Time to Catalyse Micro and Small Enterprise

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This article first appeared in my weekly column with the Business Daily on February 18, 2018

The informal economy consists of micro and small enterprises (MSEs) that are the source of income for 90 percent of employed Kenyans as well as an important economic engine of the country. Indeed, late last year, the Central Bank of Kenya Governor Patrick Njoroge credited small businesses with keeping the economy afloat terming them the backbone of the economy’s resilience in a difficult year.

Despite their importance, MSEs are neglected and economically under-leveraged. The first step to directing MSEs towards optimal performance and strengthened growth is data collection. There is currently no single repository with detailed information on the number, size, geographical footprint, sector composition of MSEs and MSE associations in the country. There should be a drive to register all MSEs and collect data through the registration process. What must be made clear during the registration process is that it will not be used to tax MSEs. If a sense develops that the aim of registration is to put businesses into the Kenya Revenue Authority (KRA) database for taxation purposes, MSEs will not show up for the exercise. Registration ought to be incentivised such that it is linked to financial and non-financial support organised and deployed by government. Indeed, only registered MSEs should be allowed to qualify for government support.

A Jua Kali artisan. Despite their importance, small businesses are neglected by the government. file PHOTO | NMG

(source: https://www.businessdailyafrica.com/image/view/-/4309902/medRes/1888118/-/maxw/960/-/j8qjoc/-/jua+kali.jpg)

The second stage is to develop a fund focused on MSEs; this could fall under the Biashara bank that is being developed by government. The main point is that there should be a facility focused on MSEs. MSE sector organisations and associations should be represented on the board of the fund such that the needs and priorities of the sector inform how the funding is structured and deployed. Through working with MSE sector leaders, the process of developing criteria for qualification of financing can begin such that funds are absorbed and effectively used. Government ought to learn from the challenges faced in the Uwezo, Women and Youth Funds such that the same mistakes are not repeated. Further, there is a need to classify the MSEs such that they align with the Big Four and prepare them to benefit from initiatives in the Big Four sectors of health, manufacturing, agriculture and housing.

A reality that ought to be considered is that there will likely be early stage MSEs that are not ready for debt financing and have to be graduated from grant financing into debt. The financial packages deployed thus can consist of grant and debt as well a blend of both. The crucial element is that financing alone will not suffice. There ought to be deliberate coordination between financial and non-financial interventions such that support sophisticates as MSEs graduate into mainstream debt.

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(source: https://www.businessexchange.ca/canada-small-business-financing-act-program-ultimate-tool-aspiring-franchise-entrepreneur/)

The bouquet of support linked to financing should include technical training which trains MSEs on up-to-date technical skills of the sector; technology upgrades that modernise technology used by MSEs and train them on their use; and physical Infrastructure upgrades that improve the physical locations in which MSEs operate including ensuring access to water and sanitation facilities as well as electricity. Finally, MSEs should be trained in basic business management training to help them better manage and plan for their business growth and possible expansion. This training must be partnered with business mentorship such that training and upgrades are effectively used.

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

 

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TV Interview: Is President Kenyatta’s ‘Big Four’ supported by the proposed Budget?

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On February 11, 2018, I was part of a panel discussing President Kenyatta’s ‘Big Four’ Priority Agenda

Key Concerns with Kenya’s New Eurobond Issue

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This article first appeared in the Business Daily on February 13, 2018

The Government of Kenya has announced that it intends to issue a new Eurobond of between USD 1.5 to 3 billion mainly to retire key debts that consist of USD 750 million for the first Eurobond as well as a USD 800 million syndicated loan. There are key concerns with a new Eurobond being issued by the government at this time.

The first issue is Kenya’s current debt status; our current debt to GDP ratio stands at about 60 percent. Please bear in mind that just over five years ago, this figure was around 40 percent. It is important to note that while debt in itself it not objectionable, the use of the debt is important. Given concerns with the financial management record of the Kenyan government at both national and county levels, any new debt issued ought to be scrutinised.

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(source: ambcreditconsultants.com/wp-content/uploads/2017/10/Debt.gif)

This links to the second point; debt sustainability. Kenya’s debt stood at KES 4.48 trillion as of September 2017. Several entities have expressed concern with Kenya’s debt status; the World Bank made the point that a rapid build-up of public debt in the past few years has put the Kenyan economy at the risk of turbulence adding that borrowing to finance infrastructure projects should be balanced with the dire risks of over-borrowing. The African Development Bank made the point that Kenya could struggle to meet its public debt obligations as more long-term loans mature and the IMF stated that the rising public debt is a concern that needs to be checked to avoid any shocks to the economy in the future.

Thirdly, these are not the only voices with concern; Kenya’s current debt portfolio has made credit rating agencies anxious. Kenya’s debt generally sits in the ‘high speculative’ space in credit rating, one tranche above the ‘substantial risks’ tranche. Indeed, Moody’s expects the government debt burden to continue rising due to high budget deficits and interest payments. Moody’s is concerned by Kenya’s debt accumulation rate and has started considering Kenya for a downgrade. A downgrade in national credit rating would make it difficult for Kenya to access cheap funds from international markets- yet here is Kenya trying to issue a new Eurobond.

Some argue that despite current credit rating, the fact that Fitch shifted Kenya’s rating from ‘negative’ to ‘stable’, Kenya’s overall rating should be viewed positively, especially in the African context. But the view here is that, if Kenya expects to issue Eurobonds affordably, every effort should be made to improve credit ratings. Yet such effort is not being made in that direction.

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(source: https://blog.ipleaders.in/wp-content/uploads/2016/08/credit-ratings.jpg)

Indeed, over the past 5 years, three key trends in the fiscal policy of the current administration have been made evident: Expenditure is higher than anticipated than in the Budget Policy Statement (BPS); revenue generation targets are generally not met and thus, borrowing is higher than expected in the BPS. Bear in mind that the Eurobond and concerns by international finance institutions as well as credit rating agencies are not the only point of concern as these understate the presence of a very important creditor; China. As of September 2017, Kenya’s debt to China was the highest of any nation, and stood at USD 4.7 billion; two thirds of Kenya’s bilateral debt.

In addition to the factors elucidated above, it is important to note that Kenya’s bond issuance this year is operating in a very different context than that in which the first bond was issued. During the first bond issuance, interest rates in Europe and North American were very depressed with weak economic growth, and Africa was riding on a commodities boom, which made the continent a bright spot in the global economy. At that time, yield hunters turned to Africa as a key income growth market to viably compensate for subpar growth in other parts of their portfolios.

Since then, the commodities bust occurred which crippled key African economies, there is notable recovery in Europe and North America, and Africa is, once again, viewed with scepticism in global markets. When one adds Kenya’s debt warnings and credit rating status to the picture, it is easy to see the concern being raised here about the prudence and affordability of a new Eurobond issue.

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(source: https://pageone.ng/wp-content/uploads/2016/08/euro-bond.jpg)

Further, if one looks at the current Eurobond objectively, while it is true that in January 2018 the bond yields stood at 3.7 and 5.5, the country has paid far more in the past. Around 2015, the opposition party in Kenya raised concerns about how the first Eurobond was being used and alleged embezzlement. The allegations and speculation during this time drove Eurobond yields up to 9.4 percent. Thus, while the government Eurobond currently enjoys relatively low yields, domestic dynamics could change the context quite quickly raising issues about the affordability and sustainability of Eurobond debt once more.

The final concern with the current Eurobond issue is that it will saddle the country with substantial future debt. It seems as though, through the new Eurobond issue, the current administration is pushing debt maturity to 2024, when it will no longer be their headache to address. Well aware that their tenure ends in 2022, it is fair to ask whether the current administration is pushing debt repayment to a point beyond their tenure.

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

The Three Layers of Income Growth

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This article first appeared in my weekly column with the Business Daily on February 11, 2018

 

A key concern for many Africans is how they can grow their incomes in a sustained and long-term manner. The reality is that there are some efforts that can be made on the individual level but holistic and trans-national income growth needs the support of others. Thus, there are three layers of income growth: individual efforts, financing from others, and government efforts.

In terms of individual efforts, a large number of people start a business either because they are unemployed and have no choice, or as a means of raising extra money while employed. The reality is that often these businesses are poorly thought out, poorly managed and have low levels of productivity and thus profitability. Thus if you are running a business, one ought to first, read up as much as you can on the business you are running in terms of strategies for business growth. Secondly, get in touch with someone who runs a successful business and make the point to reach out to them and learn tips you can apply to your own business. Make sure you research them to the extent you can and be equipped with the type of engagement you would want from them. In terms of personal income management, tap into saving strategies when possible. Invest and save through SACCOs, investment clubs and other entities that focus on investment. Too often, individuals try to invest their money on their own and fail to tap into entities that specialise in investment and have a system that makes better judgement calls on the best types of investment to be made.

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(source: http://www.centrinity.com/wp-content/uploads/2018/01/invest.jpg)

The second layer is accessing finance from individuals and institutions. The forms of financing vary but fall into three main categories: grant, debt and equity which are often accessed at an individual, group or company level. I will focus on grant financing as this is the most under-leveraged form of financing. Grants are often viewed as free money that does not require an entrepreneurial mind-set to manage. This is a mistake many groups make; they do not view the grants they receive as investment. It is time groups focus on applying for grants focused on growing income, and use those grants as they would a loan in order to not only embed financial discipline in the business venture, but also to ensure the business is well thought through and profitably meets an ongoing need.

Finally, government has a role to play in ensuring per capita income growth through implementing policies and strategies with an income growth objective. One key strategy is a focus on industrialisation and building value-added exports as this not only creates jobs, targeted productivity efforts can also lead to wage growth. Making a point to export finished/ manufactured goods does two things: first, it creates a product that is more profitable and resilient in pricing than raw materials and secondly, exports generate jobs to meet the needs of other countries thereby leading to an accrual of jobs in the home country. Thus, the job of government is to lower the cost of production to make products competitive in domestic and exports markets. Here government should focus on efforts to reduce the cost of energy, transport, and costs of compliance to government regulations. Government also ought to encourage competition such that efficiency drives the sector and creates room for wage growth.

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

 

The Cruelty of Poverty

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This article first appeared in my weekly column with the Business Daily on February 4, 2018

I have been reflecting on poverty and several truths have been made self-evident. Some may find what will follow irritating and say it builds the ‘Africa is poor’ narrative. But the truth is that far too many Africans are, in fact, poor. And poverty is ruthless. It is ruthless mentally, psychologically, spiritually and physically. Poverty prevents people from planning and strategising for their life due to overwhelming immediate concerns. Poverty not only kills people physically, it decimates psychologically, spiritually and mentally.

We routinely read about millions living under the poverty line and in reading such figures, poverty makes human life a statistic. Often ‘living under the poverty line’ means knowing that it’s your job to make sure you and your loved ones survive for the day.

Food distribution in Samburu. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/ideas/Cruelty-of-poverty-and-hope-for-a-better-future/4259414-4291068-aj9xgi/index.html)

Poverty can also make it difficult to tap into the physical potential, as well as intellect and innovation capabilities of millions. Yet many are told that poverty is the fault of the poor.  In my view, you cannot be lazy when you are poor. You cannot ‘sleep in’ and have a ‘lazy day’ when there are hungry children in the house. Sick, tired, beaten down, discouraged, millions still wake up to hustle for their family. Then we are told that the poor are lazy. This is not only blatantly false, such thinking brutalises the poor.

Indeed the pervasiveness of such fallacious thinking has created the feeling in many circles that those in poverty are not fully human. Think about it. Many are embarrassed, ashamed and discouraged by always having to ask others for help. We are all complex and proud humans. It is self-important to think this is not the case for the poor.

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(source: https://blogs.worldbank.org/africacan/files/africacan/images/africacan-measuring-poverty-and-inequality-sub-saharan-africa-knowledge-gaps-and-ways-address-them-540.jpg)

Perhaps I am preaching to the choir because for many of us Africans, poverty is not a story. In many cases, either we are poor, or we are trying to help our friends and loved ones out of the trap of poverty. Yet as the African middle class narrative gains traction, many say there are Africans making a good living and wonder why such Africans cannot save. Perhaps consider the sheer volume of people many Africans support. Poverty leads to very high dependency ratios and many forgo saving to support loved ones out of difficult situations.

That said, I am encouraged by our grit and strength. We continue to reach out and care for others. We have an ability to be focused, hardworking and untiring despite the odds we face. We have a resolute determination to improve our situation. And improve it we will, not only because that is our collective desire, but because we have no other choice.

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

Counties starting to realise their power to drive projects

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This article first appeared in my weekly column with the Business Daily on January 28, 2017

Over the last week I have been  traveling around the country and interacting with county governments  on various assignments. What has become clear is that county governments are beginning to truly appreciate the power they have to guide the direction of development in their counties. Devolution is reorganising power dynamics at county level in several ways.

The first is that devolution seems to be engendering brain gain to counties. Professionals from private sector and development agencies are now working as technical staff in counties. This is due to both push and pull factors. On one hand, county governments are seeing the wealth of expertise in their county and pulling individuals to lead various dockets in the county governments. Secondly, as professionals interact with county governments, they begin to get excited about how they could contribute to the development of the regions in which they work and push themselves into county structures. This confluence of factors is creating a situation where county need for expertise meets the willingness of professionals to work in the county, to the benefit of the county.

Council of Governors meeting. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/image/view/-/4281906/medRes/1870589/-/maxw/960/-/usgtixz/-/GOV.jpg)

Secondly, counties have learnt from the first phase of devolution and county structures are strengthening which has implications for numerous players. The first is that stronger structures at county level means development partners must align their funding and programs with County Integrated Development Plans (CIDP). No longer are donors coming in with thematic areas and priorities with which counties must comply; it is now the other way around.  Secondly, counties are becoming increasingly aware of the power of private sector in their counties and are taking steps to make the private sector environment positive and enabling. There is a willingness in many county governments to engage with the private sector on what county governments can do to build private sector activity in their jurisdictions with a focus on job creation and income growth.

To be clear these dynamics are not unfolding evenly across counties, but this is the general direction of the momentum being generated at county level. For example, counties are not interested in coordinating numerous donor programs each with varied objectives not linked to the CIDP; that is where the momentum sits. It is clear that in this second phase of devolution, that donors and development partners have to not only align their programs with the CIDP, they must ensure that  County Governments are aware of their activities. There is a sense of autonomy emerging. Donors aren’t the all powerful entities they used to be; either they make themselves relevant or counties will eventually have no real use for them.

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(source: jamhurimagazine.com/thumbnail.php?file=47_Kenya_Counties_217764471.jpg&size=article_large)

In terms of private sector, what is clear is that there is growing interest for county governments to engage with private sector. As counties open channels for communication with the private sector, there is impetus  for private sector to effectively organise itself at county level to fully leverage the attention of county government. Private sector associations must now ensure they have representation in all counties, so that they are prepared to present their ideas on how to work more effectively at county level. Gone are the days where private sector associations had a main office in Nairobi and paltry representation at county level. Private sector must be organised and effective at both national and county levels if they are to bring strategies, relevant to the local context, to the table.

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

Shared economic values can heal the political divide in Kenya

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This article first appeared in my weekly column with the Business Daily on January 21, 2018

Last year’s election highlighted the deep and bitter political divide among Kenyans, divisions usually rooted in tribal identity politics. However, if one were to ask Kenyans what they want for the country, one would likely find similar answers across the political divide. We want good schools and hospitals, decent jobs, respectable roads, security, shelter, an end to corruption and freedom from hunger and poverty. And since Kenyan politics is renowned for not being rooted in ideology, it is possible that individuals from opposite sides of the political divide could have similar views on how the government can better provide services and stimulate economic development. It is only in Kenya that two people may have identical ideologies of how they want the country to run, but then vote for different candidates due to tribal identity.Image result for 47 tribes of Kenya

(source: https://hornaffairs.com/wp-content/uploads/2016/07/Image-Kenya-ethnic-distribution-map.gif)

This conundrum is one that can be tapped into in order to unite Kenyans. The fact that Kenyans share concerns across political divides ought to be leveraged to bring the country together. Rather than focusing on the politics of identity, Kenyans ought to focus on the politics of issues such that both the ruling party and opposition engage Kenyans on how they will or would improve the socio-economic status of Kenyans. Kenyans could unite and, as a people, make the same demands regardless of which political party is in power.

Further,  the fact that Kenyans may well share ideologies on socio-economic development could be used to tackle another monster in the closet—the class divide. Just under half of Kenyans live at or below the poverty line, and the bulk of the rest live day to day or pay cheque to pay cheque. This means that there are those on opposite ends of the political divide who have similar incomes, standards of living and daily struggles. Those who would likely relate more to fellow Kenyans who face similar issues but are of a different political leaning than those of another class but with whom they are aligned tribally. It is important that Kenyans unite around addressing the class divide in Kenya rather than letting politicians use the class divide as a tribal motivator as to why Kenyans should vote for them.

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(source: http://www.msafirimag.com/wp-content/uploads/Hand.png)

Finally, Kenya can use economics to unite the country; the economics that builds incomes, creates jobs and delivers high quality government services. Kenyans ought to find those with whom they share ideologies on economic development and create fora that discuss shared concerns, no matter one’s political affiliation. In using economic development as a starting point, Kenyans will find that they have more in common with their sworn political enemies than perhaps they thought.

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