Kenya’s recent credit rating downgrades by Standard & Poor’s and Moody’s underscore the urgent need for the State to quickly strengthen its fiscal policies, enhance export performance, and expand foreign reserves.
To improve its battered credit ratings, the National Treasury must take decisive actions that address the underlying economic challenges, ultimately aiming to achieve a more stable and resilient economy.
First, Treasury must actualise its fiscal consolidation efforts by reducing the fiscal deficit by either cutting unnecessary expenditures or increasing revenue streams, or both.
The recent repeal of the 2024/2025 revenue-raising plan indicates the difficulty in maintaining fiscal discipline.
However, for Kenya to regain investor confidence and reduce its reliance on expensive debt, it is crucial to implement more sustainable and effective fiscal policies. This includes comprehensive tax reforms that broaden the tax base and enhance tax compliance.
Additionally, the government should prioritise spending on essential services and infrastructure that support long-term economic growth while eliminating wasteful expenditures.
By strengthening public financial management and ensuring transparency in the use of public funds, the government can build trust and create a more stable fiscal environment.
Expanding foreign reserves is equally important in stabilising the economy and improving its credit ratings.
Adequate foreign reserves provide a buffer against external shocks and help maintain investor confidence.
To bolster reserves, Kenya should focus on attracting more foreign direct investment by creating a conducive environment for investors.
This includes improving the ease of doing business, ensuring political stability, and offering incentives for investments in key sectors.
Encouraging diaspora remittances, which are a significant source of foreign exchange, can further strengthen reserves. The government can facilitate this by reducing transaction costs and providing attractive savings options for the diaspora.
While the recent increase in export earnings, particularly from tea and horticulture, is encouraging, Kenya must somehow start diversifying its export base to reduce vulnerability to global market fluctuations.
Targeted investments in sectors with high export potential, such as manufacturing, ICT, and services, can go a long way especially if the State can consider providing incentives and improving infrastructure.
These measures can reduce the cost of borrowing, foster economic growth, and create a more resilient economy that can withstand future challenges.
