAKER_03: we've done that on corporate income tax.
• 37:24
  SPEAKER_03: It's not produced the results Treasury was hoping for.
• 37:27
  SPEAKER_03: Isn't it now time to essentially say,
• 37:29
  SPEAKER_03: you know what,
• 37:29
  SPEAKER_03: as government,
• 37:30
  SPEAKER_03: we've failed the stewardship tests,
• 37:32
  SPEAKER_03: Matthew 25,
• 37:32
  SPEAKER_03: 14,
• 37:33
  SPEAKER_03: let people keep their money.
• 37:34
  SPEAKER_00: Trust me, I wish I could do that.
• 37:36
  SPEAKER_00: And I wish it was like that.
• 37:37
  SPEAKER_00: Let people have their money.
• 37:38
  SPEAKER_00: Let people just leave their knives.
• 37:39
  SPEAKER_00: I think this is the one thing that everyone who had the opinion will give the same opinion.
• 37:44
  SPEAKER_00: Because what my colleagues have mentioned are basically the same issues that I had
• 37:47
  SPEAKER_00: in mind that I would like to mention.
• 37:49
  SPEAKER_00: And so I wouldn't want to repeat them, but yes, there are those small leakages.
• 37:52
  SPEAKER_00: We focus so much on the main tax lines and we have paid very little attention to
• 37:57
  SPEAKER_00: the many,
• 37:58
  SPEAKER_00: many smaller leakages that cumulatively pose a huge burden to citizens and that
• 38:03
  SPEAKER_00: needs to be looked at.
• 38:04
  SPEAKER_00: But also just in addition and to mention in generally is that we need to look at the consumption taxes.
• 38:10
  SPEAKER_00: Our tax system has inclined quite significantly on consumption taxes, VAT and excise tax.
• 38:16
  SPEAKER_00: Excess tax is meant to be a syntax.
• 38:18
  SPEAKER_00: Let it be a syntax.
• 38:19
  SPEAKER_00: And let's stop the creativity of saying maybe if we include financial services here,
• 38:25
  SPEAKER_00: maybe we'll get some extra coin.
• 38:26
  SPEAKER_00: It's a syntax.
• 38:27
  SPEAKER_00: Let it be a syntax.
• 38:29
  SPEAKER_00: do not impose a sign on a seat to really on other components that are not seen on
• 38:34
  SPEAKER_00: issues that affect the day-to-day lives of citizens,
• 38:37
  SPEAKER_00: issues that make people's life easier,
• 38:39
  SPEAKER_00: issues that make business life easier.
• 38:41
  SPEAKER_00: We are happy that that was dropped with the dropping of the finance bill.
• 38:44
  SPEAKER_00: But remember,
• 38:45
  SPEAKER_00: the rejection of the finance bill does not in its entirety promise that we will not
• 38:50
  SPEAKER_00: see any of these changes in future.
• 38:52
  SPEAKER_00: Nothing stops legislators,
• 38:53
  SPEAKER_00: for instance,
• 38:54
  SPEAKER_00: from tabling a motion on the floor of the House to amend the specific tax laws.
• 38:59
  SPEAKER_00: So we hope that with saying that,
• 39:00
  SPEAKER_00: you know,
• 39:01
  SPEAKER_00: well,
• 39:02
  SPEAKER_00: the adjustments on the excess tax that were not seen taxed,
• 39:04
  SPEAKER_00: that now are rejected with the finance budget,
• 39:07
  SPEAKER_00: will not find their way to the floor of the House sometime September,
• 39:10
  SPEAKER_00: October,
• 39:11
  SPEAKER_00: November,
• 39:11
  SPEAKER_00: and you find that the taxes are back up again.
• 39:13
  SPEAKER_00: And then secondly, also now from the same perspective, looking at VAT,
• 39:17
  SPEAKER_00: and really calling out to say that VAT is a consumption tax.
• 39:21
  SPEAKER_00: Citizens, generally speaking, we need to look at how we impose VAT, especially on essential commodities.
• 39:27
  SPEAKER_00: There was a very huge public outcry last year on VAT on fuel.
• 39:30
  SPEAKER_00: And we would have expected to see quite some broader discussion around that, but it didn't happen.
• 39:35
  SPEAKER_00: We would have expected to see broader discussion now on the road maintenance levy,
• 39:39
  SPEAKER_00: but that is not happening.
• 39:41
  SPEAKER_00: And you see, just as you've reflected on what the RML...
• 39:44
  SPEAKER_00: means in terms of how much is going out of our pockets to the Ministry of State Department of Roads.
• 39:48
  SPEAKER_00: In the same manner,
• 39:49
  SPEAKER_00: then you ask yourself,
• 39:50
  SPEAKER_00: so without this road levy,
• 39:52
  SPEAKER_00: then fuel would have been eight shillings cheaper this month.
• 39:55
  SPEAKER_00: So you look at it from that perspective and say,
• 39:57
  SPEAKER_00: if our voices were heard,
• 39:59
  SPEAKER_00: if all actors just went to the drawing board and said,
• 40:01
  SPEAKER_00: don't impose this on citizens now,
• 40:03
  SPEAKER_00: let's find other alternative ways,
• 40:04
  SPEAKER_00: then that eight shillings will really have made a difference to people's pockets.
• 40:08
  SPEAKER_00: And that is the key issue that needs to be looked at here.
• 40:10
  SPEAKER_00: Thank you.
• 40:11
  SPEAKER_03: And even just to buttress that specific point,
• 40:13
  SPEAKER_03: you know,
• 40:14
  SPEAKER_03: the RML,
• 40:15
  SPEAKER_03: even today,
• 40:15
  SPEAKER_03: and I'm actually just looking at the Kenya Gazette,
• 40:18
  SPEAKER_03: the Kenya law sites,
• 40:19
  SPEAKER_03: the increase in the road maintenance levy should essentially have been gazetted
• 40:23
  SPEAKER_03: ages ago on the 10th of July.
• 40:24
  SPEAKER_03: And it's really ironic that even today,
• 40:27
  SPEAKER_03: right,
• 40:27
  SPEAKER_03: we are right at the end of the month,
• 40:29
  SPEAKER_03: that Gazette notice is still not public.
• 40:31
  SPEAKER_03: I mean,
• 40:31
  SPEAKER_03: that tells you a hell of a lot about the quality of public finance management that
• 40:36
  SPEAKER_03: we're having at the moment with Treasury and the Roads Ministry.
• 40:38
  SPEAKER_03: We're getting into the final stretch of this conversation,
• 40:41
  SPEAKER_03: and I want to turn it to the question around public debt and public debt management.
• 40:45
  SPEAKER_03: As I mentioned earlier on in the conversation,
• 40:47
  SPEAKER_03: the fact of the matter is that right now,
• 40:49
  SPEAKER_03: somewhere between five and six shillings out of every 10 that we have is
• 40:53
  SPEAKER_03: essentially just being spent on servicing debt.
• 40:56
  SPEAKER_03: And Ruth,
• 40:56
  SPEAKER_03: in early December,
• 40:57
  SPEAKER_03: you argued that,
• 40:58
  SPEAKER_03: and I'm quoting what you wrote here in the blog for IPF,
• 41:00
  SPEAKER_03: quote,
• 41:00
  SPEAKER_03: there is potential for debt rescheduling in Kenya.
• 41:04
  SPEAKER_03: Now, since then, obviously, we've rejected a finance bill, punched a slightly larger hole in the fiscus.
• 41:11
  SPEAKER_03: Incomes are certainly not recovering at all.
• 41:13
  SPEAKER_03: Companies still wary of investment.
• 41:15
  SPEAKER_03: From where you sit,
• 41:16
  SPEAKER_03: has the argument for debt rescheduling become weaker or stronger in the last seven months,
• 41:22
  SPEAKER_03: given the macroeconomic conditions we're in now?
• 41:24
  SPEAKER_00: We are not out of the woods and we are not about to get out of the woods unless,
• 41:29
  SPEAKER_00: I'm not sure what kind of miracles we should expect.
• 41:31
  SPEAKER_00: Because the biggest lingering problem we had towards the end of last year was the
• 41:35
  SPEAKER_00: euro bond that was due early this year.
• 41:37
  SPEAKER_00: And we addressed it not by effectively,
• 41:41
  SPEAKER_00: you know,
• 41:41
  SPEAKER_00: just paying off this debt and being done with it,
• 41:43
  SPEAKER_00: by essentially kicking the ball to the next generation.
• 41:45
  SPEAKER_00: Yad and saying we'll deal with it when we get to the year 2029.
• 41:49
  SPEAKER_00: And so we are not out of the woods.
• 41:51
  SPEAKER_00: That is still looking at us.
• 41:52
  SPEAKER_00: We have the euro bond that was taken in 2018 that is payable in this financial year.
• 41:56
  SPEAKER_00: We need to already start talking about that and what that would mean for the
• 41:59
  SPEAKER_00: respective sectors that would need to
• 42:02
  SPEAKER_00: be compressed in terms of resource allocation so that we're able to raise money for this current year.
• 42:06
  SPEAKER_00: But most important,
• 42:07
  SPEAKER_00: whereas in other countries and in theory,
• 42:10
  SPEAKER_00: we've seen that rescheduling may give a country some level of stability.
• 42:14
  SPEAKER_00: My argument,
• 42:15
  SPEAKER_00: even in that blog,
• 42:16
  SPEAKER_00: was that for rescheduling to really be effective,
• 42:19
  SPEAKER_00: there have to be a series of activities or reforms that take place so that these initiatives,
• 42:25
  SPEAKER_00: rescheduling and reforms take place hand in hand.
• 42:28
  SPEAKER_00: That way it becomes an effective process.
• 42:29
  SPEAKER_00: So for instance, when you reschedule your debt,
• 42:32
  SPEAKER_00: You move the debt repayment dates,
• 42:34
  SPEAKER_00: but there's also the issue of restructuring,
• 42:36
  SPEAKER_00: maybe looking at how you are repaying them,
• 42:38
  SPEAKER_00: maybe change the monthly repayments,
• 42:40
  SPEAKER_00: extend the payment period and such.
• 42:41
  SPEAKER_00: For that to happen,
• 42:42
  SPEAKER_00: there has to be a promise to the creditor that there is means to pay this debt,
• 42:47
  SPEAKER_00: even as we reschedule.
• 42:48
  SPEAKER_00: That remains shaky to date.
• 42:49
  SPEAKER_00: And we have seen that from the Moody's rating.
• 42:52
  SPEAKER_00: And we expect that sooner or later, the other rating agencies will equally do the same thing.
• 42:56
  SPEAKER_00: Then secondly,
• 42:57
  SPEAKER_00: Rescheduling has to happen around reforms.
• 43:00
  SPEAKER_00: For as long as we continue having problems with wastages,
• 43:03
  SPEAKER_00: for as long as we continue having problems with corruption and leakage,
• 43:08
  SPEAKER_00: our rescheduling process,
• 43:09
  SPEAKER_00: it will happen,
• 43:10
  SPEAKER_00: but it will happen in a problematic manner.
• 43:12
  SPEAKER_00: It will affect citizens because the extra burden,
• 43:14
  SPEAKER_00: any additional cost that comes to it,
• 43:17
  SPEAKER_00: all the additional pressure will be transferred to citizens.
• 43:20
  SPEAKER_00: And it really will not address the root cause that was meant to address.
• 43:24
  SPEAKER_00: Because the whole reason why we want to talk about rescheduling
• 43:27
  SPEAKER_00: is because we had bad decision-making on our borrowing debt.
• 43:29
  SPEAKER_00: And so if these reforms are not put in place, debt rescheduling will not really translate much.
• 43:33
  SPEAKER_00: And finally,
• 43:34
  SPEAKER_00: rescheduling needs to happen within an environment where there's prospects for
• 43:39
  SPEAKER_00: economic growth,
• 43:40
  SPEAKER_00: where you know that we're rescheduling this debt at this particular time,
• 43:43
  SPEAKER_00: using these resources to invest in this particular area so that we spur growth and
• 43:48
  SPEAKER_00: the revenues that will be generated from the growth sectors then will be able to
• 43:51
  SPEAKER_00: pay off that debt.
• 43:52
  SPEAKER_00: But with the current system of taxes and we are seeing how businesses are
• 43:55
  SPEAKER_00: responding and even pulling off with the reduced profits from businesses,
• 43:59
  SPEAKER_00: with a number of small and medium enterprises closing off because they cannot
• 44:03
  SPEAKER_00: sustain it,
• 44:04
  SPEAKER_00: then it means that even rescheduling,
• 44:06
  SPEAKER_00: basically postponing a problem that you're not able to address now and there are no
• 44:09
  SPEAKER_00: mechanisms for us to address in future.
• 44:12
  SPEAKER_00: So bottom line?
• 44:14
  SPEAKER_00: As a policy option, yes, it is possible.
• 44:16
  SPEAKER_00: But unless we fix our reforms,
• 44:19
  SPEAKER_00: then that policy option is not going to yield the kind of results that Kenya would
• 44:22
  SPEAKER_00: want to seek.
• 44:23
  SPEAKER_00: Thank you.
• 44:23
  SPEAKER_03: Indeed.
• 44:24
  SPEAKER_03: Churchill, this comes to you.
• 44:25
  SPEAKER_03: And I know we're sort of diving into part theoretical,
• 44:28
  SPEAKER_03: part drawing comparisons between what has happened in Ghana and what happened in
• 44:32
  SPEAKER_03: Zambia with what might happen here.
• 44:34
  SPEAKER_03: Because I look at our debt service schedule for the next three fiscal years and
• 44:37
  SPEAKER_03: domestic interest costs,
• 44:38
  SPEAKER_03: right?
• 44:39
  SPEAKER_03: They're the biggest component of debt service for the sake of argument.
• 44:42
  SPEAKER_03: Assuming we do a Ghana-style restructuring,
• 44:44
  SPEAKER_03: as extreme as that would be,
• 44:46
  SPEAKER_03: can you give us a sense of what impact that would have on banks,
• 44:50
  SPEAKER_03: insurance firms,
• 44:51
  SPEAKER_03: pension funds,
• 44:52
  SPEAKER_03: because they hold the bulk of domestic debt?
• 44:55
  SPEAKER_03: And I know right now it's sort of seductive for us to sit down and think about that.
• 44:59
  SPEAKER_03: well, you know, we need to create a bit of fiscal headroom, but where is that going to happen?
• 45:03
  SPEAKER_03: And debt service is one of those places where like, let's see, we can reschedule some of this stuff.
• 45:07
  SPEAKER_03: It's easy to say in theory,
• 45:08
  SPEAKER_03: but based on what we've seen in Ghana and Zambia,
• 45:11
  SPEAKER_03: how did it actually work out?
• 45:12
  SPEAKER_03: How did it hit the pockets of the firms and the savings accounts of the people in our audience today?
• 45:18
  SPEAKER_02: So the parallels between Ghana and us right now is the elevated domestic debt
• 45:22
  SPEAKER_02: interest cost as a percentage of the total interest cost in the sense that for
• 45:26
  SPEAKER_02: every 10 shillings,
• 45:27
  SPEAKER_02: we...
• 45:28
  SPEAKER_02: service or we over interest payments,
• 45:31
  SPEAKER_02: eight shillings of that is going towards repaying domestic creditors for the simple
• 45:36
  SPEAKER_02: reason that as we borrow from the domestic market is in commercial terms.
• 45:40
  SPEAKER_02: Whereas if we look at the whole spectrum of external debts, large significant chunk of that is
• 45:47
  SPEAKER_02: is concessional.
• 45:48
  SPEAKER_02: There's also a big portion of that is on some zero interest loans.
• 45:52
  SPEAKER_02: And a part of that is now the commercial loans, the euro bonds and the syndicated loans.
• 45:56
  SPEAKER_02: So the elephant in the room, as you point out, is basically on domestic debt and how do we go about it.
• 46:02
  SPEAKER_02: So Ghana, they did what you call the domestic debt exchange program.
• 46:06
  SPEAKER_02: So having halted in November, December 2022, so they started
• 46:12
  SPEAKER_02: the process of basically restructuring their domestic debts.
• 46:17
  SPEAKER_02: The coupon rates for their domestic debts was quite innovative.
• 46:20
  SPEAKER_02: We're talking about 30%, at least 30% thereabouts.
• 46:23
  SPEAKER_02: Some figures were staggering around 20%.
• 46:26
  SPEAKER_02: So it was quite innovative.
• 46:28
  SPEAKER_02: But the import of that,
• 46:29
  SPEAKER_02: having gone through the whole process of restructuring or basically domestic debt
• 46:34
  SPEAKER_02: exchange is huge.
• 46:35
  SPEAKER_02: Basically,
• 46:36
  SPEAKER_02: what you have seen is that the average coupon rate of the bonds,
• 46:39
  SPEAKER_02: the old bonds,
• 46:40
  SPEAKER_02: which was around 19%,
• 46:41
  SPEAKER_02: right now the average interest coupon rate is around 9%.
• 46:45
  SPEAKER_02: So you have seen a dramatic reduction in the debt servicing costs.
• 46:49
  SPEAKER_02: But the nature of,
• 46:51
  SPEAKER_02: or the restructuring,
• 46:53
  SPEAKER_02: basically the import of that,
• 46:54
  SPEAKER_02: because you are talking about bonds,
• 46:56
  SPEAKER_02: you're talking about pensions,
• 46:57
  SPEAKER_02: insurance funds,
• 46:58
  SPEAKER_02: who typically rely on the income investments from some of these investments.
• 47:03
  SPEAKER_02: So having lowered the average interest coupon rate,
• 47:07
  SPEAKER_02: so basically was a hit on their portfolios and also their assets and what in
• 47:12
  SPEAKER_02: technicals are going to call a haircut.
• 47:14
  SPEAKER_02: So they got a haircut technically,
• 47:16
  SPEAKER_02: but the interest that they are paying and also the fact that the bonds,
• 47:20
  SPEAKER_02: the maturity profile was also changed.
• 47:24
  SPEAKER_02: So from a present value, basically
• 47:27
  SPEAKER_02: As you receive your bonds or as you receive your investments, say you invest in a bond that is 10 years.
• 47:34
  SPEAKER_02: So at the end of the 10 year, you get back your investment.
• 47:36
  SPEAKER_02: So basically you're looking at that investment that you'll recoup after 10 years.
• 47:41
  SPEAKER_02: What is this present value right now?
• 47:43
  SPEAKER_02: So looking at the present value of the old bonds versus the new bonds and consider
• 47:49
  SPEAKER_02: even the coupon interests or the coupon payments that they'll get over the course
• 47:53
  SPEAKER_02: of the new bond.
• 47:54
  SPEAKER_02: So that is where what you call the haircut came about, that the present value changed drastically.
• 47:59
  SPEAKER_02: So that obviously will have a negative impact even in domestic debt holders that
• 48:04
  SPEAKER_02: you mentioned,
• 48:05
  SPEAKER_02: the banks and insurance and pension funds.
• 48:08
  SPEAKER_02: At some point, you also mentioned more this, obviously, based on how the
• 48:13
  SPEAKER_02: Structuring will turn about.
• 48:15
  SPEAKER_02: Is it a voluntary?
• 48:16
  SPEAKER_02: Is it basically restructuring that is avoiding a default event?
• 48:21
  SPEAKER_02: Obviously, that will have some implications.
• 48:24
  SPEAKER_02: I can see when David is on the call, he's a good friend of Jason's.
• 48:28
  SPEAKER_02: So it's
• 48:29
  SPEAKER_02: listening keenly.
• 48:30
  SPEAKER_02: I don't know where they can lay on that.
• 48:31
  SPEAKER_02: But that's basically is on a high level view.
• 48:36
  SPEAKER_02: This is what you can see in the event that we pursue a Ghana debt restructuring.
• 48:40
  SPEAKER_02: Obviously it did not stop with the domestic debt exchange program with Ghana.
• 48:44
  SPEAKER_02: Right now they're also working out restructuring their commercial debt stock.
• 48:48
  SPEAKER_02: Now the Europe ones pretty much.
• 48:50
  SPEAKER_02: They should complete it around September.
• 48:52
  SPEAKER_02: So
• 48:53
  SPEAKER_02: Basically,
• 48:54
  SPEAKER_02: this whole idea of common framework that if you restructure a portion of your debt,
• 48:58
  SPEAKER_02: you should also consider the whole lot of the debts for restructuring.
• 49:03
  SPEAKER_02: So that is Ghana restructuring mentioned earlier on.
• 49:09
  SPEAKER_03: Stephanie,
• 49:09
  SPEAKER_03: any thoughts on this Ghana-style restructuring of our domestic debt and how that
• 49:13
  SPEAKER_03: would hit banks,
• 49:14
  SPEAKER_03: insurance companies and pension funds?
• 49:15
  SPEAKER_01: Just to add and compliment to what Churchill said,
• 49:19
  SPEAKER_01: yes,
• 49:19
  SPEAKER_01: just for the audience's appreciation in summary,
• 49:22
  SPEAKER_01: restructuring,
• 49:22
  SPEAKER_01: the gunner-style debt restructuring just involved what Churchill mentioned,
• 49:26
  SPEAKER_01: extending the maturity,
• 49:27
  SPEAKER_01: lowering the coupon rates,
• 49:29
  SPEAKER_01: and also there was a haircut as well.
• 49:30
  SPEAKER_01: In Kenya,
• 49:31
  SPEAKER_01: the institutions that you mentioned,
• 49:33
  SPEAKER_01: banks,
• 49:33
  SPEAKER_01: insurance,
• 49:33
  SPEAKER_01: and pensions,
• 49:34
  SPEAKER_01: are the largest holders of government securities,
• 49:37
  SPEAKER_01: and they constitute about 80% of the total investor base,
• 49:40
  SPEAKER_01: at least for government securities in the country.
• 49:42
  SPEAKER_01: Now,
• 49:43
  SPEAKER_01: what specifically for banks,
• 49:45
  SPEAKER_01: what in my mind at the moment would be the impact of a Ghana-like debt
• 49:49
  SPEAKER_01: restructuring is on two aspects in terms of interest income and liquidity.
• 49:54
  SPEAKER_01: I'll focus more just on the liquidity because that will be of interest to us
• 49:57
  SPEAKER_01: because once banks face liquidity constraints,
• 50:01
  SPEAKER_01: they do face difficulties in meeting other obligations.
• 50:04
  SPEAKER_01: And as well,
• 50:05
  SPEAKER_01: this could also,
• 50:06
  SPEAKER_01: could is a potential,
• 50:07
  SPEAKER_01: could also affect the ability to extend credit to the private sector.
• 50:11
  SPEAKER_01: So we could see a dip there as well.
• 50:13
  SPEAKER_01: But in my opinion, I don't think it will be that nasty, at least for our country.
• 50:18
  SPEAKER_01: And I also believe even if there was a dent on capital adequacy ratios,
• 50:22
  SPEAKER_01: the regulator,
• 50:23
  SPEAKER_01: that's the CBK,
• 50:24
  SPEAKER_01: will come in to offer some temporary relief.
• 50:27
  SPEAKER_01: But on the flip side,
• 50:28
  SPEAKER_01: it may also ignite that conversation around mergers and acquisitions in the industry.
• 50:32
  SPEAKER_01: So we could see this on the rise.
• 50:34
  SPEAKER_01: Now,
• 50:35
  SPEAKER_01: in terms of insurance firms,
• 50:36
  SPEAKER_01: we do Agana-style restructuring would result in what we'll see is lower yields,
• 50:42
  SPEAKER_01: as well as affecting the insurance firm's ability to generate a return.
• 50:46
  SPEAKER_01: And what this would overall result in is insolvency issues.
• 50:50
  SPEAKER_01: which would now negatively affect those insurance firms' ability to provide payouts
• 50:56
  SPEAKER_01: to their policyholders.
• 50:57
  SPEAKER_01: Now,
• 50:58
  SPEAKER_01: in terms of pensions,
• 50:59
  SPEAKER_01: just similar to insurance firms and banks,
• 51:01
  SPEAKER_01: this will impact their portfolios or the need of restructuring their portfolios.
• 51:06
  SPEAKER_01: But all in all,
• 51:07
  SPEAKER_01: what is important for us is to realize once pension funds are impacted,
• 51:11
  SPEAKER_01: given that they're also one of the largest investors in government securities,
• 51:15
  SPEAKER_01: is that this would negatively impact now the beneficiaries of retirement benefits.
• 51:20
  SPEAKER_01: resulting in financial insecurity of retirees, which has also been a key issue in the country.
• 51:25
  SPEAKER_01: So overall,
• 51:26
  SPEAKER_01: aside from even on top of what Churchill had mentioned in terms of perception,
• 51:30
  SPEAKER_01: in terms of credit searching agencies,
• 51:32
  SPEAKER_01: and I'm sure that people who are better placed can be able to respond to that.
• 51:36
  SPEAKER_01: And in terms of perception globally,
• 51:38
  SPEAKER_01: locally,
• 51:39
  SPEAKER_01: and potential contingent effects,
• 51:41
  SPEAKER_01: there could be a temporary shock to economic stability,
• 51:46
  SPEAKER_01: especially if that debt restructuring isn't done properly and there's still issues
• 51:50
  SPEAKER_01: around that.
• 51:51
  SPEAKER_01: That's where there needs to be prudent debt restructuring during that whole process.
• 51:54
  SPEAKER_01: Yeah.
• 51:55
  SPEAKER_01: Thank you.
• 51:55
  SPEAKER_03: Indeed.
• 51:56
  SPEAKER_03: And that perhaps is just going to be a whole other conversation that hopefully,
• 51:58
  SPEAKER_03: if I'd be able to actually hold with Mango Capital and IPF in subsequent spaces
• 52:03
  SPEAKER_03: later on,
• 52:03
  SPEAKER_03: I do want to bring this to the tail end of the conversation.
• 52:05
  SPEAKER_03: Bruce,
• 52:06
  SPEAKER_03: I'm going to give you the last word on this one,
• 52:07
  SPEAKER_03: because looking at some of the conversations online that we've had,
• 52:10
  SPEAKER_03: especially after how tumultuous June was and how tumultuous July has been,
• 52:15
  SPEAKER_03: we often keep coming back to a simple question in two words.
• 52:19
  SPEAKER_03: What next?
• 52:20
  SPEAKER_03: What else can citizens do to hold politicians to account in keeping spending as efficient as possible?
• 52:26
  SPEAKER_03: What are the options that citizens have?
• 52:27
  SPEAKER_00: Thank you very much.
• 52:29
  SPEAKER_00: I'll speak into two issues in the interest of time.
• 52:32
  SPEAKER_00: First is for citizens to be on the lookout.
• 52:35
  SPEAKER_00: The primary concern
• 52:36
  SPEAKER_00: source of information that we have on how government is spending money from the
• 52:41
  SPEAKER_00: reports from the controller of budget and the auditor general.
• 52:43
  SPEAKER_00: Citizens should make use of these low-hanging fruit services that we can use to
• 52:48
  SPEAKER_00: look at them,
• 52:49
  SPEAKER_00: understand government documents,
• 52:50
  SPEAKER_00: get the information,
• 52:52
  SPEAKER_00: and even use the scorecards to rate how performance is happening.
• 52:55
  SPEAKER_00: Then secondly, the reports
• 52:58
  SPEAKER_00: or how government spends its money.
• 52:59
  SPEAKER_00: It's actually this, you know, the money is spent on citizens and meant for citizen service delivery.
• 53:04
  SPEAKER_00: And unless we question,
• 53:06
  SPEAKER_00: take for instance,
• 53:07
  SPEAKER_00: the example you've mentioned about the CDF burning being used to construct some pit
• 53:11
  SPEAKER_00: latrines that the doors were not as expected.
• 53:14
  SPEAKER_00: They already had tracks in the wall.
• 53:16
  SPEAKER_00: When this construction was happening,
• 53:17
  SPEAKER_00: It's the very same people who are there and perhaps even attended the launch and
• 53:20
  SPEAKER_00: clapped very well and said,
• 53:22
  SPEAKER_00: yes,
• 53:22
  SPEAKER_00: we are happy.
• 53:23
  SPEAKER_00: And,
• 53:23
  SPEAKER_00: you know,
• 53:24
  SPEAKER_00: fed the people who came for that occasion and said,
• 53:26
  SPEAKER_00: thank you very much for constructing pit latrines.
• 53:29
  SPEAKER_00: Rather than using those opportunities to hold back.
• 53:33
  SPEAKER_00: This has not been done to standard.
• 53:35
  SPEAKER_00: Can something be done about it?
• 53:37
  SPEAKER_00: So we need to make deliberate efforts as citizens to engage at every stage,
• 53:42
  SPEAKER_00: looking at the low-hanging fruits from the technical documents and reports shared
• 53:46
  SPEAKER_00: by these entities to citizens actually just being involved and being able to raise
• 53:51
  SPEAKER_00: a voice and put up a voice.
• 53:53
  SPEAKER_00: And then the second issue that I will bring in is that we have put a lot of focus
• 53:58
  SPEAKER_00: and very much in order around the national space.
• 54:01
  SPEAKER_00: We need to move the conversation to the county level and talk about how counties
• 54:05
  SPEAKER_00: are raising their revenues,
• 54:06
  SPEAKER_00: how they account for these revenues,
• 54:09
  SPEAKER_00: and how these revenues translate into service deliveries.
• 54:12
  SPEAKER_00: What is being done in that space?
• 54:13
  SPEAKER_00: That is a space that has not been talked about, but there's a lot that needs to be looked at.
• 54:17
  SPEAKER_00: We need to get deeper into the flesh on how counties are functioning around PFM,
• 54:23
  SPEAKER_00: identify the gaps,
• 54:24
  SPEAKER_00: raise voice on this and have those gaps be addressed.
• 54:26
  SPEAKER_00: Thank you, Roma.
• 54:27
  SPEAKER_03: Indeed,
• 54:28
  SPEAKER_03: and hopefully along the way we can stop this nonsense of current governments
• 54:31
  SPEAKER_03: blowing all our hard-earned money on silly trips and junkets to Dubai to do
• 54:36
  SPEAKER_03: completely useless,
• 54:37
  SPEAKER_03: quote-unquote,
• 54:37
  SPEAKER_03: benchmarking trips at the exact same time.
• 54:40
  SPEAKER_03: One last thing that I would like to point out to the audience,
• 54:42
  SPEAKER_03: because I do need to bring this to a close.
• 54:43
  SPEAKER_03: We've essentially gone over our time and location by about 10 minutes or so.
• 54:46
  SPEAKER_03: For a bit of extra reading on context around...
• 54:50
  SPEAKER_03: How we got here,
• 54:51
  SPEAKER_03: how economic policy has informed the decisions that has gotten us to this point,
• 54:55
  SPEAKER_03: I'd highly,
• 54:56
  SPEAKER_03: highly recommend that you head over to theafricanistperspective.com.
• 55:00
  SPEAKER_03: It's essentially a series of really interesting blogs written by Ken O'Pallo.
• 55:04
  SPEAKER_03: He's a professor over at Georgetown University.
• 55:06
  SPEAKER_03: And I see he's actually in the space at the moment.
• 55:08
  SPEAKER_03: The three-part series he did there on the Kenyan protests,
• 55:11
  SPEAKER_03: you know,
• 55:11
  SPEAKER_03: how not to clean up a fiscal mess,
• 55:13
  SPEAKER_03: thoughts on potential pathways forward,
• 55:14
  SPEAKER_03: and what these protests entail.
• 55:16
  SPEAKER_03: really do tell us about, you know, economic management and the politics of reforms in states like ours.
• 55:22
  SPEAKER_03: Highly, highly recommend it.
• 55:23
  SPEAKER_03: We'll drop a link to that, of course, on the timeline as well.
• 55:27
  SPEAKER_03: Ladies and gentlemen, we've been with you for the last 70 or so minutes.
• 55:30
  SPEAKER_03: I'd like to bring this conversation to a close with a massive,
• 55:33
  SPEAKER_03: massive thank you to all my speakers tonight.
• 55:35
  SPEAKER_03: Churchill Ogutu from IC Group,
• 55:37
  SPEAKER_03: Stephanie Kamani,
• 55:37
  SPEAKER_03: and of course,
• 55:38
  SPEAKER_03: Ruth Kendergau from the Institute of Public Finance,
• 55:40
  SPEAKER_03: who've been our
• 55:41
  SPEAKER_03: fantastic sponsors for this particular one go spaces.
• 55:45
  SPEAKER_03: Thank you very much for your time and your attention.
• 55:47
  SPEAKER_03: We'll see you in the next one.