An economy cannot be managed like a piggy bank, where one throws in anything and everything throughout the year and only checks the outcome at the end. Instead, an economy must be governed scientifically, with clear inputs, structured processes, and expected outcomes.
For a long time, Kenya’s economy has been driven by guesswork, except during President Mwai Kibaki’s tenure when economic policies were guided by structured planning and strategic decision-making. But what are the arbitrary policies and measures that have been thrown at the Kenyan economy over the years?
Is Budget Deficit Bad for the Economy?
The National Treasury recently proposed a Ksh. 4.3 trillion budget for 2025-26. Some MPs suggested lowering it to Ksh. 4 trillion, and eventually, the Cabinet settled on Ksh. 4.2 trillion. The reason given for the proposed reduction is an aversion to budget deficits. However, a deficit is not necessarily harmful to a developing country’s economy.
Studies indicate a positive correlation between budget deficits and economic growth when funds are channeled into development sectors such as infrastructure, education, healthcare, and manufacturing. However, there is concern about the budget growing by Ksh. 300 billion (7.9%) against an economic growth rate of only 4.8%. This suggests inefficiency in the allocation of taxpayers’ money since economic growth should outpace government expenditure.
What is the Real Enemy of Kenya’s Economy?
If budget deficits are not the problem, then what is crippling Kenya’s economy? The real enemies are:
- High interest rates – Kenya: 18%, China: 3.1%, US: 4.2%
- High inflation rates – Kenya: 5.1%, China: 0.2%, US: 2.9%
- High exchange rates – China: 17.9, US: 129
These economic constraints arise from excessive debt servicing and low economic activity, which contribute to high interest rates, inflation, and a weak currency.
How Can Kenya’s Economy Be Fixed?
To stabilize Kenya’s economy, the government must reduce debt servicing costs and redirect funds toward stimulating economic activity. This involves tackling the three key economic enemies: high interest rates, inflation, and exchange rates.
1. Investing in Education and Healthcare
A free and efficient education and healthcare system can act as an economic stimulus. Kenya has over 12.1 million households, with each spending Ksh. 68,702 per child on education. With an average of 3.4 children per household, the total education expenditure reaches Ksh. 2.84 trillion annually.
If the government provided free primary and secondary education, this Ksh. 2.84 trillion would be redirected into other sectors of the economy, such as housing, food, transport, tourism, and local industries. Increased spending in these areas would spur economic productivity, reduce inflation, lower interest rates, and create jobs.
2. Reducing Government Expenditure and Enhancing Household Spending
Government spending is often inefficient and contributes to high taxes, which stifle economic activity. Reducing unnecessary government expenditure while increasing private sector investments and household spending would drive economic growth. Lower government spending reduces demand for goods and services, thus keeping inflation in check.
3. Boosting Local Production
To curb inflation and stabilize the economy, Kenya must increase production by providing incentives to businesses, including:
- Tax breaks for industries like sugar, dairy, and rice processing.
- Infrastructure investment to improve logistics.
- Deregulation to ease business operations.
- Targeted subsidies for food production.
- Skills development in healthcare, engineering, and vocational training.
- Trade liberalization to expand market access.
- Policies that promote innovation and reduce production costs.
Boosting local production would address Kenya’s trade imbalance, lower the exchange rate, and ultimately reduce interest rates. With low inflation and interest rates, fuel prices could drop to around Ksh. 89 per liter, significantly stimulating economic activity and growth.
The Power of Supply-Side Economics
Kenya must shift from a demand-driven economy to a supply-driven one. Unlike demand-side economics, which fuels government expenditure and corruption through bureaucratic deals, supply-side economics prioritizes production and economic stability.
Supply-side economics benefits consumers by increasing the availability of goods and services at lower prices while expanding employment opportunities. This economic theory focuses on:
- Tax policies – Reducing corporate and personal tax burdens to encourage investment.
- Regulatory policies – Easing restrictions on businesses to promote efficiency.
- Monetary policies – Maintaining a stable money supply to control inflation and interest rates.
President William Ruto’s Bottom-Up Economic Transformation Agenda, which disrupts taxation, regulation, and monetary policy, has strained economic stability. When businesses cite Bottom-Up economics in their strategies, they fail to grasp its long-term consequences.
To achieve sustainable economic growth, Kenya must embrace supply-side economics, ensuring that production takes precedence over demand. Only then can the economy stabilize, employment rise, and prosperity reach all Kenyans.
