Month: February 2017
On Sunday February 26, 2017 I was part of a panel that was interviewed by KTN on the economic issues that ought to be addressed by political aspirants.
This article first appeared in my weekly column in the Business Daily on February 26, 2017
Last week I had a chance to attend and speak at the Africa Energy Indaba in South Africa. Several themes emerged during the conference that spoke to the need for and potential of the development of energy infrastructure on the continent, as well as the constraints that hold energy development back.
The first was the issue of energy inter-dependence versus energy sovereignty. Should nations seek to be self-sufficient with regards to energy production or should nations collaborate and pool energy resource to service populations across borders? The idea of energy sovereignty is an important part of national security particularly in countries such as Kenya with porous borders and the threat of terrorism looming. Energy sovereignty allows the country to secure all generators of energy for the country and control access in a manner that interdependence would not allow. If Kenya agrees to rely on neighbours for a significant portion of the electricity servicing the country, it has limited room for recourse should power stations be compromised in neighbouring jurisdictions. At the same time, there is a case for inter-dependence and the creation regional sources of energy where countries support each other as needed. For example, Kenya is current facing a crisis in the energy sector, specifically electricity, due to the drought that has led to insufficient power generation from hydro sources. Had Kenya been in a substantive agreement with neighbours, the country would be able to address the crisis in hydro power and draw energy from regional sources.
Another theme of the conference was approaching energy infrastructure development from a regional perspective. This regional approach to energy infrastructure development seems to already be happening in parts of the continent, particularly Southern Africa. However, formal regional cooperation can only be effected through deliberate planning at the regional level. Regional energy planning has to be methodical and cannot be merely an amalgam of national energy plans of member countries; Africa has found this to be difficult. Another factor constraining regional energy development is the reality that although regional energy plans can be cheaper and more sensible in the long term, getting political buy-in is difficult. Regional energy projects can take years to deliver concrete benefits to member populations; however the politicians leading the creation of such initiatives exist in the bubble of 5-year political cycles. So how can one expect politicians to commit to plans the fruits of which will likely emerge after their tenure? Thus the question then becomes: How can Africa create stable regional bodies that lead and ensure continuity in regional energy development regardless of the politicians in power?
The final theme of the conference was a familiar one: the battle between renewable energy (wind, solar, geothermal and hydro), and non-renewable energy (diesel, coal and nuclear). Both have advantages and disadvantages. The disadvantages of non-renewable sources are that they are pollutants both in extraction and consumption, are finite and some are very expensive. However, they deliver a solid and stable baseload on which other energy sources can build, and technology is making them cleaner and safer. It is not a secret that renewable energy sources have gained popularity in recent times as climate change and global warming have become issues of growing concern. Renewable energy has the advantage of being clean, infinite, easily deployed off-grid in remote areas, and some are becoming affordable. However, the challenge with renewable energy is that it tends to be intermittent and cannot truly provide a baseload. The main renewable that can generate baseload is hydro, but even that is not reliable as Kenya is witnessing during the ongoing drought. Thus what is Africa’s ideal energy mix?
The concluding position was that each country has to assess its domestic energy sources and create energy development strategies based on their own assets and eventually link these to regional energy assets and development plans.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in the Business Daily on February 12, 2017
The election year in Kenya is contextualised in two conflicting realities: on one hand the country is among those growing the fastest in Africa and the world and is successfully attracting mega investment. On the other hand, companies have shut down or left the country, poverty and unemployment levels remain high and cost of living continues to rise. How do we reconcile these two conflicting realities?
The first is to acknowledge that the economy is growing; by 6.2 percent in Q2 and 5.7 percent in Q3 of last year. Juxtapose this with an African GDP growth rate of about 1.4 percent and a global growth rate of about 3.4 percent in 2016. Analysts point to several sources for this growth; agriculture, forestry and fishing; transportation and storage; real estate; wholesale and retail trade as well as mining and quarrying. Kenya was not only buffered from the decline of commodities, Kenya saved nearly KES 50 billion in the first half of 2016 alone due to low global petroleum prices. Further, the Kenya Shilling remained steady with regards to major currencies, standing at around KES 100 to the US Dollar. This is important for Kenya which is an import economy; currency depreciation places upward pressure on inflation. With regards to inflation, the country remained within the Central Bank of Kenya’s (CBK) inflation target range of 5 plus or minus 2.5 percentage points; annual average inflation dropped from 6.5 percent in November to 6.3 percent in December, the lowest reading since November 2015. In addition, the country made progress on the Ease of Doing Business Index. Kenya ranked 92nd up from 113 in 2015; this is the first time in seven years Kenya has ranked among the top 100.
Further, Kenya’s profile as an attractive investment destination grew in 2016. FDI Markets ranked Nairobi as Africa’s top foreign direct investment destination with inflows surging by 37 percent in 2015. Indeed, reports indicate that Kenya recorded the fastest rise in FDI in Africa and the Middle East. The FDI intelligence website indicates that a total of 84 separate projects came into Kenya in real estate, renewable and geothermal energy as well as roads and railways worth KES 102 billion, all of which provided new jobs for thousands of Kenyans. Additionally Peugot announced a contract to assemble vehicles in the country joining Volkswagen which opened a plant last year, Wrigley invested KES 5.8 billion in a plant in Thika and a contract worth KES 18.74 billion was signed with the French government to build a dam.
However, the reality elucidated above seems theoretical in the minds of millions of Kenyans, most of whom are not feeling the positive impact of all these rosy statistics. Media reports indicate that that thousands jobs were lost last year due to company restructuring or company shut down altogether. 600 jobs were lost when Sameer Africa announced that it would shut down its factory. Flourspar Mining Company also shut down, leading to a loss of between 700-2000 direct and indirect jobs. Oil and gas logistics firm Atlas Development also wound up operations and the Nation Media group shut down three of its radio stations and one television channel. But perhaps it is in the banking sector where job losses were most pronounced. This paper reported that more than six banks announced retrenchment plans in 2016: Equity Bank released 400 employees; Ecobank announced it would release an undisclosed number of employees following a decision to close 9 out of its 29 outlets in Kenya; Sidian Bank, formerly known as K-Rep, made plans to release 108 employees, and the local unit of Standard Chartered announced plans to lay off about 600 workers and move operations to India.
Why is this happening? How can economic growth be juxtaposed with massive lay-offs and economic hardship? There are several factors at play here. With regards to the employment cuts in the banking sector, these are linked to two factors, the adoption of technology and the interest rate cap. Technology adoption has translated to the reality that millions of Kenyans no longer have to visit banks to access financial services as they can make financial transactions digitally, transactions that range from money withdrawals and transfers, to loan applications and disbursement, and the payment of bills. This automation has led to the attrition of jobs.
Secondly, the interest rate cap has placed pressure on the profit margins of banks leading to job forfeiture. The interest rate cap effected by the government stipulates that banks cannot charge interest rates above four percentage points of the Central Bank Rate (CBR). Interest rate spreads have several functions for banks, of which perhaps the most important is insulating banks from bad borrowers. There is an asymmetry of credit information in Kenya due to the fact that the creditworthiness of most Kenyans cannot be established. As a result, when banks make loans to Kenyans, they often do not know if the borrower will be a good or bad one. Thus to insulate themselves from the risk of lending to bad borrowers, interest rates are raised in order to ensure that the bank recovers as much money from the borrower in as short a time as possible. In removing this provision, the interest rate cap is essentially forcing banks to lend money to both good and bad borrowers at the same rate. This in turn threatens profit margins as there is a real risk that the bank now has no buffer against bad borrowers. As a result, some banks have responded to the interest rate cap by shedding jobs to cut down operating costs and safeguard profits.
However, the interest rate cap is having a more insidious effect on the economy. A report by the IMF released last month states that the interest rate controls introduced in Kenya could reduce growth by around 2 percentage points each year in 2017 and 2018. The IMF also expects a slowdown in the growth of private sector credit linked to the cap. Additionally, the growth of the economy has been revised downwards due to the cap. What does this mean for the average Kenyan? The interest rate cap means that SMEs and individuals who used to get loans, albeit at higher rates, are likely to get no credit at all. Banks will simply not lend to individuals and businesses whom they think cannot service the debt credibly at that capped ceiling. Sadly it is the most vulnerable who will be disqualified first as these are seen as high risk and high cost borrowers. As they are shut out of credit SMEs cannot implement growth plans and are unable to create jobs and wealth. The contraction in liquidity engendered by the cap may also mean there will be less money moving in the economy; Kenyans will feel that there is less money around and feel more broke as they cannot get loans to grow their business or meet personal costs.
However, one of the biggest factors behind why Kenyans don’t feel the rosy statistics is because most Kenyans operate in the informal economy whose performance is generally not captured in official figures. GDP growth and Ease of Doing Business data do not capture the reality of dynamics in the informal economy where over 80 percent of employed Kenyans earn a living. Therefore, one cannot extrapolate positive overall statistics as reflective of performance of the informal economy. Perhaps the incongruence Kenyans feel stem from the fact that the economy from which millions earn a living is largely ignored. The hardship and challenges of Kenyans living and working in the informal economy continues to be neglected and thus policies and action that could help most Kenyans are never developed or implemented. Until the gross negligence of the informal economy is addressed, one can expect the average Kenya to feel a disconnect between economic growth and their lived reality in the informal economy.
An additional factor leading to the disconnect between economic growth and the lived reality of most Kenyans, is that the country seems to be in a ‘jobless growth’ rut where GDP growth doesn’t lead to formal job creation. This is partly because Kenya’s economic growth is services driven, and services produces far less jobs than manufacturing. Until the manufacturing sector is given the attention it requires such that economy is driven by export-led manufacturing, the ‘jobless growth’ challenge will continue. Bear in mind that manufacturing in this country is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption. Kenya is currently deindustrialising as the manufacturing sector grows at a slower rate the economy. The manufacturing sector grew 3.6 percent in the Q1 and at 1.9 percent in Q3 of 2016. Compare this with a GDP growth rate of 6.2 percent in Q2 and 5.7 percent in Q3 of 2016; this means the share of manufacturing in GDP is shrinking. This should be of concern because, as analysts point out, industrial development is crucial for wealth and job creation. Exacerbating the already slow growth of the sector this year are the drought and cheap imports. As the Kenya Association of Manufacturers points out, the drought is having an impact on raw materials in sectors that rely on agricultural products. The drought will also lead to a higher cost of goods and services for Kenyan as electricity tariffs are adjusted upwards. The manufacturing sector is also threatened by the fact that the country has allowed the entry of cheap goods, particularly from Asia, to flood the market; goods that benefit from protection and subsidies in their home economies which is not reflected here. These constrain the growth of the sector in Kenya.
Finally, financial mismanagement at both national and county levels is compromising growth. The top allegations of the financial mismanagement of public funds according to media reports include the laptop tendering debacle, NYS scandal, Ministry of Health and the GDC tendering scandal. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. Thus the economic stimulus that ought to be garnered from public never happens because projects are either under-financed or not financed at all as public officials siphon money away from them. Further, business routinely complain that bribes have become a basic expectation of county officials around the country. A report released by the Auditor General last month revealed that Kenyans are asked to pay up to KES 11,611 by county officials; Mombasa County officials top the list of bribe-seekers followed by Embu, Isiolo and Vihiga. As long as this continues, jobs and wealth that government investment and financing could have created will not materialise.
So what should Kenyans demand from those vying for power in this year’s general election? The first and foremost is ending financial mismanagement where even opposition is culpable as counties under opposition engage in corruption as well. Kenyans must demand a clear plan that will take serious steps to make financial structures more robust and punish those engaged in the financial mismanagement of public funds. Secondly, Kenyans should push for the government to provide a detailed analysis on the impact the interest rate cap is having on Kenyans and the economy. If the analysis elucidated herein is anything to go by, Kenyans should also seek the reversal of the interest rate cap as soon as possible. Thirdly, Kenyans ought to demand the development of a policy aimed at supporting and developing the informal economy at both national and county level. The gross neglect of this sector must end given that it is in the informal economy where most Kenyans earn a living and are employed. Finally, Kenyans should push for a detailed plan on industrialisation for the country. While the Ministry of Industrialisation has developed the Kenya Industrial Transformation Programme, a detailed work plan and timeline of deliverables ought to be developed and shared so that Kenyans can reap the dividends that green industrialisation can create.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on February 19, 2017
Over the past few months we have seen a severe drought ravage our country. The loss of life and livelihood for so many Kenyans is truly devastating. But what we must realise is that the consequences of the drought impacts the lives of the populations in the domicile counties as well as the rest of us. The reality of the matter is that the drought is not only affecting the lives of our fellow Kenyans, it is also affecting monetary policy.
The Central Bank of Kenya (CBK) is in a tight fix with regards to the ramifications of the current drought; there is pressure to increase the Central Bank Rate (CBR). We have a serious drought on our hands; not only will it increase the cost of food, it will increase the cost of electricity. As the drought bites, food will be more scarce and the demand for food will outstrip the supply thereby placing upward pressure on food prices. Additionally, as a significant part of our electricity grid is powered by hydroelectricity, the lack of rain means that the dams do not have a sufficient amount of water to run effectively; as a result the country will have to switch to more expensive sources of power such as thermal power that will drive up the cost of electricity. These factors will drive inflation upwards and will force Kenyans to pay more for basic goods and services. On top of this is the increase in the cost of fuel. So the pressure here is to increase interest rates and the CBR and limit money supply to control inflation. Yet in doing so, the CBK will make money even more expensive.
At the same time, we are witnessing the effects of the interest rate cap; liquidity is tightening. Kenyans are finding that they no longer have access to the loans they used to qualify for. Small and medium businesses are seeing that they no longer have access to the credit lines to which they had access to in the past. Kenyans can no longer get that loan to boost their business or pay for emergency medical expenses because banks have become very risk averse. In a country with a poor tracking system with regards to credit worthiness, banks cannot differentiate between good and bad borrowers. As a result they seem to prefer to just limit lending altogether and restrict the amount of credit they are giving out to individuals and businesses. So what does this mean for the average Kenyan? Well it means that they have less money; and when you couple this with the cost of food, energy and transport increasing, Kenyans are feeling increasingly broke. Kenyans will have to pay more for access to the same quantity of food, energy and transport that they used to access in the past. In short, life is becoming more expensive. But ironically, the best way to address the effect of the interest rate cap would be to increase interest rates to a space where banks feel they can lend comfortably. We are in an interesting space where increasing interest rates may expand liquidity as more people would qualify for credit.
So there are several sources pointing for the need to increase interest rates. However, in increasing interest rates, monetary policy by the CBK will make money expensive for Kenyans. In increasing rates to mitigate the drought and address the effects of the interest cap, the government would be doing the opposite of what the interest cap was created to do; give Kenyans access to cheaper loans.
Thus monetary policy is in a tight fix; there is a need to increase the interest rate but in doing so the CBK would engender an increase in the price of credit. It seems the CBK must ride off this season of contradictions and see when a space will open up for effecting monetary policy changes.
Anzetse Were is a development economist; firstname.lastname@example.org
Yesterday I was interviewed by Citizen TV on the state of the Kenyan economy.
I joined Eric Olander and Cobus van Staden on the China in Africa Podcast to discuss my recent column on how Africa is bracing for a Trump-inspired shift towards to China in response to the new U.S. president’s apparent determination to shake up the international order.
This article first appeared in my weekly column in the Business Daily on February 12, 2017
The Gini Coefficient (GC) measures income inequality where a value of 0 represents absolute equality and 100 absolute inequality. Countries with high GCs have a very wide gap between the richest and poorest while those with low GCs are more income equal. Countries with the lowest GC and thus are the most equal are Norway, Australia and Switzerland; the most unequal are Niger, Congo and the Central African Republic. As you can imagine Africa performs very poorly with regards to income inequality; the least unequal is Seychelles which is 71st. Kenya is 147th out of 187 countries assessed, with a score of 47.7. While the GC is not a perfect measure, it does have an indicative quality that helps countries get a sense of where they stand with regards to the levels of income inequality when compared to others.
There is a link between informality and inequality; a study by the University of Bath (UoB) found that high degree of inequality leads to a bigger informal sector. This is not a surprise for those who live in Africa where income inequality prohibits millions of Africans from entering the formal market or accumulating wealth due to a number of variables. Firstly, most informal workers are poor and most of the working poor are informally employed. Most informal workers are without secure income, employments benefits and social protection. This is because, as the UoB study argues, the activities of informal firms are often hidden from public scrutiny and not subject to labour standards such as minimum wages, decent and non-hazardous working conditions. Workers in the informal sector are vulnerable as they are paid less than formal workers and do not have benefits such as health insurance or even workplace insurance in the event of an debilitating accident at work.
Secondly, the informally employed tend to have lower education and rates of literacy and tend to have lower wages. According to the ILO, wages are on average 44 percent lower in the informal sector. This explains why informality often overlaps with poverty. Additionally informal firms usually do not have the business and financial management skills, or sales and marketing skills to drive the performance and management of their businesses; as a result they tend to be chronically poorly managed. Thirdly, informal firms often are denied access to formal credit lines and thus cannot improve or expand. These factors link informality to poverty as millions do not have the skills to improve business performance and are unable to access credit lines that could do the same; thus they are stuck in a rut of poverty and informality.
An additional means through which informality and inequality are related is linked to the fact that because those who work in informal sector tend to be the poorer segment of the population, they often cannot afford access to goods and services via formal channels. The most obvious means through which this is demonstrated is with regards to housing and shelter. Informal workers often work and live in informal structures of very poor quality. They live and work in structures that pose a risk to their welfare. With regards to education, if children are not absorbed into the public education system, they often attend informal schools with poor facilities and where teachers may not even be formally trained. The same applies to access to health services; while there are some good clinics often run by religious groups or non-profits in areas of high housing and business informality, millions of low income people access healthcare through informal channels such as unregistered clinics and pharmacies. This exposes them to counterfeit drugs and unlicensed health care workers.
Given that income inequality and informality are related, it is important that the continent begins take the informal sector seriously and provide structures that support it. Interventions should not only aim to improve the quality of goods and services deployed through informal channels, informal businesses ought to be provided with the technical and financial support they need to truly graduate out of poverty. In supporting the informal sector, Africa will better bridge the gap between rich and poor.
Anzetse Were is a development economist, email@example.com