TV Interview: Value Addition in Africa

Posted on

I was part of a panel on Talk Africa of CGTN, discussing how Africa can build manufacturing capacity and scale value addition.

 

Advertisements

The Financial System That Keeps The World Cup Going

Posted on Updated on

This article first appeared in my weekly column in the Business Daily on July 15, 2018

The last few weeks have been dominated by the FIFA World Cup with fans all over the world tuning in to support their teams and catch all the action. What many may not know is the size of the World Cup economy and the financial ecosystem that keeps it running.

The first element of cost of the World Cup is paid by the host nation. Russian media reports indicate that the total cost of hosting the event is over USD 10 billion. Interestingly, this is USD 5 billion less than the cost of the 2014 World Cup in Brazil. There are differing views as to whether investment in hosting the World Cup generates financial returns for the host economy. A study on FIFA World Cups indicated it has varied impacts on host country stock markets. In the case of South Africa, the tournament announcement date was linked to a largely positive trend on stock returns. However, in Japan there was a decline in daily stock returns a day after the announcement of the tournament.

Gianni Infantino

(source: https://www.businessdailyafrica.com/analysis/ideas/Financial-system-that-keeps-the-World-Cup-tournament-running/4259414-4664084-121ir1pz/index.html)

Further, some economists assert that no observable short-term economic growth linked to the World Cup exists within the tourism, retailing, accommodation, and employment sectors of host countries. Others insist that the World Cup can boost tourism, retailing, accommodation, and employment because of the novelty effect of new stadiums, the feel-good effect, and the Cup’s effect on the international perception of a host country. While not all factors affect every host nation to equal degrees, the World Cup as a whole, can turn out to be positive.

In the case of Russia in particular, Moody’s is of the view that the World Cup will have limited impact on rated Russian companies, including banks, regional governments, and the sovereign itself. They argue the economic benefit will be short-lived because much of the economic gain has already been attained through infrastructure spending, and even that impact is limited because World Cup-related investments in the 2013-17 period have accounted for only 1 percent of total investments in Russia. They argue that the games will last just one month and the associated economic stimulus will pale in comparison to the size of Russia’s USD 1.3 trillion economy.

Image result for russia world cup stadiums

(source: https://www.footyheadlines.com/2018/04/all-russia-2018-world-cup-stadiums.html)

The second component is the cost of a ticket to attend the games. Here records have been broken because for the first time at a FIFA World Cup, some tickets will cost more than USD 1,000. CNN reports that fans will have to pay at least USD 1,100 for the most expensive ticket at the final, an increase from the USD 990 charged at the last World Cup final held in Brazil. The cheapest tickets for non-Russian fans will cost USD 105, a USD 15 increase on the equivalent ticket in 2014.

The third element is payments made to participating teams. FIFA announced they have allocated USD 791 million for prize money, payments to clubs and player insurance fees as part of the World Cup. USD 400 million will be awarded to 32 national federations depending to how they finish in the tournament and the FIFA World Cup 2018 winners will pocket USD 38 million.

In short, either way you look at it, the World Cup speaks money, and this is likely to only amplify over time.

Anzetse Were is a development economist, anzetsew@gmail.com

TV Panel: The Interest Rate Debate

Posted on

On the June 18, 2018 Fanaka TV held a debate in collaboration with the Kenya Bankers Association, The institute of Economic Affairs and Strathmore Business School. The debate engaged both sides of the capping divide with an intention of deeply analysing the impact of capping of interest rates and came up with possible solutions and way forward. I was among the panelists for the debate.

Kenya’s Development Expenditure Problem

Posted on

This article first appeared in my weekly column with the Business Daily on July 8, 2018

The budget for FY 2018/19 revealed the divide in expenditure as follows: recurrent expenditure will amount to KES 1.55 trillion, development expenditure is projected at KES 625 billion, and transfers to County Governments will amount to KES 376.4 billion. Development expenditure will only be 24 percent of total expenditure (below the 30 percent threshold), recurrent about 60 percent and transfers to county 15 percent. To be clear, public spending in itself is useful in principle because it increases the level of aggregate demand in an economy and can compensate for failings in other components of aggregate demand, such as a fall in household and private sector spending.

Image result for government budget

(source: https://www.vskills.in/certification/blog/meaning-of-government-budget-and-its-objectives/)

That said, government has a development expenditure problem where the development-recurrent ratio always favours recurrent, both at national and county government level not only in terms of allocation but also in terms of actual spending. The first supplementary budget for financial year 2017/18 was submitted to Parliament in September 2017 in which development expenditure was reduced by KES 30.6 billion. As the Parliamentary Budget office points out, this reduction translates to slower implementation of some projects leading to higher project costs and accumulation of pending bills as well as delayed returns on investment. At the same time, net recurrent expenditure increased mostly to cater for the repeat presidential election, enhancement of Free Day Secondary Education, drought mitigation measures as well as the implementation of Collective Bargaining Agreements in the education sector. Thus, the first problem is that the original development-recurrent ratio is not respected or followed.

The second problem is that a reduction in development expenditure juxtaposed with a rise in recurrent expenditure is deeply worrying. Government’s narrow fiscal space has led to a large bulk development expenditure being debt-financed. Thus, it is fair to ask whether if through supplementary budgets, where development spending is reduced and recurrent increased, Kenya is using debt to finance recurrent expenditure. If so, this is going against both basic common sense and fiscal prudence.

Image result for Kenya budget

(source: https://www.capitalfm.co.ke/business/2013/11/cabinet-approves-sh116bn-supplementary-budget/)

Finally, the supplementary budget above is not the first time development spending has lost out to recurrent; the question is why? Given deep development needs in Kenya, where the infrastructure deficit alone stands at USD 2.1bn annually, and significant development spending required, why does recurrent remain the winner? The first factor is the bloated wage bill, a reality that is well known and very difficult to change. Another factor is how spending is classified, which can be confusing because it makes the tracking of types of spending difficult. Public debt accrued in the development docket one year is shifted into the recurrent the next year. Development expenditure covers expenses incurred for the purchase or production of new or existing durable goods, while recurrent expenditure, includes wages and salaries, other goods and services, interest payments, and subsidies. Thus, the broadening yearly financial needs of recurrent spending are informed by debt binges of previous years.

As Kenya continues to accrue debt, interest payments on all the debt will be tabled under recurrent leading to a further bloating of this component of spending. This shift in allocations can make it difficult to determine whether development spending is ever used efficiently through its entire project lifetime.

Anzetse Were is a development economist; anzetsew@gmail.com

Don’t hold your breath for Kenya’s Fiscal Consolidation

Posted on

This article first appeared in my weekly column with the Business Daily on July 1, 2018

The budget speech for FY 2018/19 is of interest because desires of government seem to be in opposition. On one hand is the previously articulated intent from government for fiscal consolidation and on the other, the need to finance the Big Four. This article will focus on fiscal consolidation and assess the budget using this lens with a focus on planned expenditure, revenue generation and borrowing. Under fiscal consolidation, expenditure should reduce, revenue generation increase and borrowing reduce.

Budget: Treasury Cabinet Secretary Henry Rotich

(source: https://www.businessdailyafrica.com/analysis/ideas/-Kenya-fiscal-consolidation/4259414-4640846-wga0eu/index.html)

Already we can see that appetite for increased expenditure continues unabated. Planned total expenditure for the FY 2018/19 is Ksh 2.56 trillion (equivalent to 26.3 percent of GDP). Under the current administration, projected spending has gone up from Ksh 1.6 trillion in 2013/14 to Ksh 2.29 trillion in 2017/18 and now to 2.56 for 2018/19. Clearly, expenditure continues to grow indicating an inability to effect fiscal consolidation measures which are exacerbated by weaknesses in the composition of expenditure. Of planned spending, recurrent expenditure will amount to KES 1.55 trillion, development expenditure is projected at KES 625 billion, and transfers to County Governments will amount to KES 376.4 billion. It seems the element of expenditure that has been cut is the most economically productive, namely development expenditure. Indeed, development expenditure will only be 24 percent of total expenditure (below the 30 percent threshold), recurrent about 60 percent and transfers to county 15 percent. So government seems to be cutting development expenditure while allowing the excesses of recurrent spending to continue. Thus, the government is not leveraging the budget to drive public spending in an economically productive manner.

In terms of revenue generation, the government argues that revenues will rise by 17.5 percent to about KES 1.95 trillion (equivalent to 20 percent of GDP) in the FY 2018/19 from the estimated KES 1.66 trillion collected in the FY 2017/18. Part of the ‘revenue enhancement’ steps include higher corporate tax as well as a tax on the informal economy. What may materialise is not more revenue, but less. Kenya already struggles with high costs of production attributed to high power, transport and labour costs, as well as endemic corruption and rent seeking. These are dynamics that affect both big and small private sector players. Increasing tax on the private sector may well push them to a level where the combined effect of high production costs and higher taxes cut into profits substantially reducing the total government can claim as tax revenue.

Finally, government announced that in the fiscal year ending in June 2018, they estimate a fiscal deficit of 7.2 percent of GDP, down from 9.1 percent of GDP in the previous year. Indeed under, their fiscal consolidation plan, government project the fiscal deficit to narrow to 5.7 percent of GDP in the FY 2018/19 and further to around 3 percent of GDP by FY 2021/22. While this is a step in the right direction, government seems to have a problem in keeping on a disciplined path of fiscal deficit reduction. Last year government’s target for the 2018/19 fiscal deficit was 6 percent, yet here we are at 7.2 percent.

Image result for fiscal policy

(source: http://www.theedvantage.org/economics/fiscal-policy)

The fiscal deficit of KES 558.9 billion will be financed by external financing amounting to KES 287.0 billion, while domestic financing will amount to KES 271.9 billion. This clearly indicates that domestic borrowing will be substantial. In the context of an interest rate cap, government knows that continued heavy borrowing in the domestic market squeezes out private sector and places upward pressure on interest rates.

Anzetse Were is a development economist; anzetsew@gmail.com

Economic Growth in Africa not due to Serendipity

Posted on

Africans are so used to us and our continent being portrayed negatively that we latch onto any positive story about us in international media. Whether it’s about idyllic holiday destinations, masais playing cricket or mobile money transfer systems, we welcome the positivity. And perhaps because we’re used to a narrative that seems bent on painting us as the irredeemable basket case of the world, we accept ‘positive’ portrayals without question. We leave ourselves open to falsely generous narratives and fail to critique them or their rigour, accuracy and nuance. We’re just relieved someone is saying something nice about us.

We seem too easily disarmed at a positive storyline to the extent that we’re beginning to enable a pernicious narrative on the continent. A narrative which, on the surface seems generous and kind, but when further unpacked, actually emboldens the notion that Africans are inherently incompetent and incapable.

Image result for Africa(source: http://www.supercoloring.com/silhouettes/africa-map)

I first came across this narrative a few years ago when the Africa rising commentary was gaining traction. Look at Africa, it said, it’s actually not doing badly. Lots of economic growth, growing middle class, maybe we can make money here after all, it said. But the core reason behind Africa’s rise was not us or our intelligence, it was population growth. The main argument was that Africa’s population is the fastest growing in the world and soon one in four people on the planet will be African. And that’s why we should be noticed, according to this narrative.

It was as though our rise was being linked to some serendipitous stroke of demographic luck rather than to the ingenuity, determination, intelligence and grit of millions of Africans. I’ve seen Africans retweet the ‘Africa rising population story’ with pride. They want the world to know we matter. But the problem is that people look at Africa’s growing markets as the main motivator for engagement with us. Many do not seem to care about our ability to adapt, solve problems and turn problems into opportunity. Anyone who lives in Kenya, or any country in Africa, knows that many of us are problem solvers. With a low number of formal jobs, millions wake up every day with plans on how to generate income and hopefully wealth for themselves and those who depend on them. With limited financing options for their ideas and basically no government social security net, most Africans know they must figure out how to get money on the table on a daily basis by themselves.

Image result for population growth Africa

(source: https://www.economist.com/middle-east-and-africa/2014/08/23/can-it-survive-such-speedy-growth)

The mental math, emotional calculations, soft skills, negotiation capability, ingenuity and problem solving skills demanded on some days can be substantial. But these qualities seem ignored. We rarely hear of the knowledge and skills systems Africans are building and using to drive economic growth. Instead, the narrative that is gaining traction is the population growth story, and how it’s the reason behind the rise of Africa.

The subtle nature of this narrative, clothed in complimentary language, actually erases the agency of Africans in the growth of the continent. And that is saddening. But this is not the first time Africa has been underestimated. Let them continue. We’re working.

Anzetse Were is  development economist; anzetsew@gmail.com

Dynamics of China-Kenya Trade Relations

Posted on

 

This article first appeared in China Daily on June 1, 2018

A few weeks ago it was revealed that Kenya refused to sign a free trade agreement that China has been negotiating with the East African Community (EAC) since 2016. The core motivation for the rejection seems to be seated in intent to protect Kenya’s nascent manufacturing sector from being dominated by China’s massive and efficient manufacturing sector.

This development highlights the concerns Kenya has with the balance of trade between the two countries. According to The East African newspaper, China accounts for less than 2 percent of Kenya’s exports yet 25 percent of Kenya’s import bill is from China. In 2017, Kenya exported goods worth USD 99.76 million to China but imported goods worth USD 3.37 billion resulting in trade deficit of USD 3.2 billion. Between January and May 2017 alone, Kenya was importing an average of goods worth USD 348.9 million from China per month.

Image result for CHina Kenya

(source: https://hivisasa.com/posts/why-china-remains-best-bet-for-kenya-in-global-trade)

The trade deficit has made Kenya, and many other African countries in a similar position, very uncomfortable. Clearly, the trade deficit path is unwise and presents an additional financial problem the country has to address. There are also concerns by some that such massive trade deficits compromise Kenya’s ability to negotiate trade terms. Sino-phobic narratives will argue that this is a deliberate effort by China to put countries such as Kenya in a position where they cannot protect the country’s interests in trade matters.

However, it ought to be considered that the trade deficit exists between Kenya and China, not necessarily because China is pursuing this deliberately, but because China is better at producing what Kenya wants than Kenya is at producing what China wants. The trade deficit is arguably the result of market supply and demand dynamics. Top products imported from China include machinery, railway stock, iron and steel, vehicles and plastics; these compose more than 50 percent of imports from China. The truth is that Kenya largely doesn’t manufacture these and thus imports them from China.

Sadly with China, Kenya is sticking to the usual yet unwise path of exporting raw materials and importing manufactured goods; a reality that reflects the weakness of manufacturing capacity in Kenya and Africa as a whole. And sadly, even in the export of raw produce such as fish where there is growing demand in China, Kenya is not exploiting the opportunity. Kenya fish output dropped by 10.2 percent in 2016, compromising the country’s ability to exploit demand for fish in China.

The trade dynamics between Kenya and China accentuate the importance for Kenya to shift current behaviour to one that strengthens the country’s position. The first step is to enforce local content laws to limit the importation of goods in public projects and rather, procure goods manufactured locally. The good news is that there seems to be indication that for the next phase of the development of the Standard Gauge Railway, local purchases will not be lower than 40 percent of total procurement. These types of provisions are important because they provide a market for Kenyan manufactured goods thereby boosting manufacturing activity, but they also highlight the extent to which local manufacturers can (or cannot) meet large orders consistently which provides valuable lessons on what the country needs to do to improve industrial capacity.

Secondly, Kenya needs to take advantage of the off-shoring of manufacturing capacity from China to other parts of the world. Partly informed by rising wages, China has been increasingly automating and off-shoring manufacturing; and Africa is benefitting from the latter to a certain extent. A report by McKinsey last year indicated that 31 percent of Chinese firms in Africa are in manufacturing and they already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion; revenues in manufacturing outstrip that of any other sector listed. If Chinese private sector are domesticating manufacturing capacity from China, then indigenous Kenyan firms can do the same. The constraints preventing this ought to be analysed and addressed.

Image result for CHina Kenya

(source: http://studies.aljazeera.net/en/reports/2014/05/2014522115544892973.html)

Thirdly, Kenya needs to develop a trade strategy for China. The government needs to audit products with growing Chinese demand and seek to build Kenyan capacity to better exploit market opportunities presented by China. Kenyan producers ought to better leverage opportunities such as the China International Import Expo and work with the Chinese Embassy to exploit opportunities and tap into supplying the domestic market in China, thereby increasing the country’s exports to China.

Finally, Kenya should focus on revenue streams coming from China and strengthen these. Tourism is a massive opportunity for Kenya; hotel bed-nights of Chinese tourists to Kenya have increased 45.8 percent in 2017 compared to 2016, preceded only by Germany, UK, and USA. Government and private sector can be more deliberate in better understanding the needs of Chinese tourists and more aggressively market Kenya as a tourist destination in China.

In short, given Kenya’s concerns with the growing trade deficit to China, the government and private sector ought to become more proactive in meeting market demand in China. The concern should provide impetus for the country to do the hard work of building manufacturing capacity as well as better understanding the Chinese market and leveraging diplomatic and private sector ties to achieve clearly defined trade strategies and goals.

Anzetse Were is a development economist; anzetsew@gmail.com