Month: August 2015

Why Africa should be looking at China right now

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This article first appeared in my column with the Business Daily on August 30, 2015

There are a couple things happening in China right now that Africa should be looking at very keenly. We won’t talk about Black Monday here because what happens on the Chinese stock exchange does not necessarily directly speak to the impact China’s economy has on Africa. Let’s talk about what really matters for Kenya and the continent.

(source: http://www.chinaafricaproject.com/wp-content/uploads/2013/02/china_africa.jpg)

Firstly, the structure of the Chinese economy is changing; China has been undergoing a shift from heavy industry to services. In fact The Economist states China’s, ‘services sector supplanted manufacturing a couple of years ago as the biggest part of China’s economy, and that trend has only accelerated this year’. This has massive implications for Africa which has benefitted immensely from the commodity hunger from China, particularly for commodities from the extractives sector. How will Africa be affected? Well, while some countries such as Nigeria seem to be weaning their economy from an over-reliance on oil, other African countries such as South Sudan, Chad, Equatorial Guinea, DRC, Gabon and Angola still rely heavily on oil exports even for national budget formulation. Thus, Africa can expect continuing downward momentum from China in terms of a demand for such commodities and thus reduced revenues.

The wane in commodity demand from China is set to have a series of effects on African economies. For example, sovereign bond issues from oil-exporting African countries which still rely heavily on such exports for public revenue generation should be approached with caution not only because of waning demand but obviously also due to lowering oil prices. Investors should look at the overall export profile of a country before making a decision to invest. Further, countries such as Kenya and much of East Africa, which are set to become oil producers in the near future can expect oil ventures to be significantly less profitable than was the case a few years ago. Not only does demand from countries such as China seem to be waning, there is a decline in oil prices and a definite shift in much of EuroAmerica towards renewables. Such factors mean that the previous assumption that ‘oil= healthy revenue’ popular in the minds of many African governments is being challenged in an unprecedented manner. One need only look to Ghana to see the pitfalls that abound when a country overestimates projected revenue from oil sales.

Secondly is the devaluation of the yuan; the recent devaluation should be perceived as a mixed bag for Africa. On one hand, for an import country like Kenya, the devaluation of the yuan is frankly a sigh of relief in what has been a very bleak import outlook in the context of the depreciating Kenya Shilling. A look at Kenya’s import profile reveals that, by far, Kenya’s largest share of imports come from Asia with China leading the way particularly in capital and consumer goods. Thus the yuan devaluation is one bright spot in what has seemed like an unending rise in import bills. The flip side of this equation however is that a weaker yuan may make African countries deepen an already deep reliance on Chinese imports making them more sensitive to volatility in the Chinese economy. However, the devaluation of the yuan is already being seen to put depreciating pressure on the Kenya Shilling which would make imports from other parts of the world more costly for the country. This is a reality Kenya simply cannot afford as it would exacerbate current account deficit pressure.

(source: http://si.wsj.net/public/resources/images/BN-JU482_yuan08_TOP_20150810215222.jpg)

Finally, there is another shift occurring in the Chinese economy from being a predominantly export economy to one more reliant on domestic consumption. Wages have risen as millions of Chinese have reaped dividends from economic growth in which millions of Chinese were pulled out of poverty. Thus overall, Chinese have more disposable income to purchase finished goods. This shift from export reliance to local consumption seems to be part of an on-going overhaul that has perhaps been informed by the decline in exports from China after the Global Financial Crisis of 2008-09. It would be no surprise to surmise that China wants to buffer itself from the vulnerability of external demand. This, however, leaves Africa with a series of questions: Which country will now become the dominant absorber of African commodities? Can Africa manufacture goods of sufficient quality to appeal to the Chinese market? Where will commodity-reliant countries source alternative revenue now that this shift in China is happening? Further, who will be the next ‘world factory’? Africa?

Thus, there is good reason for Africa to keep an eye on China, if for nothing else, to see how Africa can make the most use of on-going shift in China’s economy.

Anzetse Were is a development economist; email: anzetsew@gmailcom

This is what’s missing in the Uganda sugar row

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This article first appeared in my weekly column with the Business  Daily on August 23, 2015-

The headlines have been full of the sugar row unfolding across Kenya. Why is Kenya importing sugar from Uganda? Should the sugar industry be protected? What about the livelihood of sugar farmers? Sadly this issue has been politicised and muddied what the focus of the conversation ought to be. So let’s deal with a few issues.

Firstly, should Kenya be importing sugar from Uganda? Well, Uganda produces about 465,000 tonnes of sugar consumes 320,000 tonnes, leaving it with a 145,000-tonne surplus. Kenya produces 650,000 tonnes of sugar against a demand of 860,000 tonnes, leaving a 210,000-tonne deficit. So even if Kenya imported all of the excess sugar from Uganda, we would still have a deficit. Some sugar farmers are of the view that no imports should be allowed, but clearly that is not practical.

(source: http://naibuzz.com/wp-content/uploads/2015/08/lugazi-sugar.jpg)

On the issue of the pricing of sugar from Uganda, according to the Departmental Committee on Agriculture, Livestock And Co-Operatives (DCALC) the average cost of producing a ton of sugar in Kenya is USD 870, compared to USD 350 in Malawi; USD 400 in Zambia and USD 300 in Brazil. The Kenya Sugar Board puts sugar production costs in Uganda at USD 180 a tonne. So yes it is true that Ugandan sugar is cheaper than Kenya’s but so is sugar from anywhere else it seems. But one has to ask, if this is a negative reality. The truth of the matter is that 45% of Kenyans live at or below the poverty line. Why should the poor pay more money for sugar because Kenya’s sugar industry is uncompetitive? Why should the sugar industry expect the poor to pay for its inefficiencies?

That said, government seems set on protecting the sugar industry. Duty on imported sugar was more than doubled to protect local production from cheaper imports. Sugar importers are charged Sh44.75 per kilogramme, up from Sh19.40. Of course some economists are of the view that this should not be happening because in raising duty, the government is enabling the continued survival of a sector that is inefficient, unproductive and uncompetitive; but protection of the industry continues.

(source: http://prudentpress.com/wp-content/uploads/protectionism.gif)

The other side of the coin however is the reality is that there are thousands of farmers and millions of households who rely on sugar for income. Indeed, according to the DCALC the sugar industry in Kenya directly and/or indirectly supports six million Kenyans and has a major impact on the economies of Western Kenya and Nyanza regions and, to a lesser extent, Rift Valley. So the reality is that any factor that is perceived to be a threat to these households will cause acrimony.

However the industry is beset with issues; according to the IEA, these include poor cane husbandry practices lead to low yields and the use of poor seed variety which results in low sucrose content and late maturity. Other factors include expensive inputs and agricultural equipment, lack of credit facilities for small growers (which dominate the sector; of the 300,000 cane farmers only 4,500 are large scale), the lack of irrigation facilities and poor infrastructure. Further modern technology is often not used although it would decrease the cost of production.

(source: http://www.africanfarming.net/images/Kenya_Africa_sugarcane_corruption.jpg)

But this brings in the broader question of whether the sugar belt in Kenya should be dominated by sugar farming. Are there other crops that can be farmed there that help address Kenya’s food security issues as well as yield more profit for farmers? This should be a core part of the conversation because sugar has not appeared to have made a noticeable impact on improving the lives of residents of the sugar belt.

Additionally, and this is the part Kenyans seem to enjoy addressing the most, there is the issue of sugar smuggling. The Kenya Sugar Board clearly has weak surveillance capacity and thus cannot effectively handle the issue of sugar smuggling along Kenya’s porous borders particularly in Eastern and North Eastern. Cases abound of business people repackaging imported sugar and selling it as locally manufactured sugar. This allows them to enjoy massive profit margins while glutting the sugar market and thus placing downward pressure on the price cane farmers earn for their crop. So a key element of this conversation is finding out who is doing the smuggling and how they can be stopped. Accusations and counter-accusations are of no use here.

But also bear in mind that there are irregularities within the sugar industry as well; between 2006-2012 a sugar company is said to have exported unknown quantity of sugar to the Democratic Republic of Congo, Ethiopia, Rwanda, Southern Sudan, Uganda Italy and the UK. Why did this happen when Kenya suffers from a sugar deficit?

This article has not exhausted all the angles that need to be considered in the sugar row but clearly there are numerous issues that ought to be addressed. And frankly, most of them are internal to Kenya. So Kenyans should not target their hostility at Ugandan sugar but rather use this issue to take time for self-reflection and look at the role Kenya itself plays in creating the problem in the first place.

Anzetse Were is a development economist; email: anzetsew@gmail.com, twitter: @anzetse

The Dualism Conundrum

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This article first appeared in my weekly column the Business Daily on August 17, 2015

Kenya, like many other African countries, has a dualism issue in the structure of its economy that informs the patterns of the economic development of the country. Although there are several forms of dualism active in the Kenyan (and African) economy, the article will focus on formal vs. informal dualism.

The formal sector of the economy comprises of activities that are captured in GDP statistics, tend to comply with legal and regulatory requirements (i.e. tax compliance, implementation of labour laws etc), offer jobs that are financially secure and tends to be the wealthier section of the economy. However, the informal sector exists as well.

(source: http://www.businessdailyafrica.com/image/view/-/1237146/medRes/295299/-/maxw/600/-/2fg1i1/-/informal+sector.jpg)

Informal sector activities are typically not captured in official GDP figures, are often not officially registered, are not formally regulated, do not necessarily meet legal operational requirements and are typically not tax compliant. According to the IEA, in Kenya, the informal sector is estimated at 34.3% and accounts for 77% of employment. Over 60% of those working in the informal sector are youth aged between 18-35 years, 50% of which are women. In the East Africa region, the sector is the source of 85% to 90% of all non-farming employment opportunities. According to NORRAG, the informal sector is no longer confined, in terms of practice or as an image, to the road-side mechanic or dress maker, the sector now includes other areas such as ICT and related service enterprises. In fact the informal sector is now present in a wide range of business operations where skills are demanded and where opportunities for productive employment generation are found.

There are multiple implications of this formal vs. informal dualism; firstly the lack of clarity on the precise size of the informal sector translates to a lack of certainty with regards to the size of the Kenyan economy. Do GDP figures capture the informal sector? Although the informal sector is said to contribute about 18% of the GDP, is this a comprehensive figure? Is it understated or overstated? Is the economy is actually bigger or smaller than assumed? To what extent is the informal economy ‘guesstimated’ into official GDP figures? The ambiguity of the size of the informal sector means that Kenya does not really know how big the economy is; this then informs the accuracy of statistics such as the debt-to-GDP ratio that provide useful information on the extent to which the country is leveraged.

(source: http://www.tutor2u.net/blog/images/uploads/shutterstock_81874246.jpg)

This formal vs. informal dualism also inform factors such as the ability of the country to move comprehensively in one direction. Policies and laws pertinent to the economy are mainly implemented and monitored with regards to the formal economy, leaving the informal behind. Other issues include social protection; workers in the informal economy are generally not covered by adequate social protection. This makes informal workers a vulnerable and sizable proportion of the Kenyan population.

Quality assurance is an additional issue. The formal economy tends to comply with established standards and quality norms; this is not necessarily the case in the informal sector. Some may meet industry standards while others do not; this has implications for consumer protection rights. Another issue is productivity; most informal sector players cannot afford analysis that informs them of the productivity of their enterprise. Thus inefficiencies are likely to continue in the informal sector, dragging down the sector’s efficiency.

Skills transfer is an additional issue of importance. While the government may change curricula in Universities and TVETs, this does not truly affect the informal economy as 60% and 73% of informal sector employees (with less than 20 employees) acquire their skills through apprenticeships. So the formal sector is likely to benefit for updates in curriculum while the informal sector does not. There are already implications to this dualism because, for example, apprentices in informal auto mechanics sub-sector have dropped sharply because many of the “older master mechanics” do not have skills to handle the “newer versions of injection engines”, they only know carburettor engines.

(source: http://latestlearnerships.com/wp-content/uploads/2014/02/BMW-Jobs-Careers-Apprenticeships-600×330.jpg)

While there may be efforts being made to formalise the informal sector the reality is that there is limited incentive for the informal sector to do so. Formalisation is often an expensive process with registration fees, lawyer’s fees, social insurance payments for employees and, the big one, tax. Why should informal business owners formalise if the exercise will be expensive with limited benefits accrued?

In terms of a way forward, the informal sector in Kenya should develop Informal Sector Associations, as seen in West Africa, which are tuned into skills updating and allow for an easier track of emerging training needs. Such associations also allow for self-regulation, make it easier for interventions to be implemented and facilitate easier and a more accurate monitoring and analysis of the sector.

Anzetse Were is a development economist; email: anzestew@gmail.com

Africa Rising Narrative: All Hype?

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This article first appeared in my weekly column with the Business Daily on August 9, 2015

Africa has grown used to negative images being relayed all over the world through media houses, social media sites, documentaries and even Hollywood movies. These bloody Africans, the commentaries seem to say, why can’t they just get it together? Ebola, famine, corruption, civil wars, fleeing refugees…the list is endless.

So you can imagine the great delight and relief Africans are experiencing from the ‘Africa rising’ narrative painting us in a positive light. Africa is not all doom and gloom, not everyone is mired in disease and corruption. There are ‘African Lion economies’, the promise of prosperity on the continent and George Soros referring to Africa as one of the “few bright spots in the gloomy global economic horizon”.

(source: http://www.howwemadeitinafrica.com/wp-content/uploads/2012/11/Africa_Rising620.jpg)

While this change in narrative is welcome, it is important Africans look at it closely to determine whether it’s mere hype or rooted in robust truths.

There are several foci in the Africa rising narrative — robust economic growth, a growing middle class, better governance and relative political stability, and the demographic dividend of a large, youthful and fairly skilled labour pool. The focus here will be on the economic story. It is true that Africa is one the fastest growing regions in the world with an average annual growth rate of around five per cent. Over the last decade, six of the world’s 10 fastest-growing countries were African.

In eight of the last 10 years, Africa’s ‘Lion’ states have grown faster than some of the Asian tigers. The African middle class is one of the fastest growing in the world and domestic demand has continued to boost growth in many countries. A stable middle class of 126 million exists and will rise to more than 42 per cent of the population in the near future. Further, consumer spending is set to rise from $860 billion in 2008 to $1.4 trillion in 2020.

(source: http://si.wsj.net/public/resources/images/OB-NS701_AFRICA_G_20110501211315.jpg)

Even The Economist, one of the most cynical weeklies when it comes to Africa, states that while some argue African economic growth has been commodity-driven, the economic outlook for many African countries looks promising despite falling commodity prices reflecting the growing economic diversification away from dependence on commodities. Further, FDI is diversifying away from mineral resources into consumer goods and services; this may inform a structural shift of the African economy away from commodities to other sectors.

But let’s not get carried away: such rosy optimism has to be tempered with reality. First, more than 46 per cent of Africans live in poverty and our share of global poverty is due to balloon to 82 per cent by 2030. Many Africans are still poor, struggling to meet basic needs and Africa is set to continue being the poorest continent in the world in the foreseeable future.

Secondly, the statement about a growing middle-class has to be tempered with the reality that the common definition of middle class in Africa is people who spend the equivalent of $2-20 a day, an assessment based on the cost of living for Africans. But the truth is that many living on $2-4 a day are on the edge of poverty and can easily slip back into poverty—how many fall into this bracket?

Further, the high dependency ratios in Africa, partly attributed to the lack of a robust government-funded social security net, translates to higher spending on meeting basic needs of dependents on costs such as health, education and food. This squeezes out more discretionary spending and reduces actual, lived disposable income.

 (source: http://borderlessnewsandviews.com/wp-content/uploads/2013/10/Social-Safety-Net.jpg)

Finally, the commodities reliance question is a mixed bag and depends on the country being considered. Some countries are diversifying while others are not. In Angola, for example, the oil industry accounts for around 45 percent of the country’s GDP, 75 percent of government revenues and 90 percent of overall export earnings. On the other hand, Nigeria’s growth of 6.3% came mainly from non-oil sectors showing that the economy is diversifying. Either way, the good news is that most African governments are well aware of the vulnerabilities to which their economies are exposed in being commodity reliant and some have begun to take steps to diversify the economy and sophisticate export profiles. That said, it is important to note that overall African currencies were negatively affected during a period of turmoil in commodity markets in 2009 and earlier this year the World Bank revised Africa’s growth prospects downward because of fall in the prices of oil and other commodities. Thus, commodity prices will still inform the growth of Africa’s economy but the jury is still out on the extent of this influence.

(source: http://www.finnovators.com/assets/icon_Commodities.png)

The Africa Rising narrative is a welcome shift in the portrayal of the continent across the world but it should not create complacency in Africans or create the impression that Africa will prosper no matter what. Problems exist, work still needs to be done on the continent and Africans need to be engaged now more than ever to drive the continent continuously forward.

Ms Were is a development economist. email: anzetsew@gmail.com; twitter: @anzetse

This is what’s really wrong with Kenya’s debt

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This article first appeared in my column with the Business Daily on August 2, 2015.

The International Monetary Fund (IMF) and World Bank recently raised the red flag over debt, stating Kenya must put a tight lid on it to keep its economy on a steady growth path.

According to the Business Daily, Kenya’s debt load crossed the 50 per cent of gross domestic product (GDP) mark to stand at 57 per cent by end of December 2013.

https://i0.wp.com/valleysleepcenter.com/blog/wp-content/uploads/2014/03/bigstock-Debt-Concept-298380591.jpg

(source: http://valleysleepcenter.com/blog/wp-content/uploads/2014/03/bigstock-Debt-Concept-298380591.jpg)

But our problems are not the GDP to debt ratio; they run much deeper and are structural in nature. One of the real problems is the way the government spends money, including debt. It is imprudent and unsustainable. For the past two years most government spending has gone to recurrent expenditure.

Analysis by the International Budget Partnership (IBP) indicates that in 2013/14, the government spent 78 per cent of the budget on recurrent expenditure. For 2014/15, government recurrent expenditure is estimated to have eaten into 63 per cent of the budget. This year, recurrent costs are set at 52 per cent of the budget. In short, in the past recurrent allocations and spending have trumped those for development. This is a concern as it informs our debt appetite and will determine debt consumption. The government has been accruing debt yet most of the money goes to consumption, not development.

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(source: http://www.australiannationalreview.com/wp-content/uploads/2015/04/salary-increase-e1429456030238.jpg)

To make matters worse, the little money left over for development spending goes unspent. An analysis of the fourth quarter of the 2014 State budget by the Institute of Economic Affairs reveals that the government has a challenge in using the development budget; only 52 per cent of this budget was utilised by the end of the financial year.

Simply, we do not seem to have the absorptive capacity to spend the development budget. So Kenya does not have the spending infrastructure to seed the economic growth required to pay back the debts government has taken on.

This is not a spending formula that will lead to economic growth. Yet this is the very same economic growth required to pay back the accrued debt.

The seriousness of this issue comes into further focus when one realises that on top of all these dynamics, Kenya is an import economy and thus always falls short on raising the foreign exchange in which international debt is paid back. Kenya sells shillings to raise dollars to pay back global debt, so the government is always at a disadvantage.

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(source: http://alluaeoneae.c.presscdn.com/wp-content/uploads/2015/01/UAE-Imports-Exports-ReExports.png)

In the context of the shilling tanking against the dollar, government debt is becoming more and more expensive. So the government has a structural spending problem in the context of an import economy and a depreciating shilling.

These are the problems with Kenya’s debt, not the GDP to debt ratio. What is required to address Kenya’s debt problem is to first, drastically cut down on recurrent expenditure. Secondly figure out how to effectively spend the development budget and, thirdly, in the long term fundamentally reorient the economy into an export economy.

Once these three factors are taken on board, Kenya will be a much healthier space to service the debt the government has been accruing.