Month: November 2017

Growing autocracy in the East Africa Region: Implications for China

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This article first appeared in ChinaFile on November 28, 2017

Though not in the headlines, China is operating in an East African region that is becoming increasingly autocratic and authoritarian. The East Africa region in this article refers to the countries of Kenya, Uganda, Tanzania, Rwanda, Burundi and Ethiopia. It can be argued that in the region, Kenya is the only viable democracy left.

President Kagame of Rwanda has made headlines in the region for what appears to be the open targeting of Diane Rwigara who tried to run against him in elections earlier this year. Ethiopia has been ruled by the same party since 1991, with marked intolerance of opposition, evidenced in the imprisonment of political dissidents. Uganda has been under the hand of Museveni for well over 30 years and in Burundi the International Federation for Human Rights claims the crisis there has left at least 1,200 dead and 10,000 imprisoned for political reasons. In Tanzania, the chief whip of the opposition party was shot, opposition figures have disappeared, and in September, President Magafuli closed a third newspaper since June as part of a media crackdown.

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The trend towards autocracy and authoritarianism in the region cannot be ignored and will have several implications for China. The first is that while it could be argued that it is easier for China to work with governments that do not have to deal with the complications of a robust democracy, there is growing unrest in domicile populations in the region. And although authoritarian East African governments may assure China and the Chinese private sector, that unrest is being ‘managed’, the reality is that it can grow to unmanageable levels, compromising Chinese investments. The Chinese private sector is already feeling the pinch where both last year and this year, protesters in Ethiopia destroyed Chinese factories and assets in anti-government protests.

The second concern China should have is that it is the very authoritarianism in the region that may make countries more difficult to deal with because decisions can be made unilaterally with no consultation or explanation given. It is possible that such decisions could negatively affect Chinese interests in the region and given the strong arm of government in most of the region, trying to seek redress through legal means would likely be futile. Further, China has branded itself through its non-interference policy. Will this position change if the action of authoritarian governments threaten Chinese investments in the region?

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Finally, Zimbabwe provides an important lesson for China. China put all of its eggs in the basket of Mugabe’s autocratic rule. With Mugabe no longer in rule, there is surely concern as to how China will protect its investments and economic position in the country. And this is the fundamental problem with China continuing to interact with openly authoritarian governments; China can never be sure that the next ruler will treat them as well as his predecessor did. Will China be prioritised in Zimbabwe as other economically powerful countries and companies jostle to enter the country?

It will be interesting and see how both the Chinese government and private sector continue to operate in a region of growing autocracy and authoritarianism both of which pose considerable risks to China’s investments in the region.

Anzetse Were is a development economist;

Priorities for the Next Administration: Fiscal Policy, Informal Economy and Light Manufacturing

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This article first appeared in the Business Daily on November 29, 2017

With election season over, it is time for the incoming administration to develop priority areas for action. There are three core areas that need urgent attention and should form part of the priority plan.

The first issue is fiscal policy where decisive action has to be taken. Kenya has been on a path of unsustainability defined by aggressive growth in expenditure, subpar revenue generation and growing debt. With a debt burden of KES 4.4 trillion, it is important that the incoming government detail a plan that will put the country on a more sustainable fiscal path. The plan should include strategies to reduce overall expenditure, improve the divide between recurrent and development expenditure, and improve the absorption of development funds. Non-priority spending has to be ruthlessly cut, while revenue collection improved. At the moment expenditure is growing at over 14 percent while revenue collection is only growing at about 12 percent; this is resulting in expanding borrowing requirements. Policy action has to be taken to ensure the growth of revenue collection is higher that growth in expenditure. This issue is urgent because both Moody’s and Fitch (credit rating agencies) are considering a downgrade in Kenya’s credit rating due to our debt position. This would have negative implications in that any new foreign debt would be more highly priced. Thus, government must get expenditure under control, reduce borrowing and improve revenue generation, which leads to the next point.

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The second point of focus should be the informal economy where 90 percent of employed Kenyans earn a living. The administration has yet to table decisive action to make the sector more productive and profitable. While the ultimate focus should be to pull more informal enterprise into the tax net, at the moment there are limited incentives to formalise. Threats of increasing taxation of informal business will merely push activity in this sector further underground and even spark social unrest. Instead, national government should create programs in partnership with county governments to improve the productivity and profitability of informal businesses. The program should include support to informal enterprise in financial and business management, improvements in access to and use of technology, improve informal business premises, concessionary financing packages and business mentorship. Over the next five years, a focus on strengthening the performance of the sector will create a boost in incomes which will not only increase the spending power of Kenyans, but also put the sector on a path where plans for formalisation become more feasible. Only through such action can the government sustainably expand the tax net and increase revenue collection.

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Finally, government needs to focus on truly developing light manufacturing, and that can only happen by boosting agriculture. Whether its food and beverages, leather and leather products, textiles and apparel, a solid agricultural base is required to develop light manufacturing. There are two segments of agriculture that need attention. The first is subsistence farming where over 70 percent of rural labour is locked in largely unproductive agricultural activity. National and county governments have to work with farmers to make their farming more productive, improve storage facilities, help with market access and create options for agro-processing and value addition through light manufacturing. The second segment of agriculture is export-oriented agriculture with it fairly productive, dominant in the sub-sectors of tea, coffee, floriculture and horticulture. Government must create and implement a 5 year plan focused on value addition of this sector by linking export farming to local manufacturing and value addition. Linked to this is the textile value chain which desperately needs revival so that local farmers can supply EPZ firms that tap into the AGOA clothing and apparel market. A process of backward integration is required that builds the value chain from cotton farming, to milling and fabric manufacture, and finally textile and apparel product development and manufacture for export.

If government focuses on these three areas with determination and grit, the next five years can put the country on a more sustainable fiscal path, spur formalisation, expand the tax base, create new and better quality jobs, and reorient the country’s economic structure through building light manufacturing. In doing so, the economy will be more diversified, productive, robust and resilient.

 Anzetse Were is a development economist;

Monetary Policy a bright spot in Kenya

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

This has been a difficult year for the Kenyan economy. A combination of the drought, effects of the interest rate cap on the economy and the extensive electioneering period all slowed down economic growth and performance. However there has been a bright spot; monetary policy. Monetary policy has played a crucial role in being a stabilising anchor for the country.

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The first means through which this is seen is in the value of the Kenya Shilling. Given the turbulence of the electioneering period in particular, it was largely expected that the value of the shilling would be knocked. However, through practical action by the Central Bank of Kenya (CBK), the value of the shilling remained relatively stable, hovering at around KES 103 to the dollar.

Secondly, is the effect of monetary policy on inflation. While inflation rate was above the preferred ceiling of 7.5 percent for a better part of the year, it came down to below the ceiling in July, and with the exception of August, has remained below 7.5 percent. The high inflation was, of course, informed by the drought that pushed up food prices and electricity that latter of which pushed up the costs of production. The management of inflation is particularly commendable given than the CBK basically couldn’t use changes in the interest rate, a key monetary policy tool, to manage inflation.

The introduction of the interest rate cap has fundamentally constrained the CBK’s ability to fiddle with interest rates to manage money supply and inflation. The cap has made the effects of a change in the rate unknown, thereby understandably engendering reluctance to change the CBR. Indeed, I am of the view that the interest rate cap has turned monetary policy upside down; an increase in the rate may create an expansion rather than contraction in liquidity, as more people would qualify for the higher rate risk ceiling. And lowering the rate would likely contract rather than expand liquidity as even fewer people would qualify for the lower rate risk ceiling. Thus it is not a surprise that the Monetary Policy Committee chose to leave the Central Bank Rate unchanged last week.

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While on the topic of the interest rate cap, its continued effects are disturbing. Beyond engendering a massive contraction in the growth of credit, it seems the cap may be dampening private sector appetite for credit. No longer qualifying for credit lines on which they used to rely, businesses have likely changed their business models to accommodate this lack of access to credit. Thus, the real test for the economy will begin if or when the cap if lifted, and whether private sector will demonstrate robust appetite for credit, having essentially survived without it for over year.

Again, in the context of a cap, the CBK has played a constructive role in managing the dynamics of the financial sector in two ways. The first is in pushing for a repeal of the cap; the second is in urging commercial banks to price their loans more reasonably. The CBK is using the opportunity created by the cap to try bring sanity to a sector that is largely seen as extractive, saddling Kenyans with very expensive debt all in the name of profit. These efforts by the CBK should be commended.

Going forward, it is important that monetary policy continues to anchor the economy and buffer Kenyans from volatility in the macroeconomic environment.

Anzetse Were is a development economist;

TV Interview: Growth of the Kenyan Economy and the Interest Rate Cap

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On November 22, 2017 I sat with Ramah Nyang of  CGTN to discuss monetary policy in Kenya and the effects of the interest rate cap.

Are we building pro-poor infrastructure?

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

Last week I attended a conference that had infrastructure development in Kenya at its heart. Several interesting points were made by some of those who attended that provide important food for thought as Kenya continues on the path of aggressive infrastructure development. The topic of conversation was the Standard Gauge Railway (SGR) and the issues that are beginning to emerge as it starts activity.

The first point made was that it can be argued that the way in which the SGR has been built is anti-poor, and by anti-poor I mean it functions in a manner that locks out low income individuals and traders from accessing passengers. The SGR is lined by electric fences on either side and the stations are built in a manner that prevents hawkers and traders from selling their wares to those inside. In the past when the train snaked through the country, train stations were a hive of business activity, a point at which passengers could buy various items from local traders. The stations were built in manner that allowed easy access to and from trains. This is no longer the case. The SGR is built in a manner that does not allow local traders or mama mbogas anywhere near the stations or train. Is this fair? Is it fair that the SGR seems to be locking out low income traders from a potential client pool? What does this mean for income growth for local and low income traders?

A modern SGR train. FILE PHOTO | NMG


The second issue is how the SGR is barricaded by electric fences on both sides where all locals can do it watch is swish by, looking at the rich who can afford the service while they remain locked out of any development that could have been brought to peri-urban and rural villages along the line. It should be noted that the poverty question is already negatively affecting the SGR. A few weeks ago, it was reported that have people have stolen materials worth KES 1.2 billion from SGR line in the last five months; the most targeted items are steel bars, electricals and signals facilities. It would be naïve to fail to consider that poverty is a motivating factor behind why individuals are stealing SGR components, presumably for resale. While I am not suggesting that such theft should be justified or enabled, the reality is that poverty is causing individuals to make that theft in the first place. It would be interesting to find out if the old railway line had/has the same problem; and if not, why not?

The third issue is that we have not unpacked how SGR will affect the trucker’s economy. To be clear, I am of the view that development should be embraced and potential game changers such as the SGR are important but there ought to be serious consideration given to the knock-on effects so that the economic station of Kenyans is improved, not compromised by new developments. It is estimated that an average of 4,000 trucks are on the roads transporting various goods in and out of the East Africa region. While the SGR will be important in decongesting Kenya’s roads and hopefully making the movement of goods cheaper, informal traders and small and medium enterprises (SMEs) will be hit. Those who will lose jobs include truck drivers (an estimated 8,000), and informal businesses and SMES who sell spare parts to, and repair and maintain trucks. All these Kenyans will lose their jobs or have their businesses negatively impacted. How will this be managed?

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So the question remains: Is the infrastructure we’re building pro-poor? Does it build or diminish commerce and trading activity along its path? Does it build or compromise income sources of the poor? Given the high levels of informality in business activity in Kenya, we ought to be cognisant of the effects of infrastructure built in a style that locks out indigenous enterprise.

The issues raised above are difficult with no easy answers but they are realities with which we have to grapple and resolve so that future projects avoid or address potential negative effects of new infrastructure development in the country.

Anzetse Were is a development economist;

TV Interview: Kenya’s Debt Question

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On November 12, 2017 I was part of a TV Panel with the CEO of the Kenya Association of Manufacturers, Phyllis Wakiaga and Alex Awiti from the Aga Khan University analysing the effect of the elections on the Kenyan economy and rising public debt.


Leverage devolution to make Kenya’s economy more resilient to politics

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

A few weeks ago the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.  The economy’s performance this year is weaker than last year. The economy expanded 4.7 percent in Q1, down from 5.9 percent 2016, with Q2 at 5 percent, down from 6.3 percent last year. Previous analysis indicates that the Kenyan economy tends to slow down in an election year by about 1.2-1.4 percent. Of the 10 elections the country has had, 7 have been associated with slower economic growth and it takes about 26 months for the economy to fully recover from an election.

While there is warranted concern about the extent to which economic performance is tethered to politics and elections, other dynamics in the country have also negatively informed growth this year. These include the drought which led to a contraction in agriculture which constitutes about 30 percent of the economy. Additionally the interest rate cap negatively affected the financial sector which constitutes about 10 percent of the economy with knock-on effects felt in a contradiction in access to credit particularly to SMEs. Thus even without the effects of the election, at least 40 percent of the country’s economy was struggling this year.

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That said, there does need to be an examination as to why economic performance during election years tends to be more muted than would have been the case if there were no election. Clearly key investment decisions from the private sector tend to be deferred in an election year while any decisive action in policy is deferred by government. The question now becomes what can be done to make the economy more resilient to politics and elections such that Kenyans are buffered from related uncertainties. Leveraging devolution with a focus on county governments and county private sector is key to achieving this.

The first step in building resilience is by encouraging a fundamental shift in the mind-set of county governments. At the moment county governments seem to view themselves primarily as expenditure units, not development units. Rather than obsessing over what allocations have or have not been made to them, county governments have to enter a mind-set where every penny is targeted at ensuring they drive economic development in their counties.

Secondly, county governments ought to listen to concerns of the private sector in their counties. Kenya’s private sector is dominated by informal businesses as 90 percent of Kenyans are employed in this sector and rely on it for their income. Yet the informal sector does not truly feature in county development documents, this needs to change. County governments, perhaps with the support of the Ministry of Trade ought to create a robust informal sector strategy that works to address structural weaknesses that compromise the sector’s robustness. These could include piloting formalisation schemes, improving technical and business management skills, and creating financial structures that provide patient capital to informal businesses. The aim should be to stabilise informal businesses so that they continue to perform even during difficult political times.

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Finally, county fiscal policy must be deliberately development oriented. Dockets such as agriculture, health and devolved education functions ought to feature prominently in county government allocations. By investing in food security through agriculture and human capital through education and health, counties can play a powerful role in building a population that is healthy and educated, and thus better able to identify and exploit economic opportunities that build income.

Anzetse Were is a development economist;