Month: February 2019

Africa should target FDI from developing economies

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This article first appeared in my column with the Business Daily on February 24, 2019

Often when the term Foreign Direct Investment (FDI) is said in Africa, images of investors from Europe and North America are the first to come to mind. And this is with reason; according to UNCTAD, the top three sources of FDI for Africa are the USA, the UK and France. China holds the fourth largest stock of FDI in Africa followed by South Africa, Italy, Singapore, India, Hong Kong and Switzerland. And while FDI flows to Africa slumped to USD 42 billion in 2017, a 21 percent decline from 2016, UNCTAD forecasted inflows to Africa to increase by about 20 percent in 2018 to USD 50 billion. UNCTAD notes that while companies from developed economies still hold the largest FDI stock, developing economy investors from China and South Africa, followed by Singapore, India and Hong Kong (China), are among the top 10 investors in Africa.

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(source: https://unctad.org/en/pages/PressRelease.aspx?OriginalVersionID=461)

Clearly African governments want more FDI, and there is an opportunity to diversify FDI strategies from targeting just Europe and the USA. While it is important to retain the interest of the top investors, there is also room to better consider the requirements of investors from developing economies such as China, India, South Africa as well as other African countries such as Nigeria (who focus almost exclusively on Africa). Thus while the anchor investors from the US and Europe are crucial, it is also important that Africa leverage at least two unique advantages that investors from developing economies bring with them.

The first advantage of investors from developing economies, is that they understand the reality of investing in countries with governments who are not very transparent. The reality is that it is difficult to find an African government where investors will not, as some point, have to contend with rent seeking behavior of some government officials. Often the perception of corrupt governments can put off traditional investors, but when one comes from a country where that is also a visible reality, this factor is less of a deterrent. This is not to say that corrupt requests from government should be entertained, but rather, the fact that this reality is faced in their own countries means that such a culture in much of Africa will not serve as a shock and limit interest.

Secondly, Africa’s private sector is highly informal, a reality that is also reflected in Asia and other regions with developing economies. According to the ILO, the workforce employed in the informal economy is over 85 percent in Africa; this figure is 68.8 percent in Arab States, 68.2 percent in the Asia-Pacific, and about 55 percent in Latin America. This is an advantage because it means investors from these regions understand the challenges that come from investing in a country where most of the private sector labour functions outside formal structures. Used to negotiating contracts and performance expectations in a culture dominated by informality, investors from developing economies are used to planning for unforeseen events linked to informality, and may possibly have a higher appetite for risk because informality is a part of the reality in their own economies and thus not labelled as an unusual risk factor.

In short, the multipolarity of FDI sources targeting Africa is likely to grow as developing economies expand their capacity to invest outside their economies. Thus, Africa has to develop its capacity to meet the investor requirements of an increasingly diversified source of investment and leverage the unique advantage each brings to the table.

Anzetse Were is a development economist

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TV Interview: The Big 4 Agenda

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On Wednesday February 20, I was part of a panel on Citizen TV discussing the Big 4 Agenda in Kenya, with a focus on manufacturing and affordable housing.

 

Responsible Banking Practices the Smart Way to go In Kenya

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This article first appeared in my weekly column with the Business Daily on February 17, 2019

As Kenya continues to mature as an economy it is important that the private sector ensures that the means through which they earn profits are done so in a sustainable and responsible manner, not because this is a trendy concept in corporate circles, but because it’s the most intelligent way to operate in Kenya. Not only is the capacity of regulators to ensure adherence to legal obligations increasing but irresponsible behavior is creating reputational risks that can negatively affect the firm’s bottom line.

A sector of interest in this conversation is the banking sector in Kenya. Kenya is lauded for expanding financial inclusion to 75.3 percent by 2017; a 50 percent increase from the previous 10 years. Kenya is also lauded for its mobile money and e-banking platforms all of which strengthen Kenya as the financial anchor for the East Africa region. Indeed, by 2013 Kenya held a 60 percent share of bank assets in East Africa’s banking sector. It is therefore crucial that the banking sector pursue strategies that are sustainable and responsible as this has ripple effects on the region.

Customers at a banking hall in Nairobi. FILE

(source: https://www.businessdailyafrica.com/analysis/ideas/Responsible-practice-in-banking-smart-way-to-go/4259414-4986138-i8vd8az/index.html)

Luckily, there are useful initiatives focused on pulling the banking sector to play a role in promoting sustainable development. The UNEP-Finance Initiative (UNEP-FI) seeks to make the banking sector part of a more sustainable economy by lending to economic activities that yield the best return from society’s point of view and seek to strengthen the sector’s ability to play a leading role in achieving the Sustainable Development Goals and the Paris Climate Agreement. While international banks active in Kenya are members, only two Kenya- headquartered banks are part of this initiative- KCB Group and the Commercial Bank of Africa. Locally, the Kenya Banker’s Association (KBA) advocates for the Sustainable Financing Initiative which has guiding principles that inform financiers on how to optimize the balance between business goals with socio-environmental concerns from a strategic level to daily operations.

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(source: https://www.unepfi.org/banking/bankingprinciples/)

We need commitment from all actors across the financing sector. It is simply not enough to allocate money to green causes. We need a fundamental approach to our financial knowledge with an ambitious agenda on sustainable growth. Clear terminology must be defined and financial regulation needs to be assessed at every level to achieve optimal disclosure and transparency and to ensure success. This is where the UNEP FI International Banking Principles for Responsible banking will see the alignment of a standard and sustainable banking practices. As a boost to the original existing KBA SFI principles, banks will be able to align their business strategies with their customer’s needs and society’s goals in line with the Sustainable Development Goals through the UNEP FI Responsible Banking Principles. The proposed principles include; alignment, impacts, clients and customers, stakeholders, governance and culture, and transparency and accountability. It is crucial for financial institutions to incorporate principles into corporate strategy funding decisions and product/service definition processes, because banks can be influential in supporting and promoting environmentally and socially responsible projects and enterprises.

 So what is the point of highlighting this? Well, as consumers of financial products, Kenyans should encourage all our banks to align themselves to the UNEP FI Responsible for Banking Principles. Perhaps in doing so, not only will the flow of illicit financial flows in the sector decrease, a greater array of responsible financial products will be created to meet the needs of excluded Kenyans and businesses.

Anzetse Were is a development economist

 

Time to rank County Performance

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This article first appeared in my column with the Business Daily on February 10, 2019

The first and second phases of devolution in Kenya have revealed the economic benefits Kenyans have accrued from it but has also highlighted key problems that have arisen from it. Key benefits include the devolution of financing to locations outside of major cities in the country, Kenyan professionals leaving big cities to work on county development and the creation of several devolved centre-points for economic development strategy formulation and implementation. However, key challenges have emerged. These include the devolution of corruption, poor fiscal accountability by county governments and a deterioration in the business environment in many counties. This article will focus on the last two points raised and how they can be addressed.

As mentioned a key problem with devolution has been the notably weak county fiscal performance; most counties are not adhering to the Public Finance Management Act. A report by the International Budget Partnership (IBP) shows that the average transparency, as determined by the availability of key fiscal and budget-related documents was 42 percent in September last year; the figure was 25 percent in 2017. Further, during physical checks conducted by IBP, where it was checked whether required budget documents are physically available in county offices, only 2 of the 15 counties assessed were found compliant. This performance is informed by two factors: capacity and corruption. Technical capacity deficiencies exist that truly compromise the ability of county governments to develop, disseminate and implement fiscal documents. On the other hand, there are no consequences for poor fiscal accountability which creates a breeding ground for corruption to run rife in counties particularly on the expenditure side.

(source: https://www.internationalbudget.org/budget-work-by-country/ibps-work-in-countries/kenya/understanding-county-budgets/tracking-county-budget-information-kenya/)

A second problem with devolution has been how many county governments are making the business environment very difficult. In my conversations with both large and small business the issues of CESS and county government levies/taxes has been raised numerous times. County governments are arbitrarily raising the cost of fees of doing business in areas under their jurisdiction; one county is said to have increased land rates by 600 percent. There are multiple charges of CESS and the creation of new permits such as the onerously expensive distribution permits which are levied even at sub-county level. In addition, businesses are harassed at county level where, for example, vehicles are unfairly impounded and brides demanded for release. Part of such actions by county governments are due to pressure to generate own their revenue, but some of it is plain corruption. Many county government actions are harming business activities and thus employment and wealth creation in their counties and thus Kenya as a whole.

What can be done to address these issues? Ranking. Rank counties on their fiscal transparency and their business environment. Kenyans and other interested parties should come together and create two ranking systems that highlight the best and worst performers on both fiscal and business environment issues. Perhaps then, there will an impetus beyond individual county government values, that make them more fiscally accountable and work to improve their business environment.

Anzetse Were is a development economist

Logic of tax increases in Africa is weak

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This article first appeared in my weekly column with the Business Daily on February 3, 2019

Last week the World Economic Forum met at Davos in its annual tradition. An interesting conversation that garnered global attention was the panel on global inequality and how this can be addressed. A key theme that emerged during the conversation was taxes and the role they can play in addressing inequality. Key issues emerged that are pertinent for the continent.

Rwandan President Paul Kagame (left) and his South African counterpart Cyril Ramaphosa

(source: https://www.businessdailyafrica.com/analysis/ideas/For-the-continent–tax-rise-no-pill-for-equality/4259414-4964484-4a3atc/index.html)

The first was the private sector and high net worth individuals (HNWI), globally, and their tax liabilities. There is a sense that private sector and HNWIs, are underpaying in terms of tax. This is due to combination of factors: regimes that undertax HNWIs and the private sector, and tax evasion by HNWIs and private sector. In terms of the related issue of tax evasion, in Africa this tends to fall under the broader conversation on illicit financial flows and specific private sector behavior such as transfer pricing. The best known report is that by the United Nations (UN) Africa Renewal project which states that between USD 1.2 trillion 1.4 trillion has left Africa in illicit financial flows between 1980 and 2009- roughly equal to Africa’s gross domestic product, and surpassing by far the money it received from outside over the same period. So what is being argued is that both HNWIs and private sector, particularly large players such as multinational corporations (MNCs), use existing legal loopholes to circumvent their tax obligations to governments. Combine that with the ease with which tax can be evaded in many African countries, and the conclusion is that African governments are being denied revenue owed to them.

The argument is that is it important to both increase tax especially on HNWIs and stem illicit financial flows to ensure that governments get their due payments and have more revenue at their disposal. Governments would then be able to use this revenue to invest in education, healthcare, infrastructure etc., all of which would drive growth in a more equitable manner. On paper this sounds good, but the reality in Africa is different.

Image result for taxes Africa

(source: https://www.huffingtonpost.co.za/staff-reporter/unpacking-the-latest-tax-hikes-in-south-africa_a_23371888/)

The logic of pushing for higher taxes or stemming tax evasion and illicit financial flows in Africa is weak as long as many African governments consistently demonstrate they are not responsible and accountable custodians of public funds. It will be difficult to convince Africans, private sector and individuals, that they should pay more taxes when it seems they are just providing more public funds to be stolen. In Kenya, the Office of the Auditor General routinely tables billions of shillings that are unaccounted for on a yearly basis. If government cannot account for the funds already under its control, why should they be provided with more? It seems that increased government revenue in many African countries would certainly not translate into public investment in the people and country.

There is a lack of strategic thinking when African governments table tax increases or argue for more revenue but don’t address their ‘expenditure problem’. Do not expect support for increased taxation or revenue inflow as long as Africans continue to feel consistently defrauded by government. The best way for government to incentivise tax payment and increase revenue from tax, is to first consistently demonstrate that they are responsible and accountable custodians of public funds. There are no shortcuts on this one.

Anzetse Were is a development economist