Month: October 2015

Interest rates present a tricky challenge for the CBK

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This article first appeared in my weekly column with the Business Daily on October 25, 2015


After the government announced that it had acquired a two-year, Sh77.43 billion ($750 million) syndicated loan, some banks raised their interest rates. This raised questions about what happened to the billions raised via the Eurobond and the implications of rate hikes on the economy. However, the truth of the matter is that there are several compounding variables with which CBK has to contend; variables that put pressure to keep rates high as well as pressure to lower rates.

In terms of the pressure to keep rates high one need only remember that the CBK raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent and then raised it again to 11.5 percent in July 2015. These hikes were done in an attempt to stem the depreciation of the shilling and control upward inflationary pressure. This act was arguably warranted given that Kenya is an import economy and has to service foreign denominated debt which currently stands at about 50% of total debt. Therefore, if the KES depreciation is not managed, import bills will become more costly and foreign denominated more expensive to service. These are real short to medium term pressures that the government has to manage.

(source: http://i.telegraph.co.uk/multimedia/archive/01811/inflation_1811026c.jpg)

Of course the problem with raising interest rates is that it often has a dampening effect on economic growth due to reduced investments and consumption. Therefore in keeping rates high further strain will be put on economic production and GDP growth. This will happen in the context of economic performance that has been so anemic that both the World Bank and the government revised GDP growth figures downwards. High interest rates will likely exacerbate the subpar performance of the economy and government will fail to generate the revenue required to pay import bills and service debt. Therefore in this scenario, CBK has to tussle with keeping rates high to stem KES depreciation and control inflation while contending with the negative consequences of doing so.

At the same time, there is pressure to lower rates. As mentioned, high interest rates tend to dampen economic growth and Kenya cannot afford this. So there is good reason for rates to be lowered, clearly the economy needs it. Lower rates will enable economic productivity, support economic growth and allow government to generate much needed revenue. However, if interest rates are lowered it risks prompting the devaluation of the shilling and enabling upward inflationary pressure. A weak shilling will mean import bills are more expensive and may make servicing foreign debt unaffordable. High inflation will raise the cost of living which will mean that basic goods such as food become more expensive for Kenyans. This is when the politics of economics comes in; no government wants to be in power when basic goods become unaffordable as social unrest usually ensues. Therefore, although there is pressure to lower interest rates, the potential negative consequences of doing so are not phenomena with which any government would want to contend.

(source: http://blog.amnestyusa.org/wp-content/uploads/2013/03/163414855.jpg)

In short, there are dangers in keeping rates high and dangers in lowering rates; so what should the CBK do? In my view, given the fact that there is extra incentive to raise rates due to heavy domestic borrowing by government, the CBK should lower rates. This is because government borrowing has prompted rate hikes beyond what CBK had orchestrated. Therefore, a lowering of the CBR will buffer the economy and Kenyans from the recent hike in rates.

However, the situation the economy is in right now has made one thing clear; Kenya’s economy cannot continue to be structured as it is. There must be concerted and deliberate action by government to plan a fundamental reorientation of the economy in which more forex is earned. This can be done through increasing exports and diversifying our export profile, as well as supporting forex earners such as tourism.

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

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TV Interview on Kenya’s debt- October 18, 2015

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Clips from an interview with KTN Kenya on Kenya’s Debt

Africa needs austerity plans for government

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This article first appeared in my weekly column with the Business Daily on October 18, 2015

Analysts watching Kenya are anxious, and with reason. Last week the government announced that it will borrow a confounding Sh78.8 billion from local banks to plug a 600 billion hole in the budget. As a result, many of us are asking ‘what happened to the Eurobond billions’? Didn’t we float the bond to avoid this precise type of problem? My contention is the problem lies in the type of leaders Kenya, and indeed much of Africa, is electing.

The basic problem with our current leadership culture, at least in Kenya, is that the wrong types of people aspire to and therefore get into elected office. Let us look at some facts; two years ago a study by the IMF showed that in Kenya the MPs’ basic pay, which excludes allowances, is 76 times Kenya’s GDP per capita of Sh84,624. 76 times. The study further found that four out of five of the highest paid MPs in the world are African: Nigeria, Kenya, Ghana and South Africa. They get more than their peers in the developed economies of US, Britain and Japan. Another study by The Economist indicated that Kenyans pay political leaders the most in the world when taken as a ratio of GDP per person. This is clearly lunacy. The consequences of this lunacy is what is biting Kenya and much of Africa financially right now, and is one of the reasons government seems to be unable to manage finances and is on an endless borrowing spree. Austerity is needed.

(source: http://afritorial.com/infographic-how-kenyan-politicians-pay-compares-globally/)

As is stands, one can confidently surmise that those who run for office in Kenya (and Africa) are interested in two things: firstly, their core interest is to use elected office to enter a plush lifestyle through ridiculous and unjustified salaries and benefit packages. Secondly, elected office provides ample opportunity to engage in corruption, and those elected seem do so with the sense of entitlement that comes with the ‘it’s my turn to eat’ mantra apparently so enthusiastically adhered to by them. As a result, Kenyan elected office attracts a certain type of person; a person driven by avarice. This person views political office as a means of enrichment rather than as an opportunity to serve and build the country. Through outrageous wages and benefits, Kenya has created criteria where those with self-seeking interests rather than those with altruistic interests self-select to run for office. It’s an open secret in Africa that getting into elected office is probably the quickest way to get rich. Is it then a wonder that the culture of servant leadership hasn’t taken root in Kenya or across much of the continent?

https://i1.wp.com/econintersect.com/wordpress/wp-content/uploads/2011/10/fat-cat-politician.jpg

(source: http://econintersect.com/wordpress/wp-content/uploads/2011/10/fat-cat-politician.jpg)

To fix this problem austerity plans targeting government are desperately needed that target the wages and perks of elected office. We should create such trim and lean governments where those in elected office get so little, that two things happen.

Firstly, those with voracious self-seeking appetites will no longer be attracted to run for office because the modest salaries and benefit packages will not fit into their plans for quick self-enrichment. As a result, an environment will be created those whose priority is building the nation and continent will self-select to vie for office. Secondly, the sincerely ludicrous government recurrent bills will come down substantially. No longer will being in elected be synonymous with going to five star hotels for ‘seminars’ and ‘conferences’ or taking expensive trips to foreign metropolises for ‘learning trips’. Being in government will mean you have to take public transport or buy a humble car to take you to and from the office.

So yes, Kenya needs austerity plans– for government. These plans will not only change the type of person who seeks to run for office, it will create a spending pattern where public funds are more likely to go to development rather than into recurrent expenditure or the pockets of elected officials.

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

The State of Kenya’s Economy- TV Interview October 15, 2015

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In this interview I talk with TeryyAnne Chebet of Citizen TV Kenya on the State of Kenya’s Economy.

El Niño will wreak economic havoc if not managed

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This article first appeared in my weekly column with the Business Daily on October 11, 2015


Kenya will be subjected to heavy El Niño rains that will start at the end of this month. The government requires Sh15.5 billion to deal with any emergencies arising from the El Niño rains but thus far only Sh5 billion and Sh20 million from each county has been set aside for the fund. That leaves a leaves deficit of about Sh10 billion. However, several international agencies have pledged to support the El Niño mitigation plans and have committed Sh 3.5 billion, part of which can be used by government. It is crucial to understand why these funds are needed and must be used appropriately because if mitigation and disaster relief plans are not implemented, the economic consequences will be dire.

https://i1.wp.com/www.kenyans.co.ke/files/images/news/waah.jpg

(source: http://www.kenyans.co.ke/files/images/news/waah.jpg)

The first way in which El Niño will cause economic problems is through the devastation of infrastructure. The rains earlier this year were not even of the scale expected from El Niño yet they ravaged infrastructure; bridges were swept away, roads were flooded and roads collapsed. To understand the scale of this issue note that the 1997/98 El Niño episode is estimated to have caused damage worth more than $1.2 billion in Kenya in infrastructure and crop destruction alone. That damage translates to funds required to do emergency repairs but more importantly collapsed infrastructure becomes non-functioning infrastructure that prevents individuals from engaging in economically productive activities as they cannot get to and from places of work and business. Further, damage to infrastructure has long-term impacts, such as damage to sanitation infrastructure and disruptions in communication links, clean water and electricity supply. The more severe the damage, the longer Kenyans will be held hostage unable to conduct business as usual causing economic activities to come to a standstill. This then translates into a loss of livelihood for millions of Kenyans.

Secondly is the damage to property that the rains will have on land, houses, businesses, offices, and vehicles. Economically productive assets worth billions, be they be in agriculture, services or industry are likely to be damaged and the spill over effects on the loss of livelihoods will be felt in commercial activities even in adjacent non-flooded areas.

(source: http://streamafrica.com/wp-content/uploads/2015/10/kenya-elnino-648×372.png)

Thirdly, is the physical dislocation that many will experience as they are forced to leave their homes, businesses and places of work. Kenyans will be unable to be economically productive and this will dampen the economic growth of not only the affected areas, but the country as a whole.

Fourthly, is the impact on agricultural activities in the destruction of crops and loss of livestock. This will make Kenya more food insecure a fact exacerbated by the fact that the heavy El Niño rains may be followed with a long period of drought. There are therefore likely to be long-term consequences on food production activities leading to losses of income by farmers. But more importantly the impact of food production will put millions of Kenyans at higher risk of being food insecure; and food insecure Kenyans cannot be economically productive Kenyans.

El Niño will also have healthcare implications as there is likely to be a deterioration in health conditions due to waterborne diseases such as Amoebiasis, Giardia and Cholera which cause physical debilitation and even deaths. The last rains earlier this year caused Cholera outbreaks across the country, will this be repeated with El Niño? Once more, disease ridden Kenyans cannot be economically productive.

Finally, the high cost of relief means that money has to be diverted away from development into disaster preparation and mitigation. Thus funds that may have bolstered economic activities will be redirected to manage El Niño. This essentially translates into a loss of resources from productive activities to disaster relief and this will dampen the momentum of the economy.

(source: https://zurukenya.files.wordpress.com/2013/12/money-shilling.jpg?w=474)

Clearly the impact of El Niño will be felt by Kenya’s people and economy. Thus, the El Niño Fund and support from international partners is crucial to ensure that the rains are managed to limit the negative impacts to the greatest extent possible.

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

Kenya’s Land Issues are Stunting Economic Development

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This article first appeared in my weekly column with the Business Daily on October 4, 2015

The on-going wrangle between the National Land Commission and the Ministry of Lands highlights the emotive nature of land issues, adjudication and control in the country. This dispute aside, it is important to understand how land issues in Kenya stunt the development of the country and the urgent need for the government and Kenyans to resolve land disputes.

(source: http://www.bbc.co.uk/staticarchive/f7b5a5c6a1dbfcf3aaba75067a6a83a35ec7a6c7.jpg)

One of the problems with land tenure issues in Kenya is the reality that felt ownership of tracts of land is not necessarily associated with ownership of land title deeds. Further, even if private land has established owners, it is well know that some of these tracts of land have been grabbed as has public and communal land creating outcry in local communities. This further muddies the water with regards to establishing clear proof of land ownership. How do these issues affect the economic development of the country?

Well firstly, in many parts of Kenya, land owned by individuals is usually passed down from parents to children in the traditional spirit of inheritance. Therefore, in some communities if you ask locals to whom a certain tract of land belongs, there may be local consensus on ownership. However, in many cases the owner of the land does not necessarily have the legal title deed proving and establishing him/her as land owner. Tracts of land in rural areas where most agricultural land lies and indeed where most of the land mass is located, is affected by this problem of traditional ownership of land with no legal title. This creates several problems with economic impacts. Firstly, if a rural smallholder farmer for example, doesn’t have legal title but actively farms his tract of land, he cannot use that land as collateral and use the loan to improve inputs into his farm to get better yields and thus income. As a result, the farmer tills his land, often using basic and out-dated methods of farming, unable to afford inputs thereby condemning him to low yields and the vagrancy of unpredictable weather. Further, when legal title is lacking, it is difficult for many smallholder farmers to come together, agglomerate their small parcels of land to create a larger tract of land that can be farmed more efficiently. In short the land cannot be used to its full economic potential. Further, it can be argued agricultural and food security issues in Kenya are linked to the amorphous nature of land tenure in parts of Kenya.

(source: http://blog.worldagroforestry.org/wp-content/uploads/2014/09/Farmer-in-Embu-County-Kenya-ByAke-Mamo.jpg)

Secondly, if parcels of land exist without legal owners, that land ceases to be an asset that can be effectively traded and used for commercial purposes such as industrial development. Investors may want to build a factory in a certain county but if the ownership of the land in which they are interested has contested ownership, the investors will not make that investment and move on to an area where land ownership is clear. Therefore, counties in which land wrangles are particularly virulent ought to be aware that this fact makes them a county that is less attractive for investors who need land to build structures that will be economically productive. Investors do not want to sink investment into an area only for the land into which capital has been injected to be the source of contention. So again, the lack of clear land ownership of land may impede the extent to which economically productive investments can be made.

Finally, it is a well- known fact that land issues in Kenya were the root cause of the tribal clashes in 1992, 1997, 2002 and even informed the post-election violence of 2007/8. We as Kenyans have proven ourselves willing to kill each other in the name of land. This is a shame because not only is there a loss of precious life, the resulting instability negatively impacts the economic productivity of Kenyans and also scares investors away from the country.

https://i0.wp.com/www.monitor.co.ke/wp-content/uploads/2015/04/PEV-snip.png

(source: http://www.monitor.co.ke/wp-content/uploads/2015/04/PEV-snip.png)

The confluence of these factors makes it clear that there is a need for the country to do the work and have the courage to fairly resolve the land disputes that currently plague a great deal of the country. Failing to do so is a sure way of ensuring land issues in Kenya continue to stunt the economic development of the country.

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