Month: July 2017

Massive potential for the Sports Economy in Kenya

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This article first appeared in my weekly column with the Business Daily on July 30, 2017

A few weeks ago, over 50,000 Kenyans attended the IAAF under 18 World Championship, the largest crowd in the event’s history. Kenyans were there to not only cheer on Kenyan athletes but also attend an international sports event in the spirit of global athletics. What the event made clear is that if a sports event is well organised, well publicised and in the right facility, Kenyans will cram themselves in to get a piece of the action.

The championship has raised broader questions on the Sports Economy in Kenya. Why isn’t sports a bigger revenue generator for the country and why aren’t local events as well attended as the Championship was in Kasarani?

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(source: http://www.athleticskenya.or.ke/wp-content/uploads/2014/12/WYC_MESSAGE111.jpg)

The Sports Economy can be defined as all economic activities which require sport as an input, i.e. all goods and services which are related to a sport activity. These include sport clubs, public sport venues, sport event organisers, sports equipment sales etc. However, the multiplier effects of the sports economy are significant, positively informing activity in the sports education and training sector, media coverage and even the hospitality industry.

Data from other countries indicates how large this sector the economy can be; a 2012 report by the EU found that as of 2005, value added by the sports-related sector was up to 173.86 billion Euros and the direct effects of sport, combined with its multiplier effects, added up to 294.36bn Euros in the EU. In the UK, in 2010 the sports sector generated GBP 20.3 for the economy. In the USA as of 2013 the sports industry as a whole is said to generate about USD 14.3 billion in earnings a year.

Given that Kenya is a sports powerhouse, excelling in athletics and even rugby, why isn’t the sports sector a more important player in the country? There are several reasons behind this. As the Sports and Development Organisation (SDO) points out, research shows that investment into sport in developing countries is much less than in developed countries as sport development is usually not a top priority in the national budget or in the education system of most developing countries. As a result a vicious cycle emerges where underdevelopment of and under-investment in sport decreases the potential for athletes to build their talent and the ability of the sector to grow. SDO also highlights the ‘muscle drain’ issue where athletes from developing countries supply industrialised countries’ markets with talent.

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(source: https://www.athletics-africa.com/s/wp-content/uploads/2015/09/davidrudisha-fergusonrotich-800mfinal2-beijing2015-800×600.jpg)

To be fair, in Kenya there have been effort to develop the sports sector through local marathons and the emergence of international training facilities for long distance runners. However, this is not enough, more effort needs to be made to not only monetise the sector but also generate a figure of the amount needed as investment into the sector to make it a more effective economic player. More efforts also needs to be done to study the sports economy ecosystem: What events are popular with Kenyans? How much are Kenyans willing to pay for a sports event? What sorts of facilities are required to attract Kenyans to sports events? In beginning to unpack these issues, Kenya stands to develop an entire segment of the economy that has thus far languished in neglect.

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

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Industrialisation in Kenya: What do political party manifestos say?

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This article first appeared in The East African on July 24, 2017

 

Further development of manufacturing can play a central role in driving economic transformation and job creation in Kenya. There is now a window of opportunity for Kenya (and other East African countries) to capitalise on positive underlying factors in the global economy – including rising wages in Asia, the rebalancing underway in China, and strong regional growth in Africa – and significantly expand its capabilities and global presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years.

But the recent performance of the Kenyan manufacturing sector has been weak. The share of manufacturing in Kenya’s gross domestic product (GDP) was only 9.2 percent in 2016 (well below average for a country with Kenya’s level of income) and this share has been declining in recent years. Several decades ago, Kenya had a relatively complex and substantial industrial sector by regional standards, but its East African neighbours have been catching up in recent years.

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(source: http://www.industrialization.go.ke/images/kenya_manufacturing.jpg)

Decisive and comprehensive action is required in order to reverse the decline, double manufacturing production and employment, and increase the share of manufacturing to 15 percent of GDP within the next five years. With this in mind, the Overseas Development Institute (ODI) and Kenya Association of Manufacturers (KAM) developed a 10-point policy plan to transform Kenyan manufacturing and create jobs. These 10 points, based on close co-operation amongst a range of stakeholders, aim to inform pre-election debates and can also be used by the new government to implement a more focused and effective industrialisation strategy.

There has been an analysis of the manifestos of the three main political parties to determine the extent to which they support manufacturing in Kenya and the region. The manifestos of Jubilee, the National Super Alliance (NASA) and the Third Way Alliance were launched at the end of June 2017. All three parties emphasise the industrial agenda as central to Kenya’s economic transformation in general terms, which is encouraging, with NASA emphasising innovative initiatives and especially the small and medium enterprise (SME) and informal sector, and Jubilee and the Third Way Alliance being more specific in their recommendations.

There are a range of notable similarities with the 10 policy priorities in the KAM-ODI booklet. Firstly, all three parties prioritise addressing either general or specific aspects of the enabling environment. The Third Way Alliance commits to addressing counterfeit goods, one of the KAM-ODI action points. Secondly, all three parties want to enforce a fiscal regime that is predictable and fair, a key action point among the ten policy priorities, and emphasise fair taxation in particular. Jubilee further discusses the action point on devolution. The Jubilee manifesto discusses the KAM-ODI action point on land banks and NASA and the Third Way Alliance discuss industrial parks, which need land. The Third Way Alliance pledges to work with county governments to set aside land for industrial parks, offering a practical way to implement the KAM-ODI action point on securing land for SEZs and industrial parks.

The feasibility of the creation land banks and setting aside land for industry will be linked to issues of acrimony over land title and cost of relocating populations on said pieces of land. For example, an SEZ was due to be set up in the Western part of the country but had to be scrapped as an agreement could not be reached on what land could be used due to claims of title on the piece of land. Thus all parties will have to undergo a thorough land audit in the areas the government intends to develop industrial parks and SEZs and begin with areas where there is clear land title that is not contested.

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(source: https://www.newsecuritybeat.org/wp-content/uploads/2012/07/kenya1.jpg)

In terms of energy, NASA discusses the need for an energy policy. Jubilee highlights the need for lower electricity tariffs for industrial usage and the Third Way Alliance calls for liberalisation of the energy sector and revisions to electricity billing and pricing to reduce the cost of electricity for key manufacturing sectors. Both NASA and Jubilee highlight the need for investment in electricity infrastructure. Jubilee also emphasises green energy and, in a similar vein, NASA and the Third Way Alliance focus on ramping up clean and renewable power generation.

What most of the manifestos are not clear on is how they will reduce the cost of energy in the country. For example, Kenya needs a reduction of five cents per kilowatt hour would bring the cost down to that in Tanzania. It is only the Third Way Alliance manifesto that states they will tackle the cost of energy issues by liberalising the energy sector and revising electricity billing and pricing. However, an additional problem with energy in Kenya is power outages; Kenya has more power outages than Uganda, Rwanda and Ethiopia. None of the manifestos are not clear on how this will be addressed. All three manifestos are vague on the type of reforms and investments needed to address inefficiencies and incentivise investment in power transmission and distribution.

All three parties suggest the establishment of industrial funds or development banks specific for industrialisation, such as an export-import bank (Jubilee and the Third Way Alliance) or a co-operative fund for agro-processing (NASA). But none of the parties place strong emphasis on suggestions for financial sector development. Similarly, the three parties’ manifestos do not give attention to foreign direct investment (FDI) to promote industrialisation. While these plans sound feasible, the implementation of these financing schemes will determine uptake by private sector. Ideally, the funds should offer financing perhaps at concessionary rates. The most important factor however is that the funds need to be patient such that private sector has time to use the capital effectively and generate returns over a realistic period of time. Yet the manifestos are not very clear on how financing to the sector will be structured. The Jubilee manifesto comes closest to specifics, stating that they seek to provide long-term credit funded by long-term bonds; one wonders why this strategy has not already been deployed. Further, none of the parties place strong emphasis on suggestions for financial sector development or how to promote FDI to support industrialisation.

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(source: https://res.cloudinary.com/people-matters/image/upload/w_624,h_351,c_scale,q_80/v1409637524/7126.jpg)

In terms of skills, NASA and the Third Way Alliance highlight the importance of general education, whilst Jubilee prioritises the need to nurture a globally competitive work force to power industrialisation. NASA and Jubilee stress the importance of linkages between universities and the rest of society, although Jubilee seems clearest on this and explicitly mentions the need to develop formal linkages between the private sector, academia and government. At the moment, there is a sizeable gap between what is taught to students and what the job market requires. Therefore, if curricula are not significantly revised and linked to a push to encourage students to take up of science, technology, engineering and maths (STEM) subjects, any partnerships with academia may not be fruitful in terms of creating a labour force with skills required for industrialisation. Jubilee manifesto’s pledge to promote the study of science, technology, engineering and maths but again, one wonders this has not already been done. Both the NASA and Third Way Alliance manifestos do not contain specific details on which subject areas to target for educational improvements.

NASA and Jubilee highlight the role of a fit for purpose civil service to support industrialisation. NASA stresses the need to reduce contractors’ cost of doing business with government, streamline procurement, process payments promptly and inculcate a zero tolerance approach to corruption. Jubilee wants a truly fit for purpose public service, and mentions the importance of reducing waste, dealing with procurement and rationalising the public sector wage bill. The Third Way Alliance has a narrower focus on measures to combat corruption. This element will likely prove to be the most difficult to implement as Kenya has notoriously been unable to hold those implicated in corruption scandals to account. Thus, it is dubious as to whether any of the parties have the political will required to implement this element of the manifestos.

The Third Way Alliance manifesto places strong emphasis on developing value chains in priority manufacturing sectors, including agro-processing, textiles and leather; but some of the Alliance’s proposals to support value chain development are quite protectionist in nature. The NASA and Jubilee manifestos also mention value chains, with the NASA manifesto emphasising synergies and linkages amongst enterprises. The issue of value chains is closely linked to agriculture and what has become clear over the first iteration of devolution is that agriculture seems to be neglected by both county and national governments in terms of budget allocations. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are clearly sub-par. Thus for the value chain manifesto declarations to work, there is need to more robust allocations to agriculture at national and county level and better coordination between the two levels of government; none of the manifestos articulate how they would make this happen.

In the context of the EAC, the push for exports in the KAM-ODI booklet is important. Both NASA and Jubilee press for better market access, NASA for SMEs in particular. Improving and/or maintaining market access in the EAC is an important element of the NASA and Jubilee manifestos, aligning well with the KAM-SET call for an export push. The Jubilee manifesto focuses on expanding Kenya’s access to the US in textiles, whereas NASA emphasises market access for MSEs. In contrast, improving access to markets for Kenyan exports is not prioritised in the Third Way Alliance manifesto.

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To be clear, access to EAC for manufactured goods is riddled with problems. Total exports from Kenya the EAC registered a 4 percent decline in 2016 to KES 121.7 billion, with exports to Uganda and Rwanda falling by 9.3 percent and 2.5 percent respectively. Further, opportunities offered by the EAC’s integrated market has institutional and regulatory barriers to trade such as such as customs clearance, standards and certification, rules of origin, licences and permits, truck inspections and language barriers.  None of the manifestos address these issues. Further, the entry of China and India into the regional market has eroded Kenya’s EAC market share from 9 percent in 2009 to just 7 percent by 2013.  The World Bank claims that Kenya’s trade performance is declining quickly due to an influx of goods from China into Uganda and Tanzania, which are major export destinations for Kenya.  In the manifestos it is not clear how EAC market access issues will be addressed. The Jubilee and NASA manifestos make general statements about Kenya’s role within the EAC, but there is little detail in either manifesto in terms of specific measures or priorities to support access for Kenyan goods in the EAC market. The Third Way Alliance’s manifesto does not make any reference to Kenya’s role in a regional context.

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

Revenue generation targets unrealistic

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This article first appeared in my column with the Business Daily on July 23, 2017

I am of the view that revenue generation targets are unrealistic, informed mainly by finding ways to cater to the government’s ballooning expenditure rather than any realistic economic dynamics. Over the past few years, revenue collection has fallen short of the targets, but it should be noted that the Kenya Revenue Authority (KRA) almost reached targets despite the constraints they face. For example, in the year just completed (FY 2016/17) total revenue collection stood at KES 1.365 trillion representing a performance rate of 95.4 percent. However, the shortfall in shillings was KES 66.64 billion- a significant number.

Although the inclination is to blame the KRA for under-performing, I am of the view that KRA is given unrealistic targets each FY. These targets seem more informed by aggressive increases in government expenditure and seem oblivious of the serious constraints that mute tax collection.

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The first issue is that revenue generation targets tend to be revised upwards over the course of the year. KRA’s original revenue target for the financial year 2016/17 was KES 1.415 trillion which was revised to KES 1.431 trillion, an increase of KES 16.24 billion. This is a concern because motivations behind increases in targets are not clear. Is the increase due a realisation in Treasury that it cannot raise as much as anticipated in borrowing and thus they place pressure on KRA in the form of increasing revenue generation targets?

The second constraint is that the macroeconomic environment informs the extent to which targets deviate from forecasts. For example, it is estimated that a 1 percent point reduction in GDP growth reduces revenue by KES 13.4 billion. In terms of inflation, a 1 percent point increase in inflation requires that revenue targets be raised by KES 13.0 billion to cater for the value of money lost due to inflation. Thus macroeconomic dynamics inform the extent to which KRA can hit targets.

Thirdly, government policy decisions particularly those related to tax policy affect the ability to generate revenue. The non- implementation of tax policy in terms of the adjustment of specific excise rates in FY 2016/27 did not occur negatively impacting revenue generation by KES. 4.911 billion. Additionally, the duty free importation of essential foods (maize, milk, sugar) led to a revenue loss of KES 4.363 billion in the 4th quarter of 2016/17. Indeed, it is estimated that government policy decisions cost KES 13.006 billion in revenue generation in FY 2016/17.

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(source: https://www.dur.ac.uk/images/law/research/researchhub/Taxpolicybig4.JPG)

Fourthly, government itself is to blame; delays in remitting income tax from public institutions costs KES 823 million.

Finally, sectoral issues inform the ability of KRA to collect tax. For example, declining profitability among large firms where 16 NSE listed firms issued profit warnings in 2016, had an adverse impact on corporation tax. Additionally, the downsizing and shutting down of firms which resulted in over 7,000 staff lay-offs in various institutions, mainly banks, adversely affected PAYE performance.

It is time that revenue generation targets were informed by the dynamics elucidated above. If this does not happen, government will continue to be seen to be trying to buffer itself from its aggressive expenditure through creating unrealistic targets rather than submitting austerity budgets that limit unnecessary spending.

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

 

 

The importance of industry in economic development and regeneration

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This article first appeared in the Business Daily on July 16, 2017

 

A few weeks ago East Africa Breweries Limited (EABL) announced it would set up a KES 15 billion brewery plant in Kisumu which is anticipated to help create at least 110,000 direct and indirect jobs. This investment in this factory is crucial for the country and region for several reasons.

Firstly, EABL’s investment is an investment into industry and manufacturing. A 10 point plan to catalyse industrialisation in Kenya was developed by the Overseas Development Institute (ODI) and the Kenya Association of Manufacturers (KAM) which points to the significance of industrialisation to any economy in the world. Many economic development success stories owe a great deal to the role of the manufacturing sector. Manufacturing can play a crucial role in Kenya’s inclusive growth by absorbing large numbers of workers, including by creating many jobs indirectly through forward and backward linkages to agriculture, raising exports and transforming the economy through technological innovation. This investment is important as a significant private sector player that has been in the region for a truly long time, views investment into industry and manufacturing as a viable and solid investment option. This is good news for Kenya.

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Secondly, this investment into manufacturing is important as it is occurring in the context of a sector that has been financially neglected. As the ODI and KAM piece points out, although aggregate finance for manufacturing has benefited from an increased stock of bank lending to manufacturing, from USD 0.8 billion in 2006 to USD billion in 2015, the share of manufacturing in total lending declined from 15 to 11 percent over the same period. Thus EABL’s investment should indicate to local and global investors that the manufacturing sector is financially attractive when the right investment decision is made.

Thirdly, investment in the food and beverages (F&B) sector is a significant job creator. USA’s food and beverage companies are the biggest source of the country’s manufacturing jobs. The advent of a manufacturing facility out of Nairobi will create viable, good quality jobs for the millions of Kenyans in the region who are unemployed, under-employed or employed in the informal sector. The quality of jobs, particularly the direct jobs created by this investment, will allow numerous households in the region and country to benefit from the stability that comes from a stable and well-informed investor.

Fourthly, EABL’s investment has clear linkages to agriculture. As Kisero points out, it was David Mwiraria when he was Finance minister, who first to come up with the idea of introducing tax remission for beer made from sorghum, millet and cassava. The remission is only valid if the company develops and invest in a comprehensive value chain for these food crops. Thus EABL, knows that it is obligated to invest in agriculture that will feed into its investment. This presents a huge opportunity, particularly for small holder farmers, to diversify into more profitable crops; an option that did not previously exist. Thus the effect of EABL’s investment may well reap dividends for the local community in agriculture.

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(source: https://www.farmafrica.org/images/where-we-work/ethiopia/Barley-wide.jpg)

Fifthly, as an investment in 2017, EABL will likely invest in a state of the art facility that will encourage a reorientation of skills required to service the factory. In Trinidad, a survey on their F&B industry revealed that technology has led to an increase in automation in the manufacturing process. This engendered a shift for skills in manufacturing process away from manual labour to skilled machine operators. EABL’s investment will play a role in pointing to the skills deficit and skills requirements for F&B manufacturing in the Kenya. As a result, the local and national labour market could make good use of this opportunity to re-skill or up-skill for the development of a labour pool skilled for an industrialised Kenya in the 21st century. To be clear, this will not be easy as education policy and educational training is still largely outdated, oriented towards social sciences and not linked to industry needs. EABL’s investment presents an opportunity, along with other new investors in manufacturing, to get a true grip of the types of skills required to drive F&B manufacturing forward in the country.

And finally, this is the first new investment in the Nyanza region for a significant period of time. Western and Nyanza have long complained of being neglected in terms of significant investments. And although efforts have been made to revitalise Mumias Sugar Factory and Pan Paper, the economic logic of these investments have been questioned, and rightly so. EABL’s investment is being made with a clear vision of return, and this will extend beyond financial returns. While the bottom line is likely a focus for the EABL team, the investment will generate forward and backwards linkages into the local and national economy in a manner that grows income for the local communities. Thus, it would be an interesting exercise to analyse not only the financial, but also social returns created by this investment.

Bear in mind that Kenya has the Kenya Industrial Transformation Programme (KITP) developed by government to catalyse industry in the country. The EABL investment should be one of many aimed at pulling Kenya into an industrial age of prosperity and engender economic growth in a manner that informs economic development and regeneration.

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

 

 

Is agriculture being neglected under devolution?

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This article first appeared in my weekly column with the Business Daily on June 16, 2017

 It is not a secret that Kenya has been suffering the consequences of a ravaging drought for about a year now. Q1 2017 GDP growth stood at 4.7 percent largely due to a notable contraction in agriculture. The 1.1 percent contraction in agriculture is obviously informed by the drought. For example, the drought has decimated the production of tea one of Kenya’s key exports; production is expected to drop by 12 to 30 percent. Livestock production has also been devastated with estimated losses of 40 to 60 percent of livestock assets particularly in the North East and Coast. Maize farmers in Uasin Gishu continue to generate measly yields from their farms.

The question becomes, how did this happen? This is the first major drought to affect the country since the advent of devolution. Are there issues that have emerged in the context of devolution that allowed the drought to grip the country to the extent it has? The answer seems to be yes.Image result for agriculture Kenya

(source: https://ccafs.cgiar.org)

The first issue is budget allocations to agriculture. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are sub-par. These paltry allocations may be due to the fact that that agriculture isn’t an attractive sector to finance. Infrastructure remains a priority for national and (it seems) county governments because physical assets can be pointed to as proof of ‘development’. The same cannot be done with agriculture, as a result agriculture seems to wallowing in financial neglect.

The second concern is the lack of coordination between county and national government. It is still not clear who is responsible for what in the agriculture sector. While agriculture has been devolved, the truth is that the national government through the Ministry of Agriculture, is still a key player in the sector. In the work I have done at county level, it has become abundantly clear that neither county nor national government are of the view that they are fully in charge of the sector. As a result, the sector is wallowing in a lack of ownership riddled by a lack of collaboration and coordination between the two levels of government. This is surely a contributing factor that allowed the drought to reach the scale it did.

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(source: https://anzetsewere.files.wordpress.com/2017/07/af82e-kenya-ag-1.jpg)

The third is a breakdown in support services to small holder farmers and poor early warning systems; both of which should sit in the county government. It has been noted that extension services that rural farmers in particular used to enjoy are no longer there. Aside from subsidies in fertiliser for example, small holder farmers on whom most Kenyans rely for food, need continuous support to make their farms more productive, limit post-harvest loss and make sure their products reach markets. County governments also seem to have failed in the early warning systems that should have signalled the crisis as they are present at grassroots levels. County governments seems to be having difficulty in playing their role in the sector and it is not clear why. Perhaps it may be a combination of a lack of technical capacity as well as limited financial allocations to the sector.

What is clear is that the situation detailed above cannot continue to happen. National and County government need to not only prioritise agriculture in terms of budget allocations but also solve the coordination problem that is so clear.

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

Lingering effects of interest rate cap

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This article first appeared in my weekly column with the Business Daily on July 9, 2017

The interest rate cap has led to several consequences, some of which have been elucidated in this column. The most concerning are the effects is has had on monetary policy and access to credit for the private sector. However new medium to long-term effects are beginning to emerge.

The first is that, private sector, particularly SMEs are getting used to functioning without the credit lines on which they used to depend. Data from the CBK indicates that credit to the private sector expanded at 3.3 percent in the year to March 2017, the slowest rate in more than a decade. So while some private sector may be turning to the shadow lending system for credit, many more may be growing accustomed to getting by with no credit lines at all. In effect, the cap may be dampening the private sector’s appetite for credit. Thus the concern is not only that the economic engine of the country is being starved of liquidity, the engine may be getting to used to ticking away at sub-optimal levels due to poor access to credit with dire consequences to GDP growth. GDP grew at just 4.7 percent in the first quarter of the year, and although part of this is due to a contraction in agriculture, the cap has also informed the sub-par growth. Will dampened appetite for credit become a long-term trend or will private sector aggressively take up credit lines if the cap is reversed?

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(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

Secondly, since the cap has made government the preferred client for many banks, the cap has created the very situation government has been stating it has been trying to avoid and that is crowding out the private sector. Thus the irony is that in government assenting to the cap, it has created the very situation it sought to circumvent. Indeed in the 2017/18 financial year government plans to finance 60.7 percent of the fiscal deficit using domestic sources. In the past government would somewhat limit heavy borrowing from domestic markets but in the age of the interest rate cap, government is well aware of its priority status and thus seems to be leveraging this to finance the budget with domestic sources perhaps more aggressively than had previously been the case. Will this become a long-term habit that proves difficult to break?

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(source: http://www.businessdailyafrica.com/image/view/-/3947270/medRes/1621958/-/62ktdm/-/NT.jpg)

Thirdly, however, there is a silver lining in the cloud; banks are going to come out of this period more efficient than ever. The cap has caused banks to ask themselves hard questions such as: how much labour is actually required to effectively meet client needs? How many branches need to remain open to serve clients and hit targets?  The cap may be accelerating the automation drive that had already began to occur in the banking sector and banks should embrace this era of capped rates to become more efficient. Banks will likely emerge from the interest rate cap as leaner and more efficient entities than would have been the case if the cap hadn’t been effected. This is a long term effect on the banking sector and may well have lasting benefits on profit margins.

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

 

How Kenya can reach Vision 2030 GDP goals

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This article first appeared in my weekly column with the Business Daily on July 2, 2017

Kenya’s annual GDP growth rate has been ticking along steadily at between 4 to 7 percent over the past five years. At no point has it hit the Vision 2030 target of 10 percent. Why not? Was Vision 2030 a pipe dream littered with deliberately illusory goals and targets? Why has the 10 percent target not been reached, and how can this be changed? There are three factors that can unlock the country’s economic growth at a fundamental level in both the long and short term.

The first is the long term issue of agriculture. The agriculture sector is a conundrum; on one hand Kenya’s agricultural sector is very efficient and profitable. Kenya is one of the leading exporters of black tea in the world, and the country’s floriculture and horticulture sector are important economic players in the sector. On the other hand, the country continues to struggle with food security as the maize price dynamic has illustrated. The ILO makes the point that the agricultural sector employs 61 percent of Kenya’s workforce, yet only contributes 30 percent to GDP.Related image

(source: https://agra.org/news/wp-content/uploads/2016/03/1-15062015071154.jpg)

This conundrum can be rectified through a multi-pronged approach that links productive sectors to less productive ones, more effective deployment of agricultural subsidies to farmers (particularly small holder farmers), and the revival of technical skills transfers to farmers at county and ward levels. Doing so will allow the labour locked in the sector to enter profitable activity either in agriculture or other sectors.

The second factor is the interest rate cap which is an overarching, hopefully short-term, constraint to meeting the 10 percent target. Earlier this year the World Bank made the point that Kenya faces a marked slowdown in credit growth to the private sector. At 4.3 percent, this remains well below the ten-year average of 19 percent and is weighing on private investment and household consumption.

Part of this massive slowdown can be attributed to the interest rate cap which has compromised two fundamental levers that support economic growth: access to credit and monetary policy. The interest rate cap has engendered a contraction in liquidity to SMEs in particular, essentially slowing down the country’s economic engine. Due to the cap, SMEs are unable to get the liquidity they need in order to expand and generate more jobs as well as income. The second lever compromised by the interest rate cap is monetary policy, reducing its ability to buffer Kenyans from economic volatility. With inflation standing at 11.7 percent in May, the cap has made it almost impossible for the CBK to step in with remedial measures such as raising interest rates as the consequences of doing so are unclear. Thus, in the short term, the interest rate should be reversed so that monetary policy can play the role it ought to, and robust credit access is restored to Kenyans.

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The third factor is the informal economy which is not only important for economic growth but also engendering equitable growth. 90 percent of employed Kenyans earn a living in the informal sector, yet it continues to be neglected. Too much of the country’s labour is locked in micro-businesses with low levels of productivity, too inadequately skilled and resourced to drive the country’s equitable growth. Thus financial, skills and technological resources ought to be directed to the sector to catalyse the ability of informal businesses to graduate into authentic profitability, sustainable job creation and robust income growth.

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