Month: September 2015

The economics of the teachers’ strike in Kenya

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This article first appeared in my weekly column with the Business Daily on September 27, 2015


Kenya has been in the throes of a teacher’s strike rooted in the fact that government has failed to pay teachers a 50% pay raise despite being ordered to do so by the courts. Government’s argument is that they don’t have money. What does government mean when they say they don’t have money? And is that the only economic factor to consider? I am of the view that teachers should be paid, so what’s the problem and can these issues be resolved?

Well let’s look at concerns economists may have that government will face in implementing a pay hike for teachers.

Firstly, raising teachers’ wages will raise recurrent expenditure. This column has already analysed government spending patterns; recurrent spending is already too large and has to be brought down. Analysis by the International Budget Partnership indicates that in 2013/14 government spent 78% of the budget on recurrent expenditure. For 2014/15, recurrent expenditure will eat into 63% of the budget. This year, the recurrent vs. development estimate split stands at 52% to 48%. Implementing a wage increase for millions of teachers will push the recurrent budget up. This is a concern.

(source: http://stateofcash.com/wp-content/uploads/2011/12/problemAreas.jpg)

Secondly is the budget deficit; the 2015/16 budget deficit was due to be 8.7 per cent of GDP. Implementing the teacher’s pay rise may raise this to 10-11 percent of GDP according to some analysts. Why is this a problem? Well the larger the budget deficit the more pressure there is on government to borrow to meet this gap. The government is already in significant debt; KES 2.5 trn. Frankly, there is already concern on how government is going to service this debt, particularly the part that is foreign-denominated in the context of a weak shilling. It is unlikely government will borrow more to pay the teachers.

The final issue is liquidity. The value of the Kenyan shilling has been tanking and although it seems to be stabilising, it is doing so at a much weaker point than it has ever been for years. This has negative implications for servicing foreign- denominated debt as well as meeting the country’s import bills. What does the teacher’s strike have to do with all this? Well remember, the government is trying to stabilise and eventually strengthen the KES and there are several factors that affect the value of the shilling. One such factor is how much money is moving through the economy. The CBK monitors and tries to control how much KES is flowing through the economy. Because of the decline of the shilling, CBK has been trying to reduce the amount of shillings in circulation to control KES depreciation. In fact, the CBK has sought to drain excess liquidity from the market by offering Sh6 billion in repurchase agreements and get that money out of active circulation. The concern is that if teachers are paid, it will inject significant amounts of shillings into the economy and this may put additional downward pressure on the value of the KES. As said before, this will have negative effects on the government’s ability to meet import bills and service foreign-denominated debt. So this may be another factor informing government’s reluctance to pay the teachers.

(source: http://www.bdlive.co.za incoming/2013/09/24/kenya-shilling-xxx.jpg/ALTERNATES/crop_400x250/Kenya+shilling+XXX.jpg)

These are some of the factors behind why Kenyans are being told by government that if teachers are to be paid, taxes will be hiked. But the truth of the matter is that there is a legal and, in my view, moral obligation to implement the wage increase. Government should look at the gravity of the country’s economic position and use this strike to remedy the problems. How?

Well on recurrent expenditure, government simply must reduce this in any case. There is clearly concern in the minds of many Kenyans on the amount elected officials earn in this country. So government can implement austerity measures starting with cutting the salaries of elected officials. Linked to this is fiscal deficit issue; government has to cut spending, period. The problem Kenyans seem to have is that elected officials are willing to raise their wages but when it comes to teachers, Kenyans are told that government is broke. This anomaly can be remedied by cutting the wages of those officials and direct that money to teachers.

(source:  http://thumbs.dreamstime.com/t/cutting-your-salary-illustration-design-over-white-background-33956082.jpg)

Then there is the issue of corruption at both central and county government levels. Kenyans know public funds are being misused by public officials and feel that if corruption were curbed, there would be money to pay the teachers. Thus until Kenyans see the government punishing corrupt public officials and getting a handle on corruption, there is likely to be intolerance with the notion that there’s ‘no money’ to pay the teachers.

The liquidity issue is the only area in which I also have concerns but frankly government should be developing strategies to, for example increase forex earned by the country, so that there is less pressure to reduce KES circulation to control shilling depreciation.

Importantly, the challenges government will have in implementing the wage increase should not be taken to be reasons as to why government should not pay, rather the factors are indications of structural problems in the economy that government ought to be addressing in any case. The teachers’ strike simply provides fresh impetus for the challenges to be faced and addressed.

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

The missing middle of Kenya’s economy

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This article first appeared in my weekly column in the Business Daily on September 20, 2015

 The World Bank makes the point that the structural economic transformation in Africa is not following the path that other developing countries have followed as they expanded and sophisticated their economies. To put this statement into context, different sectors of the economy contribute to GDP growth and these are typically characterised as three core sectors: agriculture, industry and services. Typically the path to economic development is one where there is a shift from the traditional sector of agriculture into industry and manufacturing. From there the economy tends to evolve further into services. However, this is not the pattern of growth that Africa is undergoing; Africa seems to be diversifying away from agriculture, not into industry but directly to services. Indeed in Africa, services contributed 62 percent to the cumulative growth in GDP, while manufacturing contributed 25 percent and agriculture 13 percent. Manufacturing is not really taking off on the continent and Africa is leapfrogging industry straight into services. Services here refers to a broad body of activity such as health, education, information and communication, hospitality, public administration, wholesale and retail trade, finance and insurance, and real estate among others.

https://i2.wp.com/sostg.com.au/wp-content/uploads/2013/03/iStock_000014887823Medium.jpg

(source: http://sostg.com.au/wp-content/uploads/2013/03/iStock_000014887823Medium.jpg)

Kenya falls right in line with this trend; indeed recent statistics indicates that agriculture contributed 29.3 percent to GDP, industry stood at 17.4 percent and services an overwhelming 53.3 percent. So while the share of GDP is contracting for agriculture, industry is remaining fairly stagnant and there is rapid growth in services.

But why is this important? Why should Kenya and indeed Africa be trying to industrialise? Shouldn’t Kenya be happy that we are leapfrogging industry into services? Can this not be perceived as an advantage? The answer to that is a qualified no and here’s why; firstly historically manufacturing been the driver of economic growth and has allowed countries, particularly developing countries, to catch up with advanced economies. From1950 to 2005, the pattern of industrialization has closely reflected changes in global patterns of development.

Secondly, industry is an important job creator and it creates jobs job opportunities for variously skilled levels of labour. Indeed, in services, the sub-sectors important to GDP tend to have low wage employment intensity (employment per KES million) and in Kenya, employment within the services sector has been declining since 2000. Given levels of unemployment in Kenya, it would be prudent to boost a sector that can meaningfully contribute to this problem. Further, manufacturing is traditionally the main sector responsible for the diffusion of innovation and productivity change. The development of industry allows countries to employ technology in building productivity and learning.

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(source: http://www.clker.com/cliparts/6/0/a/c/12065559172064609959chlopaya_Building.svg.hi.png)

Finally, there are risks of services leading the path to economic growth because Kenya does not have the necessary components that form the foundation on which services can function effectively and efficiently. Simple factors such as poor electricity supply, low levels of infrastructure penetration and expensive travel costs negatively inform the extent to which services can lead economic growth. Bear in mind that it is more likely that some of these deficits would have been addressed had the country been diversifying into industry. Additionally the price of services tends to increase more rapidly than that of manufacturing goods; thus a preponderance of services growth may lead to a plethora of activities that cost Kenyans more than if growth had been led by industry. Add to this the fact that in Kenya, labour tends to move away from agriculture but into low skill services with relatively low productivity growth mainly in informal retail trade; this has been dubbed premature deindustrialisation.

This discussion should not make one conclude that services (or agriculture) does not play an important role in economic development, clearly it does. The emphasis should rather be on how to build industry in a manner that allows it to play its true potential role in economic development and do so in a manner that fosters links between agriculture and manufacturing and between services and manufacturing.

The reality is that at present, without growth in industry and manufacturing, Kenya and indeed Africa will face limited growth prospects and will remain vulnerable to external shocks, adverse changes in terms of trade, and remain the eternal producer of raw fuels and metals to which little value is added and which are volatile raw export commodities. With such grim prospects, there should be a greater impetus to boost industry performance in Kenya and indeed the continent.

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

CBK in a tight spot with monetary policy options

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This article first appeared in my weekly column with the Business Daily on September 13, 2015

It is no secret that the Kenya shilling has been tanking, nearing 106 to the US dollar last week. Bear in mind that this is not the lowest the shilling has ever reached; KES reach USD 107 in October 2011. However, conditions now are different and have informed the anxiety about the depreciation of the shilling. Not only does Kenya’s Current Account Deficit remain substantial, the country is racking up foreign denominated debt. As of March 2015, Kenya’s public debt stood at KES 2.5 trn, about KES1.3 trillion (52%) from domestic sources, with the remainder of KES1.2 trillion in foreign borrowing (48%). Yet total public debt is expected to go up to 2.9trn by end year. How much of this will be foreign denominated? This question becomes important when analysing the KES value issue as it adds to the problem of a scarcity of dollars.

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(source: http://www.theodoresworld.net/pics/1111/dollarImage2.jpg)

The factors that are causing KES depreciation are numerous and include high liquidity in the market after the government released payments to state-linked entities and ministries, a strengthening of the US dollar, Kenya’s high current account deficit which has led to a scarcity of dollars, high imports, and poor tourism inflows the last of which is an important forex earner. Finally, foreign investors have been exiting the Nairobi Securities Exchange taking dollars along with them. So what can and what has the CBK been doing to address these pressures on the shilling?

Well firstly is the direct sale of foreign exchange. However, such a strategy is constrained by two factors. Firstly, Kenya is an import economy, thus by definition, forex is scarce. Yes, the government currently has Foreign Exchange reserves of about $6.4 billion as well as a precautionary facility from the IMF, but these options are limited. Not only must dollars be drained from the economy to make trade payments, lower exports and the poor performance of tourism add a further burden on the CBK’s ability to throw dollars at the depreciation problem. Further, high dollar denominated debt means that the government has to start saving dollars in order to make the repayments that are maturing on this type of debt.

(source: http://www.businessdailyafrica.com/image/view/-/2762546/medRes/836831/-/maxw/600/-/srcvs8/-/Shilling.jpg)

Secondly, the CBK can address the depreciation problem by fiddling with interest rates; and it has. CBK raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent, which had been stable since May 2013. CBK then again raised CBR from 10% to 11.5% in July 2015. But there are several problems with raising interest rates to influence the performance of the shilling. Firstly, it often has the effect of slowing economic growth due to reduced investments and consumption. The conundrum here is that the performance of the Kenyan economy will be negatively affected by a hike on interest rates; yet the Treasury’s rosy growth projection of up to seven per cent this year was based on interest rates remaining stable at around the May 2013 levels. Remember that the Kenyan economy is already performing at the subpar level of 4.9% GDP growth in first quarter. Yet interest rates hikes make the prospects of the rates of future GDP growth even grimmer. However high GDP growth performance was based on lower interest rates, the very same lower interest rates government had hoped to rely on to generate the type of economic growth to generate funds that can be used to accumulate revenue as well as build up forex reserves. Thus the irony is that the interest rate increases CBK is using to try and control KES depreciation may constrain GDP growth and thus the government’s ability to accumulate the funds needed to give it wiggle room in controlling interest rates in the future. Difficult conundrum indeed.

(source: http://starrfmonline.com/kitnes/data/2014/12/01/1.1913127.jpg)

Finally, the CBK can reduce the amount of shillings in circulation to control KES depreciation. Indeed, the CBK has sought to drain excess liquidity from the market by offering Sh6 billion in repurchase agreements. But again the CBK is constrained, mainly by political considerations. It is well known that Kenya has a very high recurrent public expenditure bill and thus the government is in a situation where more KES are regularly being released into the market than had been the case for previous administrations, pushing KES liquidity in the market up at regular intervals. But there is no way, as of now, that that public expenditure bill will be reduced; such steps would be too politically acrimonious. Add to this the fact that Kenyan teachers just secured a pay increase. That hike, if calculated up to 2017, will be Sh99.8 billion incurred on teachers’ pay alone. It is also likely that payments to police and other civil servants will rise; thus the public recurrent expenditure is on the rise. Sadly, government’s options in creating the funds to make such payments possible will, again, affect government’s ability to control the depreciation of the KES. How can government pay an ever increasing public expenditure? One by raising taxes which reduce investment and consumption and reduce GDP growth, or additional borrowing by government in domestic markets which crowds out private sector, or foreign borrowing which adds to the problem of additional foreign denominated debt. Thus here, again, CBK’s impact in lowering KES circulation via draining excess liquidity is limited given all these political considerations. Indeed in addressing all these wage demands, government again will be put in the difficult position of very high liquidity in local markets, coupled with taking actions that may dampen GDP growth while also potentially accruing more foreign denominated debt. Again, a difficult conundrum indeed.

Given all these factors, it is clear that the CBK is in a very tight position with regard to the monetary policy options at its disposal to control the depreciation of the shilling. It will be interesting to see the action CBK takes in coming months in addressing what is truly a difficult problem.

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

Does African unity ideology make economic sense?

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This article first appeared in my weekly column with the Business Daily on September 6, 2015

Last week Kenya hosted the Eastern Africa Region Pan African Congress and later this week will host the NEPAD APRM Summit which is rooted in the notion continental unity and cooperation. This is therefore a good time to take stock on how economically viable Pan Africanism, loosely defined as the ideology of African unity, is for the country and continent.

It should be noted that current conversations on Pan Africanism are very different than they were even 20 years ago which occurred in a context of poor economic performance and chronic dependence on international aid. Today, African governments seek to make the shift from aid to trade and from dependence to self-reliance. Indeed, the incoming president of the African Development Bank, Adesina (PhD) in his inaugural speech last week stated that, ‘We must integrate Africa– grow together, develop together. Our collective destiny is tied to breaking down the barriers separating us’.

(source:http://www.channelstv.com/wp-content/uploads/2015/09/afdb.jpg)

The positive elements of economic Pan Africanism are clear. Through economic integration Africa can do three important things: coordinate the economic development of the continent efficiently, negotiate more effectively on global trade and economic platforms, and leverage economies of scale.

When Africa is considered as a unit, comparative advantage and efficiency can preponderate in investment decisions and economic development. an economically united Africa has stronger global bargaining power and as a continent, Africa is a more attractive investment destination with a market of over one billion open for business to both foreign and domestic entities. Further, economic Pan Africanism can encourage regional convergence in key indicators such as the rate of inflation, budget deficit and public debt, as well as external current account balance.

(source: http://www.panafricanalliance.com/united-states-of-africa/)

However, is economic Pan Africanism truly viable? It is true Africa has taken important steps towards economic integration and most sub-Saharan African countries are members of one or more regional arrangements. These include, the Economic Community of West African States (ECOWAS), the Economic Community of Central African States (ECCAS), the East African Community (EAC), the Southern African Development Community (SADC), and the Common Market for East and Southern Africa (COMESA). The aim is to eventually create a Continental Free Trade Area (CFTA) by 2017. Yet, even when one puts aside the difficulties faced in ensuring that such regional blocs actually function (such as the intricacies of the rules of origin), there are two core problems that impede further integration.

Firstly, competition exists within regional blocs. This is partly informed by the heterogeneity of economies where weaker economies exist alongside stronger neighbours. For example, Kenya is the strongest player in the EAC and thus dominates the union. This can give rise to a feeling that Kenya does not really ‘need’ other countries in the EAC to build its economy. Indeed there can exist the notion that Kenya is opening up to neighbouring markets with lower purchasing power and thus while other EAC members benefit from Kenya’s markets with ‘deep’ pockets, Kenyan companies do not equally benefit as neighbouring countries have ‘shallower’ pockets. Further, in the EAC Kenya wants to hold its position as the dominant player in the region. Isn’t the current sugar and milk row between Kenya and Uganda an indication of the limits of the ‘spirit of Pan Africanism’ even within regional blocs?

(source: http://www.kepsa.or.ke/wordpress/wp-content/uploads/2015/08/Logo_of_EAC.svg1.png)

The second factor that prevents regional integration is that competition exists between different regional blocs. This issue is exacerbated by the reality of overlapping and multiple regional bloc memberships. In terms of the reluctance with regards to integrating regional blocs it is no secret that South Africa and Nigeria dominate Africa economically. Therefore, it can be difficult for countries in the EAC for example, to feel compelled to open their smaller economies to SADC or ECOWAS which house these dominant economies. A unification of regional blocs may mean that trade imbalances between regions are exacerbated leading to wider economic gaps with larger economies and economic blocs dictating the pace of economic growth.

Indeed, there are general issues that hinder continental economic integration continentally such as national government concerns of public revenue loss due to tariff reduction, a lack of assurance that market integration will align with national economic interests and the concern of an unequal distribution of continental integration benefits. Further, there is difficulty in reconciling a trade-off between short-term losses and the long-term benefits from trade integration, which is particularly important in the context of the short-term five-year election cycles in which African governments operate.

Thus it seems clear, that while the spirit of Pan Africanism is strong, there are real obstacles that impede the economic integration of the continent. The (good) news is that there does seem to exist a commitment to regionalisation and continental economic integration. It will be interesting to see how some of the challenges elucidated above will be addressed in this dance towards economic unity.

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