Month: March 2017

Changes needed in National Fiscal Policy

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This article first appeared in my weekly column in the Business Daily on March 26, 2017

This week the National Budget for FY 2017/18 will be read, and being an election year this budget may indicate how fiscal policy will be approached post-election.

There are three issues with fiscal policy as articulated over the past few years. The first is sub-par revenue generation and unrealistic revenue targets. The economy grew at about 5.9 percent in 2016, yet the tax revenue forecast was raised by 8.7 percent. By December 2016, it was reported that the Kenya Revenue Authority (KRA) failed (once again) to meet its half-year target by KES 20 billion. This is not a new event; revenue targets are routinely not met begging the question as to whether or why unrealistic targets are set; this habit has to change in the upcoming budget. Kenya needs more realistic targets in order to more effectively anticipate debt requirements for the year.

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(source: http://www.capitalfm.co.ke/business/files/2013/11/BUDGET-BRIEFCASE.jpg)

The second issue in fiscal policy is notable increases in expenditure.  Please note that according to the Budget Policy Statement 2017/18 released in November 2016, the government seeks to curb non priority expenditures and release resources for more productive purposes. The BPS states an expected overall reduction in total expenditures resulting in a decline of the fiscal deficit (inclusive of grants) from KES 702 billion to KES 546.5 billion, equivalent to 7.5 percent of GDP. This is positive in that this fiscal deficit should be lower than the 9.3 percent of GDP for 2016/17. However, two problems linger; firstly a deficit of 7.5 percent is still above the preferred fiscal deficit ceiling of 5 percent. Secondly, it is almost certain that supplementary budgets that ramp up expenditure will be tabled over the course of the fiscal year. Just last month the government proposed KES 75.3 billion of additional expenditure for various ministries and government departments. Government has the problematic habit of creating what seem to be artificially narrow fiscal deficits and borrowing requirements during budget reading, only for these to be revised upward significantly over the course of the fiscal year.

Finally, and linked to the point above, government has to rein in its debt appetite. Growing expenditure, partially attributed to a bloated devolution-related wage allowances and benefits bills has contributed to government borrowing aggressively for capital expenditure. The debt to GDP ratio currently stands at 52.7 percent, up from 44.5 percent in 2013 and above Treasury’s 45 percent threshold. To be clear, the debt to GDP ratio in itself would not be worrying if there were clear and demonstrated action to manage debt levels more aggressively. The World Bank puts the tipping point for developing countries at a 64 percent debt to GDP ratio above which debt begins to compromise economic growth. Thus while there is still wiggle room, continued debt appetite juxtaposed with (or due to) subpar revenue generation means Kenya is headed towards debt unsustainability in the near future.

It is hoped that the fiscal policy due to be read will provide detailed strategies on how revenue generated will be stimulated, expenditure cuts effected as well as the articulation of a clear and realistic debt management strategy.

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

How Africa can leverage growing insularity in Europe and the USA

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This article first appeared in my weekly column with the Business Daily on March 19, 2017

 It had been brewing for years, but was fully exposed last year when Brexit happened. It was bolstered by Donald Trump being elected as the President of the United States, growing popularity of Le Pen in France and now Geert Wilders, the Dutch right-wing politician who wanted to be Holland’s next Prime Minister. While celebrating Trump’s victory, Sarah Palin termed it a movement. What is it? The growing popularity of a specific strain of right wing politics in Europe and the United States.

Sitting in Africa there seem to be common threads that run through this ‘movement’; it’s anti-Islam and selectively anti-immigration with a specific strain of aggressive (white) nationalism. It also comes across as racist, self-involved and insular. Europe and the United States have grown weary of taking care of the world, the rhetoric argues, having sacrificed the welfare of ‘real’ Americans and Europeans at the altar of immigration, laissez faire economics (the Chinese are taking over!) and generous aid packages to under-developed (and corrupt) continents such as Africa.

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(source: http://i.f1g.fr/media/figaro/805x453_crop/2016/11/09/XVM94114d02-a65e-11e6-8482-bccab3302ba7.jpg)

Naturally right wing populism is making some in African capitals jittery. Civil Society Organisations (CSOs) heavily rely on Europe and North American organisations for financing, which, they argue, allows them to engage in activities that alleviate poverty, protect the vulnerable, and fight for human rights and good governance on the continent. Kenya was one of Africa’s top Foreign Direct Investment (FDI) destinations in 2015 with key investors coming from the USA, UK and the Netherlands. Large companies from Europe and the United States have also set up shop across the continent buoyed by the ‘Africa Rising’ narrative (now somewhat battered) and the growing African middle class. And military and security support from Europe and the USA have been important for countries such as Kenya currently trying to fight Al-Shabaab.

Just as Africa was starting to be seen as more than a basket-case of poverty and poor governance by Europe and the USA, just as the continent was beginning to be perceived as a serious and attractive destination for investment, right wing populism stepped in and changed everything. Some Africans worry aid from the US and some of Europe will drop; in fact last week State Department staffers in the USA were instructed to seek cuts in excess of 50 percent for funding UN programs. And the combination of the economic recovery of the USA coupled with right wing populism juxtaposed with slowing economic growth in Africa may relegate Africa to the periphery of investment once more. Right wing populism wants to Make America/Britain/the Netherlands/France great/ours again; and it seems continents such as Africa will be very low on the ‘to do’ list.

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(source: https://s-media-cache-ak0.pinimg.com/564x/30/c6/ef/30c6effe70e2baf6e07cdba0c87934a6.jpg)

However, there is another side to the story. Gone are the days where African economies were dominated by western metropoles. We now live in a multipolar world where countries such as China and India have become important economic partners for Africa. Research from a French research institute indicates that the share of Europe in Africa’s total trade has steadily declined from around 68 percent in 1990 to 41 percent in 2016. Asia has surpassed Europe as Africa’s biggest trading partner, accounting for around 45 percent of the continent’s total trade. And while some of Kenya’s top FDI investors were from Europe and the USA, key investors also came from India, Japan and China.

And it must be stated, frankly, that some Africans are relieved by the growing insularity in Europe and the USA; perhaps now those countries will have less impetus to meddle in African affairs and focus on their own domestic issues. Older Africans have not forgotten how the UK and USA in particular took out post-colonial African leaders such as Lumumba and Sankara and many modern Africans are not ashamed of being Africans; in fact we revel in Africa’s culture and newfound economic dynamism.

So while the growing popularity of (extreme) right wing politics may negatively affect the continent in some ways, let Africans also leverage the reality of a multipolar world. As some retreat into self-involvement and insularity, let the continent intelligently engage the many who are still seated at the table.

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

The effect of the interest cap on monetary policy

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This article first appeared in my weekly column with the Business Daily on March 12, 2017

Last year I opposed the interest rate cap before it was approved and came into effect. I opposed it because I knew it would lead to a contraction of liquidity, particularly for SMEs who are often viewed as high risk by mainstream banks. A few months later, the fears I had have become a reality. Last week this paper reported that Kenya’s private sector growth moved towards stagnation in February partly due to a decline in private sector credit. Treasury reports indicate that credit growth slowed down to the lowest level in a decade, partly due to banks becoming reluctant to lend under the rate cap regime.

As this paper reported, Treasury data indicates that lending to businesses and homes grew just 4.3 percent in the year to December, down from 20.6 percent in a similar period in 2015. The 4.3 percent credit increase is well below what the Central Bank of Kenya (CBK) says is ideal loan growth of 12 to 15 percent which is required to support economic growth and job creation

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(source: https://loanscanada.ca/wp-content/uploads/2014/10/credit-score-scam-1.png)

The irony of this situation is two-fold. Firstly, the interest cap did not expand lending, it contracted it, particularly for SMEs. Strathmore Business School indicates that most SMEs in Kenya struggle to raise capital from banks. With rate caps, refinancing of credit from financial institutions has become even more of a challenge. Secondly, even with the interest rate cap, most SMEs find current interest rates unaffordable. Credit is still too expensive.  So what did the interest cap achieve? Firstly, it has made it even more difficult for SMEs to get access to credit and secondly, it is an effort in futility as credit is still too expensive for most, even with the cap.

This is when monetary policy would usually come in to try and address the situation. In a normal scenario with no cap, a contraction in liquidity would usually lead to a drop in interest rates to encourage banks to lend. However, the CBK would not do this due to two reasons. Firstly, the ongoing drought is already placing upward pressure on inflation; the overall inflation rate for February this year was 9.04 percent, well above the ceiling of 7.5 percent. Thus even in a normal situation, the CBK would likely not drop rates as this would place further upward pressure on inflation. Secondly, this is an election year where billions enter the economy in an almost artificial manner, putting further upward pressure on inflation.

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(source: https://i0.wp.com/covered.co.ke/blog/wp-content/uploads/2017/02/sme-banking-e1479992621937-1024×857.png?fit=810%2C678&ssl=1)

However it is not business as usual, there is an interest rate cap to contend with. The interest cap has thrown monetary policy into chaos. In the current situation, the CBK cannot drop interest rates to encourage lending as this would engender further contraction in liquidity, shutting even more people and businesses out from access to credit. Lowering interest rates would make banks even more reluctant to lend. So the irony of the situation is that it appears that an increase in interest rates may encourage more lending from banks as it would raise the risk ceiling of those to whom banks are comfortable lending. Kenya is in an interesting position where increasing interest rates may actually expand lending; monetary policy has to work upside down. However, if the increase in interest rates were effected to try and address the contraction in liquidity and worked, it may then exacerbate the inflation being caused by the drought. Even in this upside down world there are reasons against raising interest rates as well as dropping them. Raising interest rates would likely expand liquidity and exacerbate inflation and dropping rates would likely engender a further contraction in liquidity.

The world is watching this experiment with interest rate capping going on in Kenya, and thus far it is making the case against interest rate caps even stronger.

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

 

 

 

Neglecting the youth hampers the development of Africa

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This article first appeared in my weekly column with the Business Daily on March 5, 2017

A few weeks ago, a local television station aired the story of a young man who is an orphan, had been admitted to some of the most prestigious learning institutions in the country but was now living the life of a pauper. Dishevelled and unkempt, he looked like he was living the life of a homeless man; yet when he spoke, his clarity of mind and intelligence were unquestionable. This week a video of African children in the Congo working in mines went viral. The two children in question were eight and eleven year old boys, working in awful and dangerous conditions, barely making income and living a life of destitution and hopelessness. Why are these stories important? They are important as they reveal the extent to Africa is mismanaging the potential and promise of young people on the continent.

The average age of an African is 19.5 years, yet the average age of an African leader is 65. Is there any wonder then, as to why Africa’s leaders seems to be chronically unable to catalyse a young labour force and apply it to the development of young people themselves, that of their countries and the continent at large? In fact, sometimes it seems youth are seen as a demographic liability, not asset.

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(source: http://africa-facts.org/wp-content/uploads/2015/01/african-kids.jpg)

In Kenya the rate of youth unemployment is dire; 80 percent of those unemployed are under the age of 35. There are several factors that contribute to this figure the first of which is poor education. The Brookings Institution points out that 62 percent of Kenyan youth aged 15-34 years have below secondary level education, 34 percent have secondary education, and only 1 percent have university education. Skills are a crucial path out of poverty; indeed education makes it more likely for Kenyans to not just to be employed, but to hold formal jobs that are more secure and provide good working conditions and decent pay. So the fact that the country is doing such a poor job in educating the youth translates to the relegation of those young people to the periphery of the promise of the country.

Secondly, even among those who are educated, most are ill-equipped to be absorbed into employment. A study by JKUAT made the point that the commercialisation of tertiary education in Kenya has led to overcrowding in the institutions due to the increase in enrolment. This ‘massification’ policy by universities is characterised by degree programmes that do not address the job market. As a result, millions of Kenyans are poorly trained and become frustrated graduates who cannot find employment. Another report released by the World Bank stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. Thus, even education itself does not guarantee employment in this country.

Thirdly, due to the aforementioned dynamics, most young people are left to fend for themselves, invariably in the informal economy. The informal economy employs 80 percent of Kenyans and yet this sector of the economy is grossly neglected. Sadly in many ways, the neglect of the informal economy is the neglect of the youth as it is only in this sector that most youth with limited resources are able to start ‘hustling’ and earn a living. The cost of formalisation from tax payments to compliance to minimum wage, means that the informal sector is the only choice, as it has the lowest barriers of entry for economic enterprise.

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(source: https://www.iied.org/files/styles/main-image/public/fishsellers_0.jpg?itok=UIA7ZDur)

The good news is that it is not too late to act, but the nature of action must be very different to ongoing activities. At the moment, most youth interventions either operate in silos with the limited creation of long lasting structures and partnerships; are funded unsustainably where programs end when donors pull out; or provide interventions that do not address the needs of the youth effectively (think Youth Fund). Youth need a combination of on-going employment opportunity; credit lines for enterprises through the deployment of blended financial vehicles (grants AND loans); skills upgrading (life, business, management, financial and technical skills) and mentorship. Only in doing this will the country, and indeed continent, leverage the demographic dividend that is the young people of Africa.

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

 

TV Interview: State of the Nation with a focus on the economy

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On Monday February 27, 2017 I was interviewed by Citizen TV on the State of Kenya’s Economy.