Month: May 2016

What does Devolution in Kenya look like economically speaking?

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This article first appeared in my weekly column with the Business Daily on May 29, 2016

When the new constitution was promulgated it was heralded as a positive for development for Kenyans as government would be brought closer to the people and local communities. The idea was that county governments domicile in counties would facilitate higher levels of transparency particularly in terms of how money allocated to county governments was spent.  Under the new constitution, there is an allocation for counties by National Government, the equitable share which is a single, unconditional block grant to carry out devolved functions. This amount is meant to increase year on year, and the Budget Policy Statement for 2016/17 proposes increasing the unconditional transfer to counties from KES 259.8 billion to 284.7 billion. Is this enough? The World Bank has stated in the past that county governments have benefitted from an allocation of one-fifth of the total national expenditure, or an equivalent of 4% of the Gross National Product which is more than was negotiated when the August 2010 constitution. However, counties are always fighting for more money for ‘development’ but let’s take a look at county level spending patterns.

The report by the Controller of Budget (COB) states that for the Financial Year (FY) 2015/16 aggregate approved county allocations which of which 55.3 per cent was allocated for recurrent expenditure 44.7 per cent for development expenditure. However, as of the half-year review of expenditure, development expenditure stood at an average 26 percent despite being allocated 44.1 percent.  Kwale had the highest use of development expenditure at 61.5 percent and Taita Taveta lowest at 0.1 percent expenditure on development. In terms of the major cities, Nairobi development expenditure stood at 20 percent, Kisumu at 21.1 percent and Mombasa at 25.6 percent. All the major cities had development expenditure below the national average and well below the allocated 44.7 percent.

https://i0.wp.com/ilakenya.org/wp-content/uploads/2015/07/Kenya-counties-map.jpg

 (source: http://ilakenya.org/wp-content/uploads/2015/07/Kenya-counties-map.jpg)

An additional challenge is that counties seem to be having trouble absorbing funds allocated. As of the half-year review, counties had an absorption rate of 31.3 per cent of the total annual County Governments’ budgets. The absorption of development funds was particularly low at 19.9 percent, a decline from an absorption rate of 21.9 per cent reported in a similar period of FY 2014/15. Thus we see a core spending pattern at county level where development expenditure is lower than was allocated in terms of percentages allocated and a very low absorption rate of development funds in particular. This is a troubling trend as it is the development docket through which new services can be developed to make access to basic services more available to the citizenry as well as stimulate more economic activity at county level.

In my view poor absorption levels are a reflection of a basic lack of capacity in county governments. Even the COB notes that some counties do not have designated administrators for public funds making the operationalization, administration and accounting for the funds difficult. If even managing public funds is challenging, clearly county governments need support in determining what development projects should be funded and the implementation thereof.

(source: https://citizentv.co.ke/wp-content/uploads/2015/07/rsz_kenyan-shillings.jpg)

It would be useful for organisations active at county level to work with county governments to conduct a skills audit at county level to see what talents are domicile at county level. This should be followed by an audit of the skills required for development projects so that the key skills requirements and gaps are clear. What do development projects need? Quantity surveyors, accountants, engineers? The audits are crucial. This can then be followed by a more structured strategy to acquire the skills required to move development projects at county level forward.  It is time for the pattern of a failure to use development funds to stop because this continued failure will translate to a general failure of devolution to generate the development dividends it was designed to create.

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

How the commodities decline is good for Africa

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This article first appeared in my weekly column with the Business Daily on May 22, 2016

The fact that the prices of commodities such as crude oil, iron ore, copper, aluminium and coffee have been in decline is not a secret. What seems to have been lost in the story however is how Africa is actually benefiting from this decline. The main story we’re hearing as Africans is that Africa is suffering from the commodities decline. The IMF makes the point that particularly hard hit are the region’s eight oil exporters (which together account for about half of the region’s GDP and include the largest producers, Nigeria and Angola) as falling export incomes emerge due to lower commodity prices. This results in sharp downward fiscal adjustments which limits government activity. The IMF goes on to say that among oil exporters, the sharp and seemingly durable decline in oil prices makes adjustment unavoidable, and while some had space to draw on buffers or borrow exist to smooth the adjustment, that space is becoming increasingly limited. This column agrees with much of this- but the positive elements of the commodity decline have not gotten nearly as much attention.

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(source:http://thumbnails-visually.netdna-ssl.com/world-commodities-map-africa_536becb7083f7_w1500.png)

To be clear, there are positive consequences to the commodity decline for Africa. So although Africa has to be aware of the difficulties this dynamic raises, the positive elements also ought to be highlighted.

The first positive result of declining commodity prices is that Africa finally seems to be truly serious about building manufacturing capacity on the continent. Once again Africa has found itself at the short end of the stick; because commodities were booming for so long, there was no pressure on Africa to domesticate value addition and build up manufacturing activity on the continent. Africa, once again, in the 21st century, found itself in the very old position of having just largely exported raw commodities during the commodities boom and is now suffering. It is almost as though Africans told themselves, ‘ let’s ride this wave while it lasts’, and the continent did not make any serious re-orientation in terms of domesticating value addition. Now that boom has ended and clearly African economic growth still seems tethered to commodity prices perhaps to a greater extent than expected. Thus, we now see increased impetus on the continent and scrutiny directed towards the continent on building up manufacturing and value addition capacity. . This is good news for Africa because the value of building up manufacturing, especially export-oriented manufacturing has long been an important story in countries pulling populations out of poverty. This is a chance for the fundamental reorientation of Africa’s economy which is long overdue.

Bear in mind that given the fact that China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030 the question becomes: where will they go? Africa finally seems to be saying ‘Africa!’. Those interested in the African economy driving development, now due to the commodities decline, are seeing manufacturing taking its rightful place in terms of the priorities of the continent.

(source:http://i2.cdn.turner.com/cnnnext/dam/assets/120604110703-marketplace-africa-manufacturing-china-00000403-story-top.jpg)

Secondly, the commodities decline is very good news for East Africa. The region is minimally exposed to the commodities debacle. Yes there are new oil deposits that have been discovered in some of East Africa, but these have not been fully exploited yet so East Africa economies continue to grow in spite of the commodities decline. Let’s look at some figures based on average growth rate of about 3.4 percent for the global economy in 2016. Africa, for the first time in years is below the global average and is expected to grow at only 2.9- 3.2 percent this year, the slowest since 2001 according to some estimates. Compare this to East Africa where Kenya grew by 5.6 percent in 2015 and preliminary estimates suggest Tanzania registered 6.9 -7 percent GDP growth in 2015, Uganda around 5 percent, Rwanda was estimated to have grown at 6.9 percent in 2015 and Ethiopia at 6.3 percent a year between 2016-20. Please bear in mind getting data for some of these countries is difficult. But the point is that these are all well above the estimated African GDP growth rate of 2.9- 3.2 percent and the global growth rate. So the global community is alive to the fact that East Africa is really a bright spot and is a space where economies seem to be relatively unaffected by the commodities decline.

The message is simple: Africa should more fully exploit what it stands to gain from the commodities decline. There is plenty of good news therein.

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

New Ideas for Africa to boost growth

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This article first appeared in my column with the Business Daily on May 15, 2016

Last week I attended an event organised by the University of Pretoria Gordon Institute of Business Science (GIBS) titled Africa Economic Outlook 2016: Strategic Thinking in Complex Times. The one day conference articulated issues facing the continent and provoked questions that I think ought to be asked. I took great interest in a presentation by GIBS Dean Professor Nicola Kleyn which addressed issues in management as I have seen numerous shortcomings in management in the region. Previous research in which I participated pointed to key gaps in management in East Africa. For example, we found that for senior management, while there was consensus there is competence in hard/technical skills such as finance, HR and operations, important management gaps exist in areas such as ethics and integrity, managing ambiguity, and soft skills.

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(source:http://novatechservices.com/wp-content/uploads/2016/02/ManagementLeadership.jpg)

Kleyn’s presentation provided ideas on how to manage effectively in complex environments such as Kenya where factors such as lack of a functioning legal system or ethnic competition make effective management difficult. She argues that six attributes can enable companies to effectively manage and thrive in complex environments; I will only address the three in this column.  The first attribute is that a spirit of enquiry must be encouraged where organisations encourage a culture of questioning their approach because without such questioning, more effective approaches cannot emerge. Embracing humility is also key, and this particularly resonated with me because in Kenya there seems to exist a ‘big man complex’ where hubris immediately accompanies one’s promotion to a position of power. Kleyn argues that, especially at top level management, a spirit of humility must persist rooted in an openness to learn from junior staff and even those in the field who may not be as technically qualified as management. Such humility again, allows innovations and insights from unexpected corners to percolate thinking in management in a constructive manner.

The third is a willingness to experiment (again and again). Again here I looked back at what my previous research on management gaps had highlighted: the general inability for managers in East Africa to manage in an environment of change. A key element of addressing this is by managers having an openness to experiment (within reason) and try new ideas until the best fit emerges; and a willingness to change the model when the environment changes again…and again.

Why is this important? Well because, management affects productivity. The World Bank acknowledges that although that there are differences in productivity on the Kenyan landscape, more effort is required to boost productivity such that economic growth is more sustainable. Effective management is a key element of making this a reality. The question for Kenya (and Africa) then becomes how thought innovations such as those elucidated above can be adopted by firms. Do we have a culture that accommodates thought disruptions that challenge current management practices?

Another presentation of interest was by Professor Lyal White from GIBS who shared the Dynamic Markets Index 2016 (DMI). The Index broadly seeks to measure competitive performance of countries through the evolution of their institutions or institutional reforms and looked at 144 countries of which 39 were African. Basically the DMI asks, do institutions in countries such as Kenya create a dynamic economy that thrives? The GIBS DMI measures looks at six pillars between 2007 and 2014; the first pillar is Open and Connected which looks at indicators such as trade policies and the movement of people. Second is Red Tape with indicators such as corruption perception. Third is Socio-political Stability with indicators such as civil liberties and political rights. Fourth is the Justice System which looks at indicators such as the time and cost of enforcing contracts and director liability. Fifth is Macroeconomic Management with indicators such as state debt burden and monetary stability. The final is Human Capital with indicators such as demographic energy and skills levels. All these pillars are weighted differently and create a score between zero (worst) and 200 (best). In the DMI Kenya scored 72.45 and was classified as an adynamic market due to factors such as terrorism, high corruption perception, political instability in 2007/08 and poor performance in the justice system; all these resonate with me.

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(source: http://www.travelstart.co.ke/blog/wp-content/uploads/2014/05/Nairobi1.jpg)

Although the DMI has shortcomings such as not factoring the informal economy into the index, having to contend with incomplete data sets and, for Kenya, not factoring in (positive) shifts due to the new constitution, it starkly highlighted country shortcomings. So the question is, how can Kenya and other African countries) consider issues raised by the DMI such as areas in which countries may have regressed?

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

My thoughts on the Kenya 2016 Economic Survey and interview panel on the same

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This article first appeared in my weekly column with the Business Daily on May 8, 2016

The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2016 which provided interesting insights on the state of the Kenyan economy. GDP growth stood at 5.6 per cent in 2015 compared to a 5.3 per cent growth in 2014. An important development indicator to note in Kenya however is that GDP per capita (a measure of average income per person in a country) has not moved very much marginally increasing to KES 91,588 in 2015 from KES 89,240.5 in 2014. This is because although the economy is growing, so is the population. Such robust population growth in which almost a million births were recorded last year, translates to a dilution of the ability of economic growth to significantly reduce poverty levels.

Inflation stood at an average of 6.6 percent, within the CBK preferred range of 5 percent +/- 2.5 percent. It appears that monetary policy action by the CBK which consisted of several actions such as increasing the Central Bank Rate (CBR) from 8.5 per cent to 10.0 per cent in June 2015, and further to 11.5 per cent in July 2015, managed inflation.  Interestingly however, despite the CBK interest rate hikes and a general feeling that credit is expensive in Kenya, domestic credit grew by 19.2 per cent and credit to the private sector expanded by 17.5 per cent in the 2015. Back to monetary policy, this was particularly important last year which saw the KES dip in value to the USD. This depreciation was due to internal and external factors and probably negatively informed growth as Kenya is an import economy and such depreciation created upward inflationary pressure. However the lower cost of Kenya’s biggest import, petroleum, ameliorated the inflation dynamic as oil prices fell to USD 52.53 per barrel, down from an average of USD 99.45 per barrel in 2014, which allowed government to spend KES 215 billion in 2015, down from KES 293 billion in 2014.

(source: http://www.familiesforsurvival.org/wp/wp-content/uploads/2011/10/kenya-pic-money.jpg)

Agriculture continued to be the strongest contributor to GDP at 30 percent followed by manufacturing at 10.3 percent. An important note about agriculture is that the report states the weather system El Nino as a positive contributor to agriculture leading good rains and an improvement in agriculture outputs. However a point of concern is that tea production fell by 10.3 percent and coffee by 16 percent, both of which are important exports and forex earners. Although both still earned a bit more than they did in 2014, it is important that any further deterioration in the performance of these commodities is stemmed. This is because of the continued poor performance in the tourism sector, another important forex earner, where tourism earnings fell 2.9 percent from KES 87.1 billion in 2014 to KES 84.6 billion in 2015. In short, the figures seem to indicate that forex revenue generation was difficult last year. Poor performance by forex earners has numerous fiscal implications such as negatively informing government’s ability to service foreign denominated debt affordably.

In terms of manufacturing, growth remained fairly constant growing a fraction from 10 percent in 2014 to 10.3 percent in 2015. This marginal increase is attributed to reduced cost of inputs such as petroleum products and electricity. However, on-going constraints such as the high cost of credit and cheap imports continue to negatively affect the sector.

Job creation grew by 5.6 percent and an on-going trend was confirmed in that the vast majority of jobs were created in the informal sector. Informal sector employment rose by 6.0 per cent to 12.6 million persons, with a share of 82.8 per cent of total persons engaged in employment. Clearly the informal sector continues to grow and be an important job creator for Kenyans. This should provide impetus for efforts to be directed at this sector to make it more productive in a manner that alleviates poverty.

(source: http://www.businessdailyafrica.com/image/view/-/2765356/medRes/770595/-/maxw/600/-/s8sitd/-/jua+kali.jpg)

Overall, efforts need to continue to increase productivity and outputs in agriculture and manufacturing (particularly the latter), the poor performance of forex earners ought to be analysed and addressed, and the informal sector has to feature front and centre in terms of efforts to improve the performance of private sector.

Below is an interview panel in which I participated on Citizen TV last week commenting on the Economic Survey 2016:

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

 

Manufacturing in Africa is growing faster than assumed

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This article first appeared in my weekly column with the Business Daily on May 1, 2016


Last week the Overseas Development Institute (ODI) published an interesting paper on export-based manufacturing potential in Sub-Saharan Africa (SSA). The report states that contrary to the common view, production, employment, trade and foreign direct investment in the manufacturing sectors has actually increased over the past decade in SSA. Between 2005 and 2014, manufacturing production more than doubled from $73 billion to $157 billion, growing 3.5% annually in real terms; some are higher with Uganda’s manufacturing growing by 5% over 2010-2014, Zambia’s by 6% over 2008-2012; and Tanzania’s by more than 7% in the last decade. Further, SSA countries are increasingly exporting manufactures to each other (20% of total trade in 2005, 34% in 2014), and a great deal of FDI into manufacturing is among and between African countries.

The report states that there are exceptional manufacturing opportunities in garments and textiles, agro-processing and horticulture, automobiles and consumer goods. However, the share of manufacturing in total employment fell from 10% in 1991 to 8.5% in 2013. This is important to note because although manufacturing is growing, the employment creation ability of the sector seems more muted than it used to be. Perhaps factors such as the growing role of technology in manufacturing is important and may reflect the gradual technological deepening in African manufacturing exports over the past decade.

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(source: http://www.fashionatingworld.com/images/Textile-industry-Africa.jpg)

The report is very sober in noting the reality that Africa’s (all Africa, not just SSA) share in total world manufacturing exports remains less than 1%, and this has fallen marginally since 2010. Yet the good news is that between 2005 and 2014 exports from Africa as a whole (not just SSA) grew at an average annual rate of 10% or higher in the product groups analysed.

In terms of insights on Kenya, Kenya’s share of manufacturing exports is higher than that of Ethiopia and Rwanda. Further, the intra-African trade share in Kenya was high at 67.5 percent in 2013. But, as the report notes, this figure ought to be considered in the reality that the coastal countries with large ports, such as Kenya, facilitate import and export trade in the region pushing trade numbers up. Top manufacture products from Kenya include apparel, clothing and accessories; perfume, cosmetics and cleansers; iron and steel, and inorganic chemicals. However, compared to the peers in the report, Kenya has a lower share of domestic value-added (DVA)  content of gross exports as a share of total exported value added with DVA standing at a lower than average 62 percent. The most promising sectors in manufacturing in Kenya detailed in the report, in terms of revealed comparative advantage, include automatic typewriters and word-processing machines, self-adhesive paper and paperboard, hair-nets, safety pins of iron or steel, carbonates, flat-rolled products of iron or non-alloy steel, and leather.

As ODI’s Dirk Willem te Velde states, industrial development is crucial for human development and leads to wealth creation, economy-wide productivity change, greater incomes, significant job creation and resilience throughout the economy. As a development economist, there are two keen points of interest for me in terms of informally assessing the development potential of manufacturing. First, is the extent to which manufacturing can absorb low skilled labour given that Kenya’s population’s average years of schooling is 6.5 years. The second issue is the employment creation potential of manufacturing. For too long Africa has been seen to support the jobless growth phenomena where the economy is growing but formal job creation is lacklustre.

(source: http://www.greenconduct.com/wp-content/uploads/2013/07/jobless.jpg)

The report provides some insight on these issues by looking at Tanzania. The highest low-skilled employment potential in Tanzania is in agricultural products; this good news given the importance of agriculture to countries such as Kenya and Tanzania. In terms of employment potential, for Tanzania, agriculture comes out on top again. Agricultural products such as high-value vegetables and fruits, processed grains, processed meat, wood products and leather have high employment potential. Thus, the good news is that it is possible for agriculture, a dominant player in African economies, to be best placed to absorb low skilled labour and have high employment potential. This should provide impetus for Kenya to do a similar type of analysis and closely examine the important role agro-processing can have in reaping development dividends for the country. But bear in mind that the issues of high wages is an overall constraint for the sector. Labour costs in SSA are generally higher (when measured relative to GDP per capita) than in low-and middle-income comparator countries in Asia and Latin America.

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