Month: April 2016

Questions about Kenya’s economy

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This article first appeared in my weekly column with the Business Daily on April 24, 2016

I was recently asked two questions about Kenya’s economy by a leading economic think tank active in Africa. I thought it would be useful to share the questions I was asked in order to give others a sense of the puzzles the Kenyan (and African) economy present to global research institutions. The two questions were: 1) Why is manufacturing productivity so low in Kenya? 2) Why is informality not decreasing with economic growth (in Africa)?

These are great questions and reflect some of the issues I grapple with as a Kenyan development economist. My response to the issue of manufacturing productivity in Kenya was as follows; firstly there is no single story about productivity in manufacturing in Kenya. The recently launched World Bank Country Economic Memorandum(CEM) makes the point that  levels of productivity vary greatly between sectors and within sectors, so there is no single story that has emerged yet. However, I do agree there are productivity issues in manufacturing in Kenya broadly speaking and these are driven by three core factors.

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(source: http://www.thepromota.co.uk/wp-content/uploads/2012/09/Africa-manufacturing-hub.jpg)

The first is the fact that inputs such as electricity and transport are high; but an often overlooked expensive input is the high wages in Kenya. The CEM made the point that Kenya has the highest wages among peers such as Bangladesh, Cambodia, Ghana, Burkina Faso, Tanzania, Pakistan and even India. Thus if one were to do a wage to productivity analysis in Kenya, how well would we do compared to peers? Secondly is the question of poor management. Some are of the view that management is fairly good in Kenya but I differ with this view. In the past I have been part of a team coordinating surveys on management issue in companies in Kenya. What we basically found was that while Kenyans are technically competent, we lack soft skills such as good communication skills or managing staff in a manner that makes them productive, motivated and committed to the organisation. In short, there are thousands of Kenya who show up to work but have zero motivation to give the organisation their very best; and management cannot or does not know how to change this. Finally, many Kenyans in manufacturing are employed in the informal manufacturing sector which is characterised by low productivity due to poor management skills, poor education levels and the lack of access to finance, technology and innovations. All these factors negatively inform productivity in manufacturing.

The second question was: Why is informality not decreasing with economic growth (in Africa)?

Again there are again, three core factors informing this feature. The first of which is that there are real barriers to entry into formality. First is the expense of entry; realities such as business registration and licensing are expensive and laborious processes. Secondly, formality is also linked to expensive compliance requirements such as paying (high) Kenyan wages, complying to inspections, and of course, taxation. Running a formal business is expensive and on the tax issue, informal businesses are yet to be convinced that they will benefit from formalising and entering the tax net. What benefits do they accrue in return for paying taxes? A clear case has yet to be made to them.

https://i0.wp.com/www.redpepper.org.uk/wp-content/uploads/informal.jpg (source: http://www.redpepper.org.uk/wp-content/uploads/informal.jpg)

Finally, for many Kenyans starting a small informal business is often a last resort. We all know the story of the graduate who has tried to get a job for years and has failed. As a result such a graduate opens their own small business in order to make some income, however little, to maintain themselves as they keep looking for a job. Such a person may not have the desire (or resources) to start a formal business as the business is not their true passion or career focus area. Why would such a person formalise their business?

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

Why the recalibration of the banking sector is good for Kenya

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This article first appeared in my weekly column with the Business Daily on April 17, 2016

Kenyans have been shaken by the number of bank closures over the past few months. The first was Dubai Bank in August 2015, Imperial Bank in October 2015 and more recently Chase Bank.

Kenya’s most recent story in the banking sector from a development point of view was how it expanded financial inclusion offering credit lines to a segment of the population that had previously been considered ‘unbankable’. Able to access credit from banks oriented to the low income population and SMEs, many Kenyans found themselves able to use the credit offered to improve their standards of living. However, as we are seeing, perhaps the push for financial inclusion compromised other elements required for a robust and stable banking sector from an ethics and corporate governance point of view. Did the previous push for financial inclusion lead to unintended laxity on the corporate governance element of Kenya’s banking industry?

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This question is precisely why the recalibration of the banking sector in Kenya is a positive development in terms of the determination the Central Bank has clearly communicated to ensure all banks adhere to all regulations, stipulations and high quality corporate governance principles. This ongoing correction while painful at the moment, will ensure the sector comes out more robust and with stronger structural integrity. In many ways the order of events has been serendipitous in that this period of realignment to better practices in corporate governance was preceded by a period of financial inclusion. Now, more than ever, one can see that it is truly the common Kenyan that was at risk when dubious practices by some banks were allowed to proceed unchecked. Indeed, because it is small businesses and, low and average income Kenyans who are being affected by the current banks under question, there is great moral impetus to ensure that Kenyans who scraped their savings together, are protected from any vagrancy in poor corporate governance. Thus it is crucial that the sector undergo scrutiny so that any existing laxity is corrected.

Bear in mind that Kenya is not unique in terms of the questions being targeted at the banking sector. The Global Financial Crisis (GFC) in 2007-08, from which the global economy has yet to recover, was informed by dubious practices in the global financial sector. Indeed, a Governor of the Central Bank of Bosnia and Herzegovina made the point that the GFC proved that the principle of responsible finance had not been sufficiently developed with banks and with clients and that the non-transparent and ambiguous lending practices put many customers at risk. Indeed the GFC catalysed a reanalysis of bank governance with a view to improve bank governance particularly in South East Europe (SEE).

(source: http://images.indianexpress.com/2015/01/financial-crisis-main.jpg)

Thus given the current point of development of Kenya’s economy and banking sector, the clear and much needed direction from the Governor of the Central Bank to ensure that the state of ethics and practices in corporate governance of the banking sector in Kenya are robust, is ahead of its time and should be applauded. And it is crucial that as this recalibration occurs, that depositors are protected, a fact of which the CBK seems keenly aware. Further, while the banking sector in Kenya is still viewed as largely stable, even the IFC acknowledges that shortcomings in bank corporate governance can destabilize the financial system and create systemic risks to the economy. Thus, the current dynamics may be the needed corrections required to ensure Kenya’s economic development is based on a solid foundation of a financial sector with integrity.

As senior counsel from the European Bank for Reconstruction and Development (EBRD) stated, banks are in a unique position to influence the corporate governance of their corporate borrowers and can become role models for other companies in implementing high standards and best practices. In this spirit, the EBRD organised a two day workshop aimed at improving the transparency and accountability of the SEE financial sector back in 2009. Perhaps Kenya should follow suit.

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

 

Why the Panama Papers are so important for Africa

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This article first appeared in my weekly column with the Business Daily on April 10, 2016


Last week a huge leak of confidential documents detailed how the wealthy and powerful use tax havens to hide their wealth. Eleven million documents leaked from Panamanian law firm Mossack Fonseca, were passed to German newspaper Suddeutsche Zeitung, which then shared them with the International Consortium of Investigative Journalists. One of the key elements that is shocking about the revelations is the sheer scale of the number of individuals and the volume of wealth hidden in tax havens either legally or illegally. These ‘Panama Papers’ amount to approximately 3 terabytes of data which is about 100 times larger than the 1.7 GB of data revealed by Wikileaks in 2010. As The Economist points out, the uses to which these shell companies, trusts and the like are put range from the perfectly legitimate to tax evasion to hiding what is the suspected looting of public money.

(source: http://ichef.bbci.co.uk/news/660/cpsprodpb/7F18/production/_89063523_panama_index_draft2.jpg)

Africans on the list included president’s relatives, state officials and leading business people such as Ahmad Ali al-Mirghani, former Sudanese president; Alaa Mubarak, son of former Egyptian president; John Addo Kufuor, son of Ghana’s former president; Clive Khulubuse Zuma, nephew of South African president; José Maria Botelho de Vasconcelos, Angola’s minister of petroleum; Emmanuel Ndahiro, Rwanda’s former Chief of Intelligence; Kojo Annan, son of former United Nations secretary general and, closer to home, Kalpana Rawal, Kenya’s Deputy Chief Justice.

In terms Rawal’s activities, the Mail and Guardian reports that Rawal and her husband were directors of two companies based in the British Virgin Islands, prior to her joining the nation’s Supreme Court. The family used other offshore companies to buy and sell real estate in London and nearby Surrey. Her response to this is that she has not been involved with the family businesses except for generally knowing they were involved in real estate. She says she was listed as director on two of them without her knowledge by her husband when he was told two directors were required.

There are three elements that are saddening for Africa in this debacle. The first is that Africans are not surprised that Africans are on the list; not in the very least. Africans have long known that the wealthy, especially those who loot public funds for private gain, scurry their illegitimate wealth from African jurisdictions to obscure tax havens elsewhere. Thus, although there was surprise in many Africans at the scale of activity in the Panama Papers, barely an eyelid batted when Africans appeared on the list. We already knew. The Panama Papers merely elucidate how some Africans engage in what can be arguable described as delinquent behaviour.

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(source: http://i.telegraph.co.uk/multimedia/archive/02017/taxh_2017367c.jpg)

 The second saddening element the Panama Papers highlight is that Africa continues to haemorrhage away wealth to the detriment of the continent. This is a not a new revelation; indeed the irony of ironies is that Kofi Anan, whose son is on the Panama Papers list, has been an ardent champion of stopping illicit financial flows from Africa. Figures from the UN for how much has left Africa in illicit financial flows range from between $1.2 trillion and $1.4 trillion between 1980 and 2009 which is almost equal to Africa’s current gross domestic product and about four times Africa’s external debt.

But the truly saddening element of the Panama Papers revelations is that it is not difficult to surmise that public funds constitute some, if not most, of the wealth being hidden by Africans on the list. Thus it can be inferred that some Africans stole taxpayers money then hid the money so as to avoid being taxed on the very same taxpayers money they stole. Thus Africans undergo a double loss of money that should be used for their economic and social development.

What is sure is that as the Panama Papers continue to be mined, more African names will emerge detailing the scale of tax evasion and concealment of wealth in which rich and powerful Africans engage. It will be truly interesting and frankly entertaining to see how Africans on the list explain why they’re on the list or why they should not be there. Get ready Africa.

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

Renewable energy the way to go for Africa

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This article first appeared in my weekly column with the Business Daily on April 3, 2016

As the world begins to respond to the reality of climate change, generating renewable energy has become an important component of managing the issue. Indeed, the amount of money committed to renewable energy investment totaled $286 billion last year, up 5 percent from $273 billion in 2014. Interestingly the part of the world leading the charge to renewable energy is the developing world which committed $186 billion compared to the developed world’s $130 billion. Solar power accounted for $148 billion, wind accounted for $107 billion and biomass accounted for $5 billion of investment pledges. This is not to say fossil fuels are not being invested in, but that amount stood at much smaller $130 billion. It is however important to note that this UN- backed study, excluded large hydrological power projects because of environmental concerns.

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(source: http://cdn.zmescience.com/wp-content/uploads/2016/01/windsolar.jpg)

With regards to Africa, clearly a growing population and economic progress are pushing up requirements for energy. According to International Renewable Energy Agency (IRENA) the push for renewable energy development in Africa is rooted in four core phenomena: to fuel industrial growth, catalyse power sector transformation, support lifestyle changes and for rural development. These will be sourced primarily from four renewable energy technologies: biomass, hydropower, wind and solar power. For Kenya and East Africa an additional important source is geothermal.

Efforts exist under the Africa 2030 umbrella to ensure renewable sources collectively meet 22% of Africa’s total final energy consumption by 2030. According to IRENA this would require an average of $70 billion per year of investment between 2015 and 2030 within which about $45 billion would be for generation capacity and $25 billion for transmission and distribution infrastructure. The vamping up of electricity generation by renewable sources is especially important for East Africa which has the lowest KwH per capita in Africa and the lowest percentage of individuals with access to electricity.

https://pbs.twimg.com/media/CRcR2p_XIAADTVS.png (source: http://www.irena.org/DocumentDownloads/Publications/IRENA_Africa_2030_REmap_2015_low-res.pdf)

The push for renewables has a practical component for Africa in that renewable energy creates more jobs than fossil fuels, renewable energy technologies can be deployed locally at small scales, and the costs of renewable technologies are decreasing rapidly; indeed IRENA argues that recent project deals for renewables in Africa have been among the most competitive in the world. Kenya seems to be well aware of the benefits of renewable energy as Kenya currently generates about two-thirds of its electricity from renewable sources. Further, there is aggressive investment into the sector; investment in the sector in Kenya grew from next to nothing in 2009 to $1.3 billion in 2010. Important projects include The Lake Turkana Wind Project spanning 40,000 acres which can contribute 300 MW to the country’s national grid. There are aims to expand the country’s geothermal power production capacity to 5,000 MW by 2030 with a target of 460 megawatts by 2018. The solar scene has hobbled more than the other sectors in that government has not been as involved and most development has been primarily self-initiated by companies and businesses such as Safaricom’s MKopa. However, last year the government announced a financing partnership to develop 1-gigawatt of solar power in the country.

The truth is that the rise of renewables in Kenya and Africa is positive and will help put the country’s recent finds in fossil fuels in perspective. However, the truth of the matter is that extensive fossil-fuel reserves, including recent natural gas and oil discoveries, could tempt some countries to disregard the benefits of a more balanced energy mix. This is worrying given that currently over 52 percent of energy on the continent is sourced from thermal and other non-renewable sources. But investment in renewables needs to continue to build momentum across the continent because as the world continues to shift from fossil fuels to renewables, the boon that used to be fossil fuel discoveries in Africa will likely wane and the continent, particularly those reliant on the export of fossil fuel exports, will be negatively affected. Africa stands to become one of the cleanest continents in the world with regards to energy generation. This is a possibility that should be embraced not resisted.

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