The China Debt Question

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This article first appeared in my weekly column with the Business Daily on May 20, 2018

There has been clear concern voiced over the sustainability of Kenya’s fiscal path over the past five years. Total debt has risen from KES 1.7 trillion in 2013 to about 4 trillion in 2017. The good news is that there seems to be indication that plans for fiscal consolidation are underway, although these will only be confirmed when the 2018/19 Budget is read.

Embedded in concerns with Kenya’s fiscal path, is a narrative that raises red flags on Chinese debt. If you look at the accrual of public debt owed to China, this stood at 63 billion in 2013 and rose to 479 billion in 2017; China owns about 66 percent of Kenya’s bilateral debt. This has led to alarm about Kenya’s ‘over-exposure’ to Chinese debt. Indeed, there is an emerging commentary that argues that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent.

 Kenya's President Uhuru Kenyatta (left) and Chinese President Xi Jinping  prepare to inspect Chinese honour guards during a welcoming ceremony outside the Great Hall of the People in Beijing on August 19, 2013. AFP PHOTO

(source: https://www.businessdailyafrica.com/analysis/columnists/4259356-4571188-tw2sm7/index.html)

While I agree that there should be concern with debt levels, I think the ‘danger’ of Chinese debt has dubious motives. In fact it is fair to ask if all the hue and cry over debt owed to China would be as pronounced if the debt belonged to another part of the world. The focus on Kenya’s and indeed Africa’s, rising debt needs to be approached in an intellectually honest manner that demonstrates, firstly, that the appetite for debt is coming from Kenya. China is not saddling Kenya with debt, the Kenyan government wants the debt. The Kenyan government has prioritised infrastructure and gone through expansionary fiscal policy to finance this priority. Thus, it is hard to conceive that given the financing demands of infrastructure development, the government would turn down credit lines that can finance this priority.

Secondly, if you look at the portfolio of China’s debt to Kenya, it is focused on infrastructure indicating that perhaps the Kenyan government feels it has found a partner that is willing to invest in its focus on building railways, roads, electricity transmission lines, dams etc. Bear in mind that China is still a developing country with a 2017 GDP per capita of USD8,643, and ranked 75th in the world. However, the Chinese view is that despite this, it will continue to provide sizable development loans to Kenya of which almost half are concessional loans or preferential credit lines with a 2 percent interest rate and 20-year maturity period.

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(source: https://www.diplomaticourier.com/2017/04/29/africa-chinas-human-rights-concerns-dont-apply/)

The point is that, once you find a partner that seems to understand where you are coming from and supports your vision, it is likely that the partnership will grow. Further, if other parts of the world are not offering similar debt packages in terms of scale and conditions, they really are not in a position to criticise. So why do some seem surprised by burgeoning credit lines from China?

Finally, beyond debt sustainability, the core problem with rising debt is less related to from whom Kenya is getting debt, but more about how that debt is spent. The first problem is the question of the management of public finances. If debt does not end up in projects that drive growth and rather is diverted to private pockets, then the country is in serious problems. Debt only makes sense when it is economically productive and thus mismanagement of public monies comprises the ability of debt to inform economic development. Second is the issues of absorption of funds. Government at both national and county level have clear problems with absorbing development financing, and debt sits in that docket. So securing all this debt and failing to ensure it is used correctly and that the funding is absorbed in intended projects is the real problem.

It is important that the country have a sober conversation about debt, because no matter where the debt comes from, if it is mismanaged, Kenya will be in hot water regardless.

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

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The Changing Face of China-Africa Relations

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This article first appeared in the China Daily on May 11, 2018

The relationship between China and Africa is one that generates immense interest and debate in both countries and around the world. The combination of strengthening economic growth in both China and Africa, particularly in the context of an increasingly insular USA and Europe means that the relationship between the two parties will play a progressively important role in their development and global dynamics. There are three factors to consider as we unpack Sino-African relations.

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(source: http://africanleadership.co.uk/china-open-to-president-weahs-view-on-china-liberia-relations/)

First is the leadership of China where Xi Jinping is redefining China’s presence on the global stage. In the context of the trade spat between the USA and China, Xi Jinping continues to emphasise China’s commitment to globalisation and free trade perhaps best demonstrated in his massive Belt and Road Initiative. In early April, Jinping restated his commitment to continue to open the nation’s economy affirming that China will open its doors wider to foreign investment. While some may argue that China does not walk the talk and that the country’s economy remains very protected in some ways, what is clear is that Xi Jinping is positioning himself as a global leader and one who encourages global cooperation both economically and diplomatically. Whereas in the past it seemed China was happy being a leading economy but not necessarily a leading voice in global interactions, Jinping is redefining how China positions itself globally. As Europe and the USA turn inward, he emphasises that China continues to look outwards and seeks to lead global conversations.

The implications for Africa in this regard is that Africa can expect initiatives under Jinping to deliberately foster deeper collaboration and cooperation. These will not only be from an economic standpoint but politically and militarily as well. Geopolitical dynamics in Africa will be informed by a leadership in China that seeks to strengthen its global presence and reputation and Africa will be an important party in how this plays out globally.

Secondly and linked to the point above, Jinping is actively rebranding China. Brand China has both positive and negative elements. The key negative elements particularly with regards to Brand China in Africa, is that China is corrupt and environmentally destructive. It seems China is aware of these negative elements of its brand because the Two Sessions addressed both these issues. A key focus of Two Sessions was to ratify a law to set up a new powerful anti-corruption agency. Africa’s struggle with corruption is a well-known fact, and Brand China has been seen to tolerate or even facilitate this corruption. Thus, the announcement of steps that will be taken to stem corruption in the Chinese government may have an impact on Africa in the form of new rules and requirements linked to Chinese funding. The two Sessions also revealed the growing importance of environmental concerns as a government priority in China.  This seems to stem not only from an understanding in the Chinese government that environmental degradation must be addressed as a strategic concern for the country and economy, but also as a response to growing demands from the Chinese public for responsible environmental behaviour and action as part of the country’s development model going forward. Again, it will be interesting to see if this shift will be reflected in how the Chinese government interacts with Africa going forward. The point is that Jinping’s administration is taking clear and bold steps to address the negative aspects of the country’s brand as he seeks to position China as a powerful and responsible global leader.

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(source: https://www.irishtimes.com/business/economy/chinese-trade-unexpectedly-speeds-up-but-is-expected-to-drop-1.3112037)

Finally, as China continues to strengthen economically, and as Jinping strengthens China’s global influence, we will likely see a heightening of Sinophobic narratives on China’s presence in Africa by Europe and North America in particular. One key feature of EuroAmerican analysis of China in Africa has been notable Sinophobia; and we have seen an evolution in this Sinophobic commentary. The narrative started with Europe and North America warning Africa that China is the new colonial power and that China will subjugate Africa with colonial-like behaviour that undermines Africa’s sovereignty. This then shifted to the Africa being warned that China only wants to exploit the continent’s natural resources in a rapacious relationship that will suck Africa dry. This was coupled with accusations that China facilitates and participates in corruption in Africa and that Chinese investment has poor social and environmental standards and indeed kills the continent’s environment in the form of unregulated pollution and destruction of wildlife. Now, the narrative is that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent. China should expect more aggressive Sinophobic commentaries coming out of Europe and North America as an ideological battle is waged on African hearts and minds.

However, despite the fact that the Sinophobic narrative will continue to be generated by Europe and North America, the reality is that China is not good at communications. China does not do a good job at sharing its contributions to Africa’s development in a strategic and sustained manner both inside and outside Africa. Whereas Europe and North America have sophisticated communications strategies both as government and private sector, the same cannot be said of China. Both the Chinese government and private sector ought to be cognisant of these dynamics and generate positive counter-narratives on China’s presence in Africa. Africans ought to also be aware of the ideological battle on the continent and generate informed narratives that analyse China-Africa relations from an African perspective.

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

 

The Changing Face of Corruption in Kenya

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This article first appeared in  my weekly column with the Business Daily on May 13, 2018

The fact that the Kenyan public is concerned with the perceived mismanagement of public finances is a well-known fact in the country. At both national and county level, Kenyans cite concerns with corruption not only in terms of how public finances are misappropriated, but how bribes are demanded to secure government contracts. You sometimes have to pay government officials in order to provide a service to government it seems. Given how well the negative effects of corruption on development and economic growth have been documented, many may wonder why it persists.

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(source: https://www.weforum.org/agenda/2017/12/four-myths-about-corruption/)

There seems to be an emerging understanding of the psychology of corruption. An understanding that seems to answer why public officials continue to seek bribes and misappropriate funds even though the Kenyan public is outraged by the practice in the country. The psychology of corruption seems to be guided by the logic of self-aggrandisement and gaining financial security for the corrupt individual and his/her loved ones. Indeed, some may reason that engaging in corruption is logical in a corrupt society. It can be argued that some government officials misappropriate funds because they know government is corrupt and will misappropriate funds. Thus, they steal public funds to ensure they benefit from government funds and don’t miss out. They steal public funds to avoid the barrenness corruption brings when you’re not part of the process. They are being corrupt to escape the effects of corruption. This is not a justification of corruption but rather a realisation that when corruption is pervasive, it provides a deeper impetus to engage in corruption. This is not only because one can get away with it, but also because there is an urgency to get to the money first before someone else comes in and takes it instead.

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(source: https://www.coe.int/en/web/greco/-/council-of-europe-anti-corruption-body-to-carry-out-urgent-evaluations-of-new-legislation-concerning-the-judiciary-in-romania-and-poland)

Devolution is also adding an interesting dynamic to corruption it seems. When Kenya was governed under a centralised system, grand corruption was a distant affair that benefited a limited circle of individuals. A farmer in rural Kenya could not conceive how he/she would ever get a kickback in the circle of corruption. Devolution has changed this. When county officials divert public finances to their pockets, much of that money remains within the county economy. The money can be used to finance household expenses, education and health costs, as well as generally improve the quality of life of the corrupt individual and those in their circle. Diverted public monies also become investment funds, where corrupt individuals suddenly have a supply of cash that can be directed to business activity. I have travelled to counties where I have been openly told that this building or that business belongs to a government official. This government official did not have these assets before gaining office, but suddenly they are serious financiers in the county. And interestingly, these facts are not shared with a tone of bitterness or annoyance, there almost seems to be an appreciation that even if public monies are being stolen, at least they are benefiting the local economy. After all, businesses are being financed, people are being employed to run and manage those businesses and suddenly there is a source of income for many that did not exist before.

This is not a justification of corruption but rather an exploration of how corruption is evolving. We seem to have moved on from the days when misappropriated public finances were sequestered in accounts in distant capitals of Europe and North America. Now when public money is stolen, much of it sticks around. How will this inform the fight against corruption? How do strategies that seek to address corruption need to be updated to become relevant again? These are questions for us all.

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

Fiscal consolidation opportunity to address private sector issues

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This article first appeared in my weekly column with the Business Daily on May 6, 2018

The government seems intent on implementing a course of fiscal consolidation that will put Kenya on a more sustainable fiscal path. While fiscal consolidation is welcome and should be supported, it raises new challenges with which the country has to grapple. The intent of government is to ramp down spending, reduce borrowing, bring down the fiscal deficit and raise revenues. The combination of these factors translates to the reality that government will not be able to finance its new agenda, particularly the Big Four, as robustly as perhaps was initially intended.

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(source: http://www.thebluediamondgallery.com/handwriting/f/fiscal-budget.html)

As a result, government has already began calls for the private sector to actively engage in the Big Four. The Budget Policy Statement has made it clear that Public Private Partnerships (PPPs) will be fast tracked in order to fully leverage private sector engagement. However, there are realities of which we ought to be aware as government makes the call to private sector to help realise and frankly, co-finance, the Big Four.

Firstly, over 90 percent of the Kenyan private sector consists of Micro, Small and Medium Enterprise (MSMEs). While the presence of the large companies is dominant and well publicised, the reality is that the engine of the economy is run by smaller businesses that sprawl across the formal and informal economy. MSMEs are thought to contribute at least 30 percent to GDP and employ over percent of employed Kenyans. However, MSMEs work in an environment, and have internal firm dynamics, that negatively inform their productivity and economic strength. The fact that they constitute over 90 percent of business in the country yet only contribute about 30 percent to GDP signals serious productivity problems.

Thus, while government intends to pull in the private sector to work on their agenda, they ought to be cognisant of the composition of private sector in the country. I am of the view that MSMEs can be engaged to deliver on government projects, but the nature of the engagement will likely be more involving than government initially envisioned.

Linked to the point above is the issue of the capacity and experience of indigenous firms. Given that foreign firms are angling for Big Four projects, the question of the competitiveness of domestic private sector becomes important. Will government deliberately reserve a portion of projects for indigenous private sector to ensure local participation? If not, does Kenya risk outsourcing the bulk of government projects to foreign companies, and what would be the implications?

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(source: http://kassweekly.co.ke/KW/?p=1021)

Linked to the point above is the issue of PPPs, where it has been widely noted that domestic firms do not have the financing, experience, and enablers that foreign firms do. For example, domestic firms get credit at 14 percent while this figure can be as low as 2 percent for foreign firms; this reduces the former’s competitiveness. Government seeks efficiency in the context of limited funds thus the question becomes how domestic private sector can secure contracts and competitively deliver on them in the context of international competition.

In truth, fiscal consolidation will shine a spotlight on the domestic private sector and the factors that inform their ability and competitiveness. Government and private sector ought to use this opportunity to address key issues decisively, such that the process strengthens the domestic private sector.

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

Implications of the Economic Survey 2018

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This article first appeared in my weekly column with the Business Daily on April 30, 2018

Last week the Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2018 providing data on the economy for 2017. There are several data sets that should be noted and inform economic strategy going forward.

Firstly, the economy is estimated to have expanded by 4.9 percent in 2017 compared to 5.9 percent in 2016; that is a reduction of 1 percent year on year. This is unsurprising and in fact good news because previous analysis indicates that the Kenyan economy tends to slow down in an election year by about 1.2-1.4 percent. Thus, a reduction by 1 percent, particularly in a drought and election year, indicates the fundamental engines of the economy are robust. Growth was powered by accommodation and food services; ICT; education; wholesale and retail trade; and Public Administration.

Kenya’s top export earners last year included tea and, horticulture products. FILE PHOTO | NMG (source: https://www.businessdailyafrica.com/analysis/ideas/Implications-of-the-Economic-Survey/4259414-4535818-3tjw81/index.html)

Secondly, GDP per capita increased from KES 158,575.5 in 2016 to KES 166,314.4 2017. Inflation aside, the increase in per capita is good news and indicates that on the whole, economic growth is rising faster than the population thereby leading to net growth in income. However, poverty remains prevalent thereby implying the inequality remains a core problem in the country. The survey shared insights for the 2015/16 Household Survey which indicated that overall poverty stood at 36.1 per cent (16.4 million people), food poverty at 32.0 percent (14.5 million people), and hard core poverty at 8.6 percent (3.9 million people); in all cases poverty is higher in rural than urban areas. This indicates that the rural-urban wealth divide is real and will likely continue to catalyse rural-urban migration as Kenyans move to towns and cities in search of higher incomes.

Thirdly, the informal sector continues to employ most Kenyans and accounted for 83.4 per cent of total employment; this is down from about 89 percent last year. Informal employment tends to be of lower quality than formal employment in terms of wages, job security, and working conditions. Thus, the bulk of Kenyans continue to work in a sector is precarious and may very well negatively inform the quality of their lives.

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(source: https://www.standardmedia.co.ke/business/article/2001263519/foreign-investment-forecast-to-slow-down)

Finally, data on exports paints an interesting picture in that top export earners were tea, horticulture, articles of apparel and clothing accessories, coffee, and titanium ores and concentrates. Thus, Kenya’s exports continue to be dominated by agricultural products and products with limited value addition particularly given that manufacturing sector growth was very weak last year and grew at 0.2 percent.  Further, Africa remained the leading destination of Kenya’s exports, accounting for 37.7 percent of total exports in 2017, with East African Community (EAC) accounting for more than half of total exports to Africa. What this means is that Kenya’s exports mainly go to countries with low GDP per capita that informs spending power and aggregate demand. It is important that the country restructures exports such that they are more sophisticated and target countries with higher incomes so that exports become a stronger engine for job creation and income growth.

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

Factors to Consider in Affordable Housing Scheme

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This article first appeared in my weekly column with the Business Daily on April 22, 2018

The government recently announced that it seeks to develop 500,000 units of affordable housing as part of the Big Four agenda. Government also announced that it seeks to extend affordable mortgages for as low as 7 percent, facilitated by the Kenya Mortgage Refinancing Company (KMRC). Reports indicate that KMRC has secured financing from the World Bank and the African Development Bank which have allocated KES 16.1 billion and KES 15 billion respectively.

Several factors ought to be considered if the affordable housing intent is to translate into home ownership for low-income earners (this piece draws from an article by Dr Mbui Wagacha in the Business Daily on April 4, 2018).

An informal settlement in Nairobi. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/ideas/What-State-must-get-right-in-affordable-housing-scheme/4259414-4493452-vkwsl5/index.html)

Firstly, the criteria of who qualifies for affordable housing and related loans needs to be crystal clear. It is important that government present granular details of and rationale for the specific criteria that need to be met to be eligible for the scheme. Ideally, the target should be low-income households currently living in informal settlements. Once the criteria is established, government should develop a database of all individuals who qualify for the scheme. A system can then be set up where once housing is available, individuals are randomly chosen from the database and granted the houses and linked loan facilities. This can be coordinated through an Affordable Housing Authority.

Secondly, government needs to invest in both sides of the housing market. The demand side is being addressed through the creation of KMRC and subsidised mortgages. Finding the right financial partners to deploy the mortgages will be crucial and here, Savings and Credit Cooperative Organisation(SACCOs) ought to be brought in strategically. SACCOs and cooperative networks currently already provide 90 percent of mortgages in the Kenyan housing market, invariably at more affordable rates than commercial banks. Government should actively pull in and incentivise SACCOs to deploy the subsidised loans, and in doing so, leverage the latter’s knowledge of lending to the housing market affordably and thereby penetrate lower income markets. Linked to this, there ought to be a strategy to finance the construction of affordable homes. This can also be deployed through SACCOS, so that the interest charged on construction loans remains at manageable levels and does not push up home purchase prices. Further, domestic firms ought to be actively engaged to bid for construction tenders, and requisite support to ensure project by domestic firms is prioritised.

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(source: http://nca.go.ke/new/src/investigation-of-construction-failures-in-kenya-for-enhancement-of-development-control/)

Thirdly, an affordability strategy ought to be developed to comprehensively address the issue of land prices. Land currently constitutes the lion’s share of home prices especially in urban and peri-urban areas, which is where most of the affordable housing ought to be constructed. Government can provide the land at no cost as part of the scheme such that the prices of homes only feature the cost of construction; this will drastically bring down prices.

Finally, conditions of resale of affordable houses have to be specific and stringent. If individuals in the scheme seek to sell their house, they can only sell back to the housing scheme itself; no third party ought to be allowed to buy the affordable homes. If these measures are not taken, unscrupulous investors will target the affordable homes, offer individuals great deals and mop up all the houses through re-sale, thereby defeating the intent of the scheme in the first place.

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

Banning Used Clothing a Bad Idea

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

Ripples of concern spread over Africa when Rwanda was punished by the USA for their ban on the import of used clothing from the USA. In response, the USA announced a 60-day suspension of Rwanda’s AGOA duty free privileges on clothing and footwear.

The Rwandan government is of the view that a prohibition of second hand clothes band is crucial for the Rwandan economy. The argument is simple and argues that a ban all imports of second-hand clothing is necessary to strengthen their textile industry. With textile and apparel a key component of their industrialisation strategy, the ban on used clothes seeks to tap into domestic demand for clothing to strengthen the domestic textile industry.

Mitumba (used clothes) sellers in Nairobi help customers to pick items at a market in Nairobi. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/ideas/Why-banning-mitumba-is-a-bad-idea/4259414-4395006-3smd5w/index.html)

The view here is that beyond the loss of livelihood issue, the ban on used clothing is a bad idea, not so much because of the ire it will draw from the USA, but because it’s bad economics. Firstly, used clothing allows Africans to buy a wide range of clothes and shoes affordably. At the moment, the price point at which local manufacturers sell their clothes and shoes are too high, particularly for low income Africans who have very limited funds. With a poverty rate of 35.6 percent, the reality is that many Kenyans have to pinch their pockets to clothe themselves. The used clothing market allows millions of Kenyans to buy clothes for as little as KES 30; these price points do not exist in the clothing produced by the domestic textile industry. Thus, in banning used clothing, government would essentially be imposing a fine on the poor, forcing them to put even more of their limited income to basic items such as clothing.

Secondly, local clothes and shoes manufacturers do not have the capacity to meet the demand for clothing and shoes in the domestic market. Thus, a ban on used clothes presents the very real risk of excess demand pushing the price of new clothing even higher.

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(source: http://voicesofafrica.co.za/second-hand-clothing-donations-creating-dilemma-kenya/)

Thirdly, a ban on used clothing in a context where used clothes are the most cost effective and preferred channel for clothing will create a black market. This shadow market will operate outside legal parameters and will penalise consumers in terms of price point because the risk of peddling contraband will have to be priced into the clothing on sale. Thus, there is the risk that a ban on used clothing will create a shadow market from which many will be forced to buy their clothing, because it will likely still be the cheaper option, but a price point higher than that which existed when the sale of used clothing was legal. Thus again, the poor will be unnecessarily fined due to government policy.

What would make sense is to start a gradual ban on new clothing imports and encourage local manufacturers to make clothes for that domestic new clothing market segment first. This should be coupled with government support to local manufacturers so that local companies can make a wide variety of clothing and shoes available at reasonable prices. A ban on used clothing would only make sense when local manufactures are able to produce clothing and shoes at a price point similar to that in the used clothing market.

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