Month: November 2015

The expense of the SGR and related implications

Posted on

This article first appeared in my weekly column with the Business Daily on November 29, 2015.

It is now well known that the Standard Gauge Railway (SGR) is being developed under the leadership of the Kenyan government and will connect Mombasa to Malaba (with a branch line to Kisumu) onward to Kampala, Kigali (with a branch line to Kasese) and Juba (with a branch line to Pakwach). What is also well known is that Ethiopia is developing Ethiopia Rail (ER) which will link Addis Ababa to Djibouti. The importance of the SGR to Kenya is, yes, the potential dividend that will arise from bolstering infrastructure in the country; indeed the government expects the project to reduce freight costs from $0.20 per tn/km to $0.08 per tn/km. But importance also lies in the fact that the SGR is expensive. Indeed, last week Treasury made the point that the SGR has caused an upwards revision of the fiscal deficit from the initial 7.4% of GDP to 12.2%.

(source: http://i2.wp.com/nairobiwire.com/wp-content/uploads/2015/05/sgr2.jpg?resize=1121%2C682)

So is the approach towards the construction of the SGR the most cost effective possible? A comparison with the ER would be useful. As early as 2013, experts raised questions about the costing of Kenya’s SGR; Kenya is being charged $6.6 million per kilometer compared to $4.9 million per kilometre for Ethiopia’s ER. This is particularly a concern because, as experts have pointed out, there are no major rivers or lakes or big hills to justify the high cost of the SGR. In addition, parts of the ER will be a double track, not a single track as the SGR will be in its entirety. The SGR freight will have an average speed of 80KPH while the ER will go up to 120KPH; experts state that it is doubtful those speeds will be reached by the SGR because it is a single track and stoppages will be needed to allow other trains to pass. The SGR passenger train will have an average speed of 120 KPH while the ER will have an average speed of 160 KPH with future provision for 225KPH. Questions also arise because Kenya is spending more to buy its trains and rolling stock than Ethiopia. Why?

Ethiopia has also been smarter with regards to reaping human development dividends from rail construction, specifically the Light Rail Transit System (LRT). Ethiopia has been using the development of the LRT to build domestic technical capacity. Reports indicate that foreign contractors conduct training for local staff at the Institute of Technology in Addis Ababa University. Further, the Ethiopian government is sending promising undergraduates to Russia, India and China to continue their education. Indeed, the Ethiopian government is doing all it can to ensure that the all other rail network projects including ER will be carried out by Ethiopian enterprises. Are there such plans and activities going on with regards to Kenya’s SGR?

(source: http://www.hgomezgroup.com/wp-content/uploads/2015/02/techtransfer_620.jpg)

The basic sense one gets when comparing Kenya and Ethiopia is that the latter has been able to get a better deal overall and is leveraging all experience to build domestic capacity and reduce future dependence on external contractors for rail construction. Kenya on the other hand has agreed to a plan that appears to not be the most cost effective and there have been no plans announced indicating intentions by the Kenyan government to use SGR construction to build domestic capacity. I have long argued that if Kenya does not leverage all infrastructure development projects to build domestic technical capacity, Kenya will be relegated to eternal dependence on others to do the basics of building infrastructure of the country. The prudence of such a strategy is questionable. Kenya is in a position to learn from Ethiopia; pressure ought to be applied to ensure such learning happens.

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

Advertisements

India: A growing footprint in Africa

Posted on Updated on

This article first appeared in my weekly column with the Business Daily on November 22, 2015

It is widely known that China has been making significant inroads into Africa over the past two decades and a great deal of energy has gone into analyzing Sino-African economic interaction. However, another country has been making big moves yet barely any attention has gone into analyzing India’s growing footprint on the continent. Last month the Third India Africa Summit took place in New Delhi, clearly signaling India’s interest in the region.

(source: http://mahersamajworldwide.com/wp-content/uploads/2015/11/India-Africa.jpg)

Carlo Lopes of the UNECA makes an important point when he recently stated that Chinese foreign direct investment (FDI) stock is less than 1% of the country’s total global investment yet India invested as much as 16% of its outward FDI, valued at $70 billion, in Africa in 2013. Further, Africa is responsible for 26% of India’s total inward FDI stocks at $65 billion, more than Brazil, China, the Russian Federation and the USA. Analysts make the point that Indian FDI to Africa is concentrated in oil, gas and mining, and investment in the manufacturing sector is focussed on automobile and pharmaceutical firms. Most of the Indian FDI in African countries is through Greenfield investments and joint ventures. India’s growing investment in the region is seen to be motivated by a blend of factors such as socio-cultural ties particularly due to a healthy Indian Diaspora on the continent estimated at over 2 million, host country policies, regional integration agreements, bilateral investment treaties as well as GDP growth in Africa. An interesting point to note however is that India’s FDI into the continent is focused on a limited number of countries; in 2012 95 percent of India’s total FDI stock went to Mauritius alone partly due to its favourable tax treaty with India.

In terms of trade, the IMF estimates that the value of India’s exports to Africa have increased by over 100 percent from 2008 to 2013, and the value of India’s imports from Africa also grew dramatically from 2008-2013 by over 80 percent. This year Indo-African trade it is expected to be about USD 70 billion. African exports to India have been growing annually at 32.2% while Indian exports to Africa grew annually at 23.6%. Sadly in terms of trade composition, a vast majority of exports from Africa to India are raw materials such as crude oil, gold, raw cotton, and precious stones. Indeed, while India’s merchandise imports from Africa totalled $447.5 billion in 2015, oil imports accounted for $116.4 billion and gold was $34.4 billion Exports from India to Africa mainly consist of high-end consumer goods such as automobiles, pharmaceuticals, and telecom equipment. Trade between Kenya and India stood at USD 4.23 bn in 2014 and the country has been jostling with China as Kenya’s top trade partner.

(source: http://financialtribune.com/sites/default/files/field/image/06_Pilot%20launch.jpg)

India is also becoming an important lender to the continent, USD 8bn was provided in Lines of Credit (LOCs) to Africa between 2008 and 2011 and Africa constitutes 53 percent of India’s operative LOCs. The LOCs finance a range of sectors ranging from agriculture, food processing, rural electrification, IT and infrastructure.

As the Brookings Institute states, although Indo-African economic relationship is burgeoning, there is clearly much more room for growth if the country wants to be as significant as China and the USA on the continent. Indeed as China reorients itself and undergoes some difficulty, India can become a very important partner for Africa. From an African perspective, African countries should focus on diversifying their exports to India, tapping into the technological expertise in India and leveraging that for African development and being more proactive in attracting FDI from India.

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

The effect of raising US interest rates on the Kenyan economy

Posted on Updated on

This article first appeared in my weekly column with the Business Daily on November 15, 2015

There is an increasing expectation coming out of the USA that the Fed will raise interest rates in December this year. Many African economists have been keeping an eye on the Fed and with good reason as the rate raise is likely to have an effect on frontier markets. The precise effect is hard to determine definitively but there are key elements of which one should be aware.

Firstly, a rise in interest rates will make investment in the USA more attractive after the Fed having pursued a zero interest rate policy for seven years. However, as the Financial Times speculates, because a rate hike has been anticipated for so long, the response to an actual hike may be muted. From a Kenyan perspective there are two ways we could go in terms of our own interest rates to keep Kenya an attractive investment destination. Interest rates could be cut to help the economy grow more robustly and boost domestic productivity, or rates could be maintained or increased in order to deter investors from taking their money abroad.

(source: http://gainspainscapital.com/wp-content/uploads/2015/09/focus-interest-rates.jpg)

Secondly, a US rate hike will inform the value of the Kenya Shilling. As has been seen in recent times, a stronger US dollar which will now be backed by higher US interest rates, has tended to place downward pressure on the value of currencies in Africa. Bear in mind that Kenya has been battling a weak shilling for months and the currency seems to have finally reached some point of stability. An interest rate hike in the US may put all the effort put into stemming KES depreciation to waste. Indeed, the CBK should expect the KES to depreciate when the rate hike is announced and will now face a renewed challenge of stemming the KES plummeting having already used most of the monetary policy tricks at their disposal. Further, although some say that investors may not react to a rate hike, there is the real risk that because the hike will strengthen the dollar, this may attract capital away from emerging and frontier markets. In short there may be a severe contraction of US dollars from global markets, especially frontier markets. Bear in mind the emerging and frontier economies as a whole benefited from an estimated $4.5 trillion gross inflow between 2009 and 2013. The thought of that scale of funds leaving emerging and frontier markets, Kenya included, is a daunting prospect.

Thirdly, Kenya has been accruing a great deal of dollar denominated debt and the government has largely been able to do so because of the leakage effects of the very low interest rates tied to the dollar. Rate hikes may therefore present the challenge of making such debt unsustainable. What can be sure is that any future sovereign bond issues by Kenya and other countries will not be nearly as favorable, with regards to interest rates, as was the case even last year. The serendipitous combination of plenty of QE informed liquidity and low interest rates in the US and Europe from which Africa and Kenya has benefited for so long, is not likely to occur again in the near future. Kenya will have to price any debt it offers particularly competitively to attract the scale of funds raised in the recent past.

(source: http://blog.heartland.org/wp-content/uploads/2013/10/debt.jpg)

However, the bottom line is that a rate hike will be a clear signal that the US is well into recovery terrain and thus US investors will be better placed and more confident in investing in general. This particularly good news for Africa, Kenya included, given the challenges the Chinese economy has been facing in the recent past. Also bear in mind that the QE from European Central Bank may buffer Africa and Kenya for a while still as a fresh round of liquidity enters global markets from Europe this time.

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

Kenya’s Fiscal policy: Challenges and Recommendations

Posted on Updated on

This article first appeared in my weekly column with the Business Daily on November 8, 2015


Over the past few weeks Kenya’s fiscal management has been under domestic and international scrutiny particularly with regards to the Eurobond. However, what has been lacking in the conversation is a look at Kenya’s overall fiscal policy and how it has informed the articulation of the economy. There are three core anchors that can be useful when analyzing Kenyan fiscal policy: planned expenditure, fiscal deficits and revenue generation. These will allow an elucidation of the prudence of Kenyan fiscal strategy.

In terms of planned expenditure, annual fiscal budgets have been consistently increasing year on year. In 2012/13 the budget stood at KES 1,459.9 billion, in 2013/14 it was KES 1,640.9 billion, 2014/15 the budget presented was KES 1,773.3 trillion and for 2015/16 it was a massive KES 2.2 trillion. Noting these consistent increases in annual budgets are important as it puts pressure on government to increase revenue generation.

(source: https://www2.illinoisworknet.com/SYEP2014/PublishingImages/reports_color.png)

Secondly, yearly increases in planned spending have been correlated by growing fiscal deficits: 6.5 percent in 2012/13, 7.9 percent in 2013/14, 7.4 percent in 2014/15 and 8.7 percent in 2015/16. The first point to note is that Treasury has been consistently flouting its 5 percent fiscal deficit target. Secondly, as of October 2015 according to Standard and Poor’s the fiscal deficit has already exceeded what government intended and stands at a much higher estimate of 9.4 percent. Finally, these hikes in fiscal deficits are occurring in a context of decelerating GDP growth: 2012 GDP growth was 6.9 percent, 5.7 percent in 2013, 5.3 percent in 2014 and this year we’re hoping to hit 5.4 percent. This anaemic performance fuels anxiety around growing fiscal deficits. Increases in fiscal deficits buttressing increased expenditure in the context of decelerating growth puts pronounced pressure on government to ensure sufficient revenue is generated to meet these costs. How will government sustainably finance growing fiscal deficits in the context of a slowing economy?

Further, this year Treasury aimed to finance the deficit through external financing worth KES 340.5 billion and domestic financing worth KES 229.7 billion (~ 60/40 divide). Though understandable, debt heavily weighted towards foreign currency is bound to be strenuous to service because as an import economy a scarcity of FX preponderates in Kenya. However, although government stated most funds would be sourced externally, government has since signalled it will borrow heavily in domestic markets as well, partly to service the fiscal deficit one presumes. Therefore, not only are Kenyans being pushed out of domestic borrowing markets by government, there is added pressure to raise foreign currency to service the fiscal deficit portion sourced externally. Thus, the Kenyan economy will be hit both by hikes in interest rate due to aggressive domestic borrowing by government, as well as experiencing pressure in servicing foreign debt in the context of poor FX earnings (especially tourism) and a depreciating shilling.

(source: http://www.forextradeoracle.com/images/ForexTradeOracle.jpg)

Finally, although government budgets have been increasing each year revenue generation has not been growing at par. In 2012/13 KRA collected KES 800 billion, in 2013/14 KES 963.7 billion, in 2014/15 KRA collected 1.001 trillion. This year the KRA target stands at KES 1,358.0 billion, juxtapose that with the 2015/16 budget of KES 2.2 trillion. Already there are signs this year’s targets will not be met; it emerged that the Kenya Revenue Authority missed its revenue target by KES 10 billion shillings for the first quarter ending September. Ergo it can be surmised that government may experience difficulty in not only financing future ballooning budgets, but meeting the debt service obligations of both domestic and foreign denominated debt including that linked to the fiscal deficit.

In short, there is an extent to which current fiscal strategy has informed the squeeze the economy is facing currently. There is clear room for improvement and this can be done by lowering planned expenditure and controlling spending, lowering fiscal deficits and ensuring that revenue generation is more at par with (lower) planned expenditure.

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

My panel interview with NTV on the serious problems facing the Kenyan Economy, November 2, 2015

Posted on Updated on

I was part of a panel that looked at media coverage on Kenya’s economic problems on Press Pass on NTV.

The Importance of the Eurobond Mystery

Posted on Updated on

This article first appeared in my weekly column with the Business Daily on November 1, 2015

In June 2014 Kenyans were given the impression that the issuance of the USD 2.75 billion (KES 269.5 billion) ‘Eurobond’ would be of great use to the country and economy. Not only did government state that it would be used to fund infrastructure, it would also allow them to pay off onerous debt. Government linked the bond to lower domestic interest rates stating they would not borrow domestically because of liquidity offered by the bond. Then last month the government announced that they were going to borrow heavily domestically and acquired a two-year, KES 77.43 billion syndicated domestic loan. Some banks responded by raising their interest rates rubbishing the ‘low interest rate’ Eurobond promise. This is when questions around what happened to the proceeds of the bond intensified and hard questions asked.

(source: http://apolloassetmanagement.co.ke/wp-content/uploads/2014/07/euro-bonds.jpg)

The National Treasury Cabinet Secretary Henry Rotich argued that KES 196 billion from the bond went into infrastructure and another KES 53 billion deposited in a foreign account intended to pay off external debts. Yet the Controller of Budget told Parliament that an estimated KES 176 billion could not be accounted for; and although KES 53 billion had been withdrawn to ‘pay off loans’, this was done un-procedurally. Many Kenyans know most of this but what many Kenyans do not know is that the bond is costing them KES 16.4 billion in interest payments as of July 2015. Kenyans are hemorrhaging money to service a debt for which there is no clarity as to how precisely it is being used. How is this acceptable?

The mystery of where the Eurobond billions went is important for three reasons; firstly if the money is not being used as planned, will the ‘alternative use’ generate sufficient returns to service the bond particularly when it matures? The bottom line is that if the bond does not generate the economic activity required to raise revenue such that government meets its obligations, then that money is likely to come out of revenue intended for other purposes. Global financial markets are not patient development financial institutions that entertain ideas of ‘forgiving’ debt. The Eurobond must be paid and will be paid and if government has to dip into national budgets to do so, then so be it. This factor alone should cause sufficient concern in the minds of Kenyans.

(source: http://orientalreview.org/wp-content/uploads/2014/09/debt.jpg)

Secondly, given the uncertainty surrounding the Eurobond, how can it be ensured that the country will reap the economic and development dividends that apparently motivated the bond issuance in the first place? Kenya needs infrastructure; that was not a hard argument to make and perhaps informed the bond’s oversubscription. But for a government that seems to believe in the ‘multiplier effect’ of infrastructure and promised as much, this expectation is yet to be met by reality. Where is the multiplier effect? GDP growth is insipid; and what precisely is the progress on infrastructure projects? If Kenya does not execute progress on what was essentially an infrastructure catch up plan devised by government that informed the bond issuance, then any potential catalytic effects of the bond will obviously not be felt in the economy.

Finally, this Eurobond debacle is going to inform the Kenya government’s reputation globally- a reputation that has already being hammered in recent times. It was absolutely crucial that the Eurobond be handled meticulously–particularly given that it was the country’s debut sovereign bond. Meticulous management is not the sense one gets when looking at this issue. The other concern is that potential fiscal mismanagement may fall out into the rest of the economy and raise questions as to whether Kenya is a credible investment destination, period.

There is a need for clarity to be brought to the Eurobond mystery not only because doing so will make many of us sleep better, but because Kenyans are owed an explanation as to how their money, which is servicing the bond, is actually being used.

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