Month: June 2016

Time for Africa to change strategic partnership with Asia

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This article first appeared in my weekly column with Business Daily on June 26, 2016


Earlier this month the President of South Korea visited Kenya and numerous intentions of bilateral cooperation were articulated including a deal to establish a science and technology centre and other agreements centred on trade, investment promotion, education, sport and culture. It was a shame that industry and manufacturing did not feature very prominently during the visit as Kenya and other African countries can clearly learn from South Korea and other Asian countries on this sector.

Sadly if you look at Kenya’s trading patterns with Asian countries, it’s the continuation of an old story; Kenya exports mainly raw agricultural commodities and imports finished and manufactured goods. Our biggest trading partners are from Asia, specifically India, China and Japan.  It seems as though although Africa is waking up to the need to industrialise, practical partnerships both between governments and between businesses do not exist to catalyse industrialisation on the continent. In short, Africa should shift from calling in Asia to build roads, rails bridges and instead start to focus on partnerships to boost industry and manufacturing.

(source: http://resources.carsguide.com.au/dp/images/uploads/asian-industry-factory-w.jpg)

With China alone due to shed about 85 million jobs at the bottom end of the manufacturing sector between now and 2030, Africa has to shift from the development assistance and infrastructure focused partnerships with Asia and shift to building low end manufacturing on the continent. Yes it is true that the infrastructure base in the continent is poor, but so is the manufacturing and industry base. While infrastructure development is front and centre for Africa right now, manufacturing has not received such prominence. There ought to be a dual focus on infrastructure and industry while working on other aspects of Africa’s landscape particularly with regards to education, land reform and technology absorption and development.

Bear in mind that getting guidance and mentorship from industrialised countries is how much of Asia rose to become the manufacturing giant it is in the world today. For example industrialisation in Japan was a result of many factors but a key factor was the support it got from the USA. Japan’s industrialisation took off in during the Cold War. With the massive communist dragon called China so nearby, the USA made a deliberate effort to build ties with Japan to buffer China’s influence as well ensure capitalism took root in Japan next to a bastion of communism. As a result, some analysts argue that the USA even hollowed out some of its own manufacturing capacity and made deliberate efforts to build Japan’s industrial and manufacturing base and also opened its markets to manufactured Japanese products.  Indeed by 1953, US military procurement from Japan peaked at a level equivalent to 7% of Japan’s GNP.

Although the global context in which Africa seeks to industrialise is very different the core point remains the same; Africa must learn from others and seek to reach out to countries that have successfully industrialised to build this sector on the continent in a very practical manner.  African governments ought to more deliberately bring the issue of industry and manufacturing on the table during any negotiations with Asian countries. We all know that as wages rise in China, Chinese exports will become more expensive and this provides opportunities for manufacturing in Africa. Africa should position itself to do the manufacturing Asia no longer wants to do as their economies sophisticate.

(source: http://resources3.news.com.au/images/2014/04/20/1226890/654895-6c56fdd8-c6d8-11e3-8387-e6d61b132205.jpg)

The path Africa can take can include starting with building low end manufacturing that is not too complex and can absorb what is still largely an under-educated labour force by starting with textiles and other light manufacturing. This can then be displaced by the growth of engineering and chemical industries. I am of the view that the textile assembly that goes on in the Export Processing Zone in Kenya does not count as manufacturing since most of the components of the apparel are imported and are not building Kenya’s textile factories and industry. Thus the point is simple; Africa should call in Asia to help build industry not just infrastructure.

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

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The Implications of Brexit on Africa and Kenya

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On Friday morning the world awoke to the news that the UK had decided to leave the EU.

The same day saw currencies, stocks and bonds plunge across Africa, and a slump in oil and other commodities. From an African point of view, the immediate aftermath of Brexit has exacerbated problematic trends in international markets which have already hit African growth prospects. African currencies slipped against other currencies like the USD and Yen but of course gained against the GBP. Further, in the aftermath of Brexit, some African Eurobonds plunged with yields rising for Nigerian, Ethiopian and Rwandan Eurobonds.

If one were to trace some of the short and medium term effects of Brexit on Africa, the departure of the UK from the EU complicates African access to EU markets. Countries and businesses that were using the UK as a point of entry for their goods into the EU will have to find new partners in mainland Europe. Further, any trade deals that African countries had with EU will have to be renegotiated with the UK as a standalone entity. Although it is unlikely that the UK will effect drastic departures in terms of trade deals with African countries, the process of re-negotiation will take a period of time during which African exports to the UK will be negatively affected due to the uncertainty in the limbo period.

https://i2.wp.com/www.economywatch.com/files/imagecache/story/story/eu_no_uk_1.jpg (source: http://www.economywatch.com/files/imagecache/story/story/eu_no_uk_1.jpg)

Closer to home, Kenya’s horticultural sector, particularly cut flowers, will suffer. Flowers are one of Kenya’s top exports and the UK is a major export destination. Thus again any trade deals that Kenya had negotiated with the EU will stall with regard to the UK because of Brexit; and this may well translate into losses in the short to medium term for those firms. Another example of how Brexit will negatively inform access to EU markets for African goods is the case of Kenyan tea. If Brexit leads to the tightening of access to the EU markets for UK goods, Kenyan blended tea exports will suffer because the UK has been a major re-exporter of Kenyan tea into EU markets. UK appetite for Kenyan tea was informed by this re-export function thus with Brexit, the UK may possibly lose easy access to EU markets which may lead to a cut in the volumes of tea the country imports from Kenya.

If one looks at the effect of the weakening of the GBP, Africa will be affected. Firstly, African exports to the UK will be more expensive for UK consumers and this may dampen their appetite for African products. Further, with a weaker GBP, Kenya will become a more expensive tourist destination which will negatively affect a sector that has already been under-performing as the UK is an important source of tourists for Kenya. On the other hand, a weaker GBP will be good news for an import economy such as Kenya as imports from the UK will be cheaper.

More broadly, if Brexit triggers a UK recession, there will be a more medium to long term problems with which Africa will have to contend in a context where African growth is at its slowest for decades. Not only will there be dampened appetite for African exports thus muting trade, FDI from the UK will also be negatively hit, the latter of which is particularly bad news for Nigeria for which the UK was the largest source of FDI in 2015. Further, remittances from Africans in the UK are likely to drop if the UK economy slides into a deeper recession. In terms of development assistance, it is unlikely that a new, post-Brexit government would drastically alter UK’s commitment to spend 0.7 percent of its gross national income (GNI) on development aid, but a struggling UK economy would translate to a decline, in absolute terms, in the amount of aid Africa will receive.

https://i0.wp.com/www.travlang.com/money/uk10.jpg (source: http://www.travlang.com/money/uk10.jpg)

Another key negative effect of the UK leaving the EU is that the country has been a proponent of African interests on certain issues in the EU. For example, the UK has been a voice in the EU calling for a reduction of EU subsidies to farmers, subsidies that negatively affect African farmers by keeping the price of EU agricultural produce artificially low. With the UK leaving the EU, the interest of African farmers will no longer have a voice in the bloc. Secondly, a decision was recently made to cut EU funding to the African Union mission in Somalia (AMISOM) by 20 percent; the UK opposed this. The departure of the UK from the EU means that African countries will have to look at the EU anew and identify which countries can be pulled in as allies on key issues.

However, Brexit can be seen as good news in this context because the UK will no longer have to live with EU decisions and regulations concerning Africa with which they don’t agree. Indeed, the UK Minister to Africa said Brexit will allow the U.K. to “focus more on our bilateral relationships with Africa” allowing the country much more flexibility when interacting with Africa than was possible while working under the EU.

It will be interesting to see what the post-Brexit UK government African strategy and policy will look like. In terms of Kenyan interests, given the deep and longstanding ties the country has with the UK, aid, trade and investment are likely to continue. In fact, an analyst made the point that in all of Africa, perhaps Kenya may benefit the most from Brexit as the UK may be particularly eager to establish bilateral ties with Kenya after leaving the EU, giving Kenya exceptional leverage.

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

My thoughts on Brexit- TV Interview

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Yesterday I shared my initial thoughts on Brexit and the implications for Africa and Kenya.

This is how to get the informal economy into the tax net

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This article first appeared in my weekly column with the Business Daily on June 19, 2016


The informal economy has been a theme of mine this year and since the budget speech, even more so. The government seems to have caught on to the financial potential of tapping into this sector for revenue generation purposes, and understandably so. The informal economy is estimated to contribute to 34 to 35 percent to the country’s GDP and currently generates over 80 percent of jobs created in the country on an annual basis. My concern is that what will happen is a heavy handed reflex from government to over-regulate and intimidate informal economy players into paying taxes. I think this would be the wrong approach due to several reasons.

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(source: http://cteast.co.nz/wp-content/uploads/sites/12/2015/05/pay-income-tax-online-02.jpg)

Firstly, the Kenya Revenue Authority (KRA) has already taken a step in the right direction by introducing itax and making it easier for individuals and businesses to pay taxes. As a result, some informal economy players who found the tax process too difficult to comply with voluntarily registered and started paying taxes. Another useful initiative the KRA is doing to facilitate tax compliance is working with county governments to recruit informal economy businesses who have established business premises such as in malls or office buildings, to pay taxes. To be clear, there is a difference between facilitating compliance and intimidating people and businesses into it. Thus I think the KRA should continue to focussing on facilitating tax compliance and scaling up their efforts on sensitising the general public on how to file taxes as well the benefits of doing so; benefits such as having a paper trail of tax compliance that make it easier for small businesses to qualify for financing or become suppliers for government contracts.

Secondly, there should be a distinct effort by government to improve the efficiency, productivity and profitability of the informal economy. As it stands, informality tends to overlap with poverty and low income. Due to the fact that it is often the poorly skilled who find themselves stuck in the informal economy as the qualifications for employment in the formal economy often serve as automatic disqualifiers, informal economy players need to be supported in building their ability to manage and scale up their businesses, as well as making their businesses more profitable. Therefore, government bodies should work with county governments to seek input from informal economy players on the factors they think constrain the growth of their informal businesses. There is already a sense that training in areas such as bookkeeping, business management, and market access strategies would be valuable for this sector. Thus rather than aiming to squeeze out as much as possible from a sector that is still largely defined by poverty, government should support informal businesses to become more profitable. This would likely then make more in the informal economy willing to pay their share of taxes because as it stands, most feel they are too broke to pay taxes as they are already struggling to get by.

Finally, the government should give tax amnesties to informal businesses that register and start the journey towards tax compliance.  Government should give such business at least a three to five year tax amnesty period. The reason why this amnesty is so important is that it not only allows small businesses to develop the capacity to comply, it also provides a time period over which support to the informal businesses, such as that detailed above, can be deployed. This amnesty would also allow government to collect much needed information and data on the informal economy that can be used to better support the sector. Government could then, for example, use such data to establish realistic tax bands for small businesses.

(source: http://cdn.theglobalist.com/wordpress/wp-content/uploads/2014/10/Jua_Kali_0008-resize.jpg)

In short, the informal economy is too valuable a sector of the economy to me intimidated out of existence or pushed further underground by threats of punishment for failure to comply with tax obligations. The priority should be for the KRA to continue facilitating tax compliance as other arms of government work to support players in the sector to become more profitable. Only then can a realistic conversation about more robust tax compliance occur.

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

My Insights into Kenya Budget 2016/17

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This article first appeared in my weekly column with Business Daily on June 12, 2016


Last Wednesday the National Government announced the National Budget for 2016/17. Overall expenditure and net lending for FY 2016/17 will be KES 2,264.8 billion, about 30.6 percent of GDP. Estimated revenue collection is KES 1,295.4 billion or 19.7 percent of GDP by end of June 2016. As a result there is a financing gap of KES 691.5 billion which reduces to KES 603.2 billion if the Standard Gauge Railway (SGR) is excluded. Please note that the Treasury Cabinet Henry only gave the fiscal deficit as 6.1 percent of GDP excluding the SGR; the full fiscal deficit was not detailed in the budget speech. The deficit will be financed by net domestic borrowing of KES 225.3 billion plus what was termed ‘other domestic financing’ of KES 4.0 billion. Net external borrowing will be KES 462.3 billion.

There are several points to note with regards to the budget. Firstly, if one has been following the Kenya budget formulation process for several years it is clear that expenditure is ramping up faster that revenue generation is. As a result the fiscal deficit continues to be sizeable, trending towards consecutive expansion year after year. Once again, the fiscal deficit, even excluding the SGR is above the Government’s own preferred ceiling of 5 percent. It seems to have become habit for Government to state that fiscal deficits may be a bit high currently but will come down in the medium term. This year is no different; CS Treasury made the point that Government continues to be committed to bringing the fiscal deficit down gradually to below 4.0 percent of GDP in the medium term. From where I’m sitting it looks like reducing the fiscal deficit is a moving target that Government pushes out another year during each annual budget speech.

(source: http://cctv-africa.com/wp-content/photo-gallery/2016/05/SGR.jpg)

The core problem with the fiscal deficit is that revenue generation has been subpar and revenue targets are routinely not met. I think part of the problem is that the rapidly expanding expenditure has led Government to set aggressive and frankly unrealistic targets for the Kenya Revenue Authority. There are several structural constraints in the Kenyan economy that undermine revenue generation a key one of which is a sizeable informal economy that exists outside the formal tax net. Although the CS noted the challenges of the informal economy remaining largely untaxed and undermining revenue generation efforts, no specifics on how this will be addressed were mentioned.

Secondly, in terms of borrowing for the fiscal deficit, the bias is towards external borrowing. This is understandable as Government does not want to crowd out private sector or effect upward interest rate pressure if domestic borrowing preponderated. However, it will be interesting to see how such aggressive external borrowing will play out given the highly publicised Eurobond debacle last year where the political opposition accused Government of embezzling Eurobond proceeds. This event dented the Government’s reputation in international financial markets. It will therefore be interesting to see the types of risk premiums that will be associated with Kenya Government borrowing in pursuit of foreign credit.

(source: http://d34elvfuwuckt2.cloudfront.net/wp-content/uploads/sites/21/2015/11/eurobond-wealthcoaching-620×350.jpg)

Finally, KES 280.3 billion will be allocated to the 47 County Governments as the equitable share of revenue. While Government noted that this allocation is more than double the constitutional minimum of 15 percent of the latest audited revenues, there was no mention of the fact that Counties are having problems absorbing devolved funds, particularly in the development expenditure docket.  According to the Controller of Budget’s latest report, only 19.9 percent of development funds had been absorbed as of mid-year. This inability to spend funds as required may well translate to limiting the extent to which Devolution will deliver the development dividends it was intended to deliver. Thus while it is wonderful to see National Government’s continued commitment to deploying funds to counties, it would be useful for National Government to make suggestions on how County Governments can better absorb devolved funds.

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

 

My TV Panel Interview on the Kenya 2016/17 Budget

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Yesterday I was on Panel on Citizen TV with Tax Partner at Deloitte Nikhil Hira and CEO of the Nairobi Securities Exchange  Geoffrey Odundo discussing the Budget Kenya 2016/17 presented by CS Henry Rotich earlier in the day.

The importance of the informal economy in rural regeneration

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This article first appeared in my weekly column with the Business Daily on June 5, 2016

The informal economy has emerged as a key theme for me this year as a development economist. The informal economy can be broadly defined as economic activity that is not subject to government regulation, taxation or observation. The reality is that although there is a general acknowledgement of the informal economy, there has yet to be a targeted and coordinated analysis of the informal economy in Kenya and I suspect much of Africa. This is not due to the fact that different organisations and businesses in society do not intersect with the informal economy in the both professional and private lives, what seems to lack is a specific effort to delineate between the formal and informal economy in analytical work. Therefore, for example, a company may assess an aspect of agriculture pertinent to their work but will not, while doing the analysis, delineate between formal and informal agricultural activity. And this is no surprise as the informal economy is messy and complex. But lack of focused attention on the informal economy translates into a reality where numerous insights on the informal economy are embedded in general research and data generated for different sectors.

(source: http://www.theeastafrican.co.ke/image/view/-/1078736/medRes/129040/-/maxw/600/-/pn8pvfz/-/jua.jpg)

This lack of clarity has therefore limited the extent to which policy interventions can be designed to meet the needs of players in the informal economy who are invariably the poorer and more vulnerable members of society. In my view it is time for a greater attempt be gather data and information on the informal economy and its various sub sectors in order to better understand the features and characteristics of this economy.

This delineation is particularly crucial to unlock the potential of rural Kenya and Africa in general.  In a paper published last year, the International Institute for Environment and Development (IIED) makes the point that in Africa, the informal economy generates up to 90 per cent of employment opportunities in some countries and contributes up to 38 per cent of GDP in others. The IIED piece that specifically looks at the rural informal economy argues that the rural informal economy (economic activities performed by rural populations linked to informal trading and markets) is critical to rural livelihoods. For example, most farmers across Africa rely on informal networks to access their markets and communities diversify their income beyond farming (non-farm work) mostly in the informal sector which accounts for 40–45 per cent of the average rural household income in the region. Further, as non-farm work is associated with higher income and wealth, informal activities may offer ‘a pathway out of poverty’ in rural Africa according to some analysts.

(source: http://polosbastards.com/wp-content/uploads/2008/03/village.jpg)

But the informal economy is still viewed as a pariah because it is labelled as inefficient, unregulated, and as IIED aptly states, the informal economy is equated with illegality and thus faces strong pressure to formalise. My view is that addressing the informal economy should not be based on the assumption that formalisation is the best way forward. The reality is that entry into the formal economy is expensive and that goods and services provided in the formal economy tend to be pricier. The informal economy is a key means through which lower income groups, especially in rural areas where there is limited access to goods and services offered by formal institutions, get access to goods and services, and at a more affordable price. Of course there is warranted concern with the lack of regulation of goods and services in the informal economy and the extent to which customers in this economy are exposed to danger, but the response of government and other stakeholders should not necessarily be a push for formalisation.

Since there is a pronounced the lack of presence of formal organisations and businesses in rural Kenya and Africa in general, the informal economy is an even more important player in terms of determining the welfare of rural residents. It would therefore be prudent for actors active in rural Kenya and Africa map the features and characteristics of this economy. The first step should be the use of such data and information to design interventions that increase the productivity, efficiency and safety of activities in the rural informal economy. This may increase the income generating capacity of economic activity in rural areas and translate to great income and access to goods and services for rural populations and regenerate rural areas.

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