Africa

Factors that will inform the cost of living in 2018

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This article first appeared in my weekly column with the Business Daily on January 14, 2017

This year started with the news that price for maize flour has increased from KES 90 to KES 115 after the stock Government subsidised flour ran out. Understandably, Kenyans are complaining with many asking how they are going to manage rising costs of living, particularly in urban areas.

There are several factors informing the increase in the cost of living the first of which is that the country has not fully recovered from the 2017 drought. The short rains have not been as robust as hoped and thus food production is till sub-par. As a result, until the country fully recovers, Kenyans can expect to continue to face upward pressure on food prices.

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(source: https://www.foodbusinessafrica.com/wp-content/uploads/2017/09/MaizeonShelfKenya.jpg)

Linked to the point above is continued aggressive inflation. During the last four months of 2017, average inflation was between 7.98 and 8.4 percent- well above the preferred government ceiling of 7.5 percent. Thus inflation will mean money does not stretch as far as it used to, and thus Kenyans will find basic items eating into their household budgets significantly.

Third is the reality that 2017 was a tough year for the economy due to several factors, the first of which was a struggling agriculture and financial sector. Agriculture which is about 30 percent of the economy was hit by the drought and the financial sector, which is about 10 percent of the economy, was hit by the effects of the interest rate cap. Finally, the prolonged election period affected the economy and GDP growth was revised downward from 5.9 percent to an actual growth of 4.4 percent in Q3 of 2017. Elections have tended to have a negative effect on economic growth and 2017 was not an exception. Suspended investment decisions and disrupted business activity led to the reality that Kenyans did not make as much money as they would have had it not been an election year. As a result, Kenyans are feeling the pinch of muted economic growth as having less money in their hands leaving them feeling more broke than usual.

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(source: https://www.bizmalawi.com/sites/default/files/images/news/inflation1.jpg)

Fourthly, as I have stated before, the interest rate cap led to a contraction in credit growth as banks became more hesitant to extend credit in the context of capped loan pricing. Sadly, credit growth may be further stymied by the onset of the new International Reporting Financial Standard 9 (IFRS 9) where banks are required to switch from an incurred to an expected loss model. Without getting into much detail, IFRS will mean that, at least in the short term, banks will be more risk averse as they reduce lending periods to high-risk borrowers to limit the probability of default. Thus Kenyans may find that it will be even harder to get access to credit due to both the cap and adoption of IFRS. This will lead to less money in the hands Kenyans which will make them to more acutely feel the cost of living.

Finally, the cost of oil is set to rise in 2018, which is not good news for Kenya which imports oils products. Increases in oil prices will likely drive inflation upward exacerbating the already high inflation status the country is in at the moment.

In short, Kenyans should brace for a high cost of living in the short term. It is hoped that a return to stability will allow the economic engine to get back to normal and create channels through which Kenyans can earn an income to adequately meet their cost of living.

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

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How to Achieve Kenyatta’s Big Four

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This article first appeared in my weekly column with the Business Daily on January 7, 2018

Last month, President Kenyatta indicated that his last term would focus on the big four for economic development in Kenya. These are food security, affordable housing, manufacturing and affordable healthcare; the article focuses on the first three.

A considerable challenge with food security at the moment is that it is dominated by small scale farmers who operate at a subsistence level with limited financial resources and technical support that would allow them to make their farms more productive and get their products to market. A key element for this sector would include a reinstatement of technical support to rural farmers in the form of agricultural extensions officers. Additionally, storage of food products has to be vastly improved in order to ensure food does not rot before reaching market, but also allow farmers to use stored produce as collateral for credit to improve farm inputs. Finally, financial support should be targeted at the sector to improve the quality and cost of farm inputs and encourage the strategic use of farm technology. Linked to this is the crucial need for government entities that purchase food products from farmers to pay in a timely manner such that farmers can have a seamless farm cycle.

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(source: https://agra.org/news/wp-content/uploads/2016/11/MWfarmer-maize-green-790×527.jpg)

Manufacturing is linked to agriculture. The manufacturing sub-sectors of focus are the blue economy, agro-processing, leather and textiles, all of which require agricultural inputs. Government first ought to coordinate manufacturing inputs with agricultural strategy such that factories have robust source markets. And as the President pointed out, the skills gap for the sector has to be addressed so that there are enough individuals with the appropriate skills sets to drive manufacturing. In addition, the cost of production must be cut in order to make Kenyan products more competitive. Thus the step taken to cut the cost of power is important although clarity is required on how it will be implemented and implications for fiscal policy. Finally, the sector ought to benefit from fiscal incentives such as tax rebates, tax deductions and other strategies to encourage the development of industrial capacity.

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(source: https://www.africa.com/wp-content/uploads/2016/03/Kenya-factory-jobs2.jpg)

It is encouraging to see affordable housing as a priority, as this sector has been direly neglected in the past. As of 2015, the annual housing requirement in Kenya stood at about 132,000 units with a backlog of 1.85 million units. This has created a dynamic where excess demand fuels price escalation in terms of home prices and rents charged. First, government ought to encourage the adoption of technology and materials that reduce construction costs. Secondly, government must improve access to land and facilitate the registration and transfer of titles. Thirdly, financing for the construction and purchase of affordable homes must be incentivised. Savings and Credit Cooperative Organization (SACCOs) have overtaken commercial banks and mortgage providers in the provision of home construction loans in Kenya and account for more than 90 percent of home loans in Kenya. However, there are no fiscal incentives that target SACCOs- this must be rectified. Finally, government must create a registry of whom qualifies for affordable housing. Currently, when cheap houses are constructed, wealthy individuals purchase several units and rent them, locking out low income individuals from purchasing the homes- this must stop.

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

The Three Economic Paths for Kenya in 2018

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This article first appeared in my weekly with the Business Daily on January 1, 2018

For the better part of 2017, Kenya was in the throes of politicking, elections and political tension. As the new year starts, there are questions as to what direction the country will take in 2018. It seems there are three paths the country could take, each with different economic results.

The first is that heightened political and related tribal tension, will continue unabated. The country may see a parallel swearing ceremony from opposition and continued reluctance for dialogue from the ruling party. Civil unrest will continue as per 2017 which will likely result in dampened business prospects for the country. The combative back and forth from both sides of the political divide will lead to the continuation of jitters that create anxiety in both domestic and foreign investors. This will lead to subpar investment into the country and the related knock-on effects of suspended investment decisions. Domestic businesses, particularly SMEs with limited financial buffers, will continue to struggle as political tensions stifle purchasing appetite, the flow of money and robust business activity. The ‘wait and see’ attitude of investors will extend into 2018 and the consequences of political uncertainty and tensions will continue to exert negative effects on economic growth.

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(source: https://upload.wikimedia.org/wikipedia/commons/thumb/4/49/Flag_of_Kenya.svg/2000px-Flag_of_Kenya.svg.png)

The second scenario is one where the ruling administration will respond to political upheaval with a heavy hand marked by aggressive armed action while the opposition party and its followers continue with determined political mass action and resistance. The economic consequences will depend on how hard-nosed the clamp down on political protests will be, and how determined opposition supporters will be in sustained resistance. It is possible that a tense calm will settle over the country as people deal with the reality of having to get on with life, as well as fatigue from what feels like years of political conflict. Thus in this case, there will be an overall but artificial calm, punctuated by recurrent sparks of protest and unrest. Some investments in resilient sectors and geographical areas may get the green light to cautiously proceed while others will remain suspended, waiting for a clearer political outcome. Thus some sectors or geographical areas will see a resumption of business activity and investment, while others will continue to be left out.

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(source: https://softkenya.com/kenya/wp-content/uploads/2011/09/Cash-crop-economy-in-Kenya.jpg)

The final scenario is one where the ruling party and opposition seek to engage in authentic dialogue and conflict resolution resulting in the restoration of genuine peace and calm in the country. Both national and county government will be able to execute their mandate without having to engage in a political juggling act. Investors and businesses will likely fully engage in economic activity, seeking to catch up from all the opportunities that were lost in 2017.

So which of these three scenarios will pan out in 2018? Only time will tell.

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

Trump’s Plan for Africa is #MAGA on Steroids

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

About two weeks ago Trump released his national security strategy where, for the first time it seems, Africa was directly addressed. Trump made two intentions clear in the strategy in terms of his economic focus for Africa: the first is that he recognises Africa’s potential as a market for American goods and as a means of building wealth for Americans. Second, he wants a clearer shift from aid to economic partnership. What is not clear is how Africa will benefit from the plan beyond his support for economic integration and an improved business environment (both of which are already priorities for most African governments). His plan puts the USA’s interests first, as per Make America Great Again (MAGA), but it fails to articulate how expanded economic cooperation with the USA will benefit African nations and citizens. In short, Trump’s economic plan for Africa is MAGA on steroids. His obsessive focus with ‘America First’ will clearly extend beyond the borders of the USA, and Africa is a mere player in the larger plan to re-establish the global economic dominance of the USA. Whether Africa will benefit seems to be of little consequence.

President Donald Trump speaks on national security, Dec. 18, 2017, in Washington.

(source: https://www.voanews.com/a/trump-to-unveil-new-national-security-plans/4168148.html)

Another element that is clear in his plan is that he wants to kick China out of Africa and take back dominance on the continent; his distaste with China is clear. Through the plan, Trump seeks to make the USA an alternative to ‘China’s often extractive economic footprint on the continent’. What is not clear is how kicking out Chinese interests and replacing them with those of the USA will be of use to Africa. Will investments from the USA be more generous and attractive than China’s? Will goods from the USA be more competitive than those from China? Will investments from the USA create more jobs for Africans than is the case with China’s? Will credit lines from the USA be more affordable than what China offers? There are no answers to these basics question in the strategy.  Instead what we get is the argument that the USA is inherently better for Africa than China- just because.

As can be expected, the plan is already being criticised. China and Russia take issue with being labelled as competitors that challenge American interests. The language of ‘us versus them’, particularly with regards to China comes out clearly. A pessimist looking through Trump’s strategy would argue that he’s setting up for a proxy war with China over Africa.

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(source: thenakedconvos.com/wp-content/uploads/2012/09/china_africa_us1.png)

However, the most puzzling feature of the strategy, in terms of the economic focus on Africa, is the language. Aren’t we taught in Strategy 101 that one ought not announce plans for dominance as ‘plans for dominance’? One ought to use amicable language that highlights the benefits of mutual cooperation and economic partnership—which is what China does. Strategic language underplays true intentions of dominance and instead uses language that will put everyone at ease and welcome the player onto the field. However, rather than discretion, Trumps language boldly announces his plans to make the USA boss of Africa again and thus, transparently, makes his strategic objectives obvious to all.

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

How the interest rate cap has helped banks

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This article first appeared in my weekly column with the Business Daily on December 17, 2017

The interest rate cap and the effects it has had on the financial sector, specifically banks, has been a consistent feature in discussions about business and economics in Kenya this year. The main effects of the cap have been a notable contraction in liquidity particularly to SMEs. Banks are of the view that the cap has limited their ability to build risk into loan pricing and thus prefer to lend to government and larger companies. However, there are ways through which the interest cap, perhaps inadvertently, helped banks given the turmoil it has created in the sector.

Firstly, the cap has forced the sector to become more efficient. In order to cut costs to, partly, manage the effects of the cap, banks have put in several measures such as closing branches, reducing employee numbers and leveraging automation. Technology has been aggressively brought on board via new features, such as PesaLink, that reduce the need for staff to receive and process payments. Low performing branches seem to have been shut down and over 2,000 staff have been laid off. Perhaps the cap fast-tracked these efficiency measures since it was clear that automation, for example, had been part of long term plans for the sector. That said, the cap has forced banks to become leaner and more efficient entities in order to protect profit margins.

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(source: https://securecdn.pymnts.com/wp-content/uploads/2017/01/mobilebankingkenya.jpg)

Secondly, the cap may well have started a conversation among bank management on their risk assessment tools. It is an open secret that banks in Kenya are risk averse and generally want security in the form of assets or a monthly pay cheque against which they issue credit. Perhaps the cap has forced banks to rethink their risk assessment tools in order to better delineate high versus low risk clients. It is time the banking sector created more sensitive tools that look beyond assets and monthly salaries to determine whether credit will be offered or not. The reality is that there are relatively high income Kenyans who would likely be safe bets but have ‘informal’ sources of income that tend to be immediately classified as high risk by banks. It is time banks sophisticated their risk assessment tools to more clearly determine to whom they should lend. Hopefully the cap catalysed a conversation in this direction.

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Finally, the cap has perhaps woken the sector up to the need to be seen as an ally of the Kenyan people. One of the factors that informed the implementation of the cap was the widespread feeling among Kenyans that banks were greedy shylocks that deliberately over-priced loans with little concern over the onerous weight such pricing placed on Kenyans. Indeed disgruntlement with the banking sector is what led to popular support for the cap in the first place. Thus, hopefully the cap has made the sector more fully appreciate the need to be an ally of the Kenyan people by pricing loans more reasonably in the future.

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

Autocracy and Democracy in Africa: China’s Influence

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This article first appeared in my weekly column in the Business Daily on December 10, 2017

I’ve been thinking about China’s growing influence in Africa, and whether it is linked to growing autocracy on the continent, especially the East Africa region. However, it is not China alone that seems to be informing a move towards authoritarianism in the region. When Africa is given examples of countries that managed to catch up economically, the Asian bloc is often presented as the case study. Look at Singapore, Vietnam, China, Malaysia, Japan and South Korea, we’re told, they all managed to pull millions of out poverty and substantially improve the quality of life of their citizens in a relatively short period of time. What is not mentioned is that, for the most part, these countries were developed or are still developing under an autocratic state-led capitalism model where government drives and leads the articulation of capitalism and, to a greater or lesser extent, monitors and guides its evolution.

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(source: www4.pictures.zimbio.com/gi/Beijing+Municipal+Congress+Communist+Party+AYzoNUVRU8Al.jpg)

Africa is also not told that even Europe and North America made significant economic gains using models that were not democratic. The USA relied on the slave trade and slave labour to build wealth that was then used to drive industrialisation. Much of Europe relied not only on financial involvement in the slave trade to amass wealth, but also colonialism which played an important role in providing colonial powers with land and labour that generated immense profits that were then repatriated to European metropoles.  So some are asking: Why is Africa being told that the continent must develop under a democracy when so many others haven’t? And is this the most efficient path towards economic development?

In East Africa, we can see a move towards autocracy; indeed it can be argued that Kenya is the only viable democracy left. Ethiopia and Rwanda have made no secret of the fact that they are essentially autocratic states. Uganda has been under the hand of Museveni for well over 30 years and in Burundi President Nkurunziza seems bent on retaining control and extending his autocratic rule beyond constitutional provisions. In Tanzania, signs of autocracy are emerging given that the chief whip of the opposition party was shot, and President Magafuli shut down several newspapers.

China has been making aggressive inroads in Africa with mega project deals. FILE PHOTO | NMG

(source: http://www.businessdailyafrica.com/image/view/-/4222430/medRes/1832547/-/maxw/960/-/g7bbas/-/china.jpg)

Beyond philosophical questions as to why there seems to be growing autocracy in the region, international dynamics are also playing a role, specifically growing insularity in Europe and North America. The Trump Administration hasn’t even bothered to table a strategy for Africa and Europe seems preoccupied with Brexit, anti-immigration sentiment, and calls to use European money on Europe rather than on ‘others’. As a result, the voice from the global north that lectures Africa on the merits of democracy is receding and the power vacuum is intensifying the influence of autocratic China in Africa. Indeed, the autocracy that is emerging in Africa seems to be modelled more against the technocratic autocracies of Asia rather than the old African autocratic model exemplified by leaders such as Idi Amin, Mobutu, Mengistu and more recently, Mugabe.

It seems it is time for Africa to ask itself some tough questions: Should growing autocracy be encouraged? And if so, what will it cost Africans in terms of freedom of expression, human rights and political freedom? Or is democracy, despite all its problems, still the best way forward for the continent?

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

Podcast: China and the rise of Africa’s new autocrats

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On December 3, 2017 I featured on the China Africa Project Podcast with Eric Olander and Cobus van Staden where we discussed growing authoritarianism, in East Africa in particular, and the role of China in challenging the notion that democracy is the best governance model for Africa.