Economics

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.

 

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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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(source: https://softkenya.com/kenya/wp-content/uploads/2011/11/Kenya-Economy.jpg)

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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(source: https://i1.wp.com/kenyanlife.info/wp-content/uploads/2016/11/Counties-in-kenya.png)

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; anzetsew@gmail.com

Kenya can do more on Ease of Doing Business

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

Last week the World Bank’s Ease of Doing Business Report was released which revealed that Kenya’s standing had improved by 12 places. Kenya is now ranked 80 among 190 economies and is the top improver in Africa. The last time Kenya was ranked this highly was in 2008 when the country stood at number 84. Kenya is now the third highest in Africa with only Mauritius and Rwanda higher than Kenya at 49th and 56th place respectively. The report stated that Kenya’s improvement was credited to five reforms in the areas of starting a business, obtaining access to electricity, registering property, protecting minority investors and resolving insolvency.

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(source: primer.com.ph/blog/wp-content/uploads/sites/14/2016/10/doing-business.jpg)

These improvements are important for several reasons the first of which is that the report is an important signaller for investors, particularly foreign investors. Improvements in ranking are positive signals for foreign investors in particular. Some may argue that the report makes no difference to the ordinary Kenyan but the truth is that SMEs and informal businesses are tethered to larger businesses who often seek foreign investors. Thus an indication that the investment climate has improved bolsters investment opportunities for large formal businesses who can that pass business on to SMEs and informal businesses as suppliers, distributors or service providers.

Secondly the report is important because it gives an indication of how easy it is to start and run a formal business in Kenya. The easier it is to start and run a formal business in Kenya, the higher the chances are that informal businesses may take the path toward formalisation. With about 90 percent of employed Kenyans sitting in the informal economy, efforts to formalise are welcome as formalisation is associated with higher productivity and profitability, better compensation, better working conditions as well as business stability.

That said, there are areas not covered in the report, the first of which is that it does not give an indication of the business environment for informal businesses where most Kenyans are employed. Informal businesses are affected by unique factors such as high vulnerability to corruption, lack of formal business premises, lack of supportive policy action and lack of access to credit and financing precisely because of their informality. Kenya could take the report further by creating a process through which the business environment in which informal businesses function is also assessed and recommendations made for improvement.

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(source: https://kenya.oxfam.org)

Secondly, the report does not breakdown the business environment to the county level. While it may be out of the scope of the World Bank to do a comprehensive county investment climate assessment, Kenya needs it. Thus a process ought to be developed through which the business environment at county level is assessed and rankings published. Ranking counties will do two important things; first it will signal to domestic investors where they ought to invest. Secondly county ranking will create positive peer pressure between counties and catalyse a process through which county governments more firmly effect improvements in county business environments.

Thus as Kenya celebrates the gains made in the Ease of Doing Business ranking we should be cognisant of how the process can be pushed further to catalyse further improvements in the domestic business space.

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

 

 

TV Interview: Effect of the elections on the Kenyan economy

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On November 2, 2017 I was part of a panel on Citizen TV that analysed the effects of the elections on the Kenyan economy.

How poverty impedes development in Africa

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 This article first appeared in my weekly column with the Business Daily on October 29, 2017


The fact that Africa struggles to meet development goals is not a secret, but an understanding of the role poverty plays in this process is less common. Africa seems to be caught in a vicious cycle where a poor status of development across a cross section of criteria exacerbates poverty and poverty negatively affects the ability of Africans to meet development goals.

According to the organisation World Hunger, in 2012, 47 percent of the population of sub-Saharan Africa, lived on USD 1.90 a day or less; below the poverty line. 22 percent of the world’s human development is lost due to inequality; the figure is 32 percent in Sub-Saharan Africa. There are several means through which poverty curtails Africa’s ability to develop.

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(source: http://www.borgenmagazine.com/wp-content/uploads/2014/04/africa.jpg)

Firstly is the role of poverty in economic growth. Poor Africans do not have the savings required to invest in activities that would boost their income. Further, poor Africans are seen as high risk and thus are routinely denied access to credit streams that would enable them to improve their financial status. Thus being poor, makes it harder to get the financial support required to get out of poverty.

Secondly there are effects of poverty on health and education. Higher levels of income reduce infant mortality, and better education in terms of primary and secondary school enrolment rates are positively associated with higher levels of income. But the reality is that poor people often cannot afford the healthcare they require, nor are they able to educate their children to basic levels of education. Thus the fact that almost every 1 in 2 Africans are in a state of poverty means that half of the continent has a fundamentally compromised ability to afford access to healthcare and education; a reality that then makes the prospects of rising out of poverty more difficult. Poor health compromises one’s ability to physical work and exerts a great toll on income growth. Poor education ensures that millions of Africans are vulnerable, stuck in low paying jobs, often in the informal economy that routinely undercompensate. Poverty itself makes it difficult for Africans to rise out of poverty.

Finally, poverty negatively affects human development itself. Research has found that exposure to poverty in early childhood impacts brain development. Damaging effects can range from poor cognitive outcomes and school performance, stunted development, limited future productivity as adults and intergenerational transmission of poverty, to a higher risk for antisocial behaviours and mental disorders. According to UNICEF, nearly half of all children in sub-Saharan Africa are living in extreme poverty; children are twice as likely as adults to be living below the poverty line. And because more children live in poverty, they are much less likely than an adult to be able to cope with extreme poverty because of stunting, infant mortality, and compromised early childhood development.

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(source: http://www.essaywow.com/wp-content/uploads/2014/12/lndikumana0723.jpg)

The good news is that this can all change. For example some of the negative effects of poverty on children’s brains can be mediated by support of the children’s caregivers. It is time Africa developed a strategy on how the negative effects of poverty on development can be systematically eliminated.

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

 

 

Gender inequality expensive for Africa

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This article first appeared in my weekly column with the Business Daily on October 22, 2017

 

According to the UN gender inequality is costing Africa USD 95 billion a year.  This figure peaked at USD 105 billion in 2014, or six percent of the region’s GDP.  In a report released by the UNDP last year, it was found that women achieve only 87 percent of the human development outcomes of men and only make 70 cents for each dollar made by men. The causes of gender inequality are numerous and range from lower levels of female secondary attainment, lower female labour force participation and high maternal mortality, to the physical and sexual abuse of women and girls by boys and men, as well as women being underpaid and undervalued in the workplace. Indeed, while 61 percent of African women are working, they still face economic exclusion.

Gender inequality is jeopardising Africa’s efforts for inclusive human development and economic growth. FILE PHOTO | NMG

(source:http://www.businessdailyafrica.com/)

The continued marginalisation and mistreatment of women and girls is making the continent lose billions and leaving everyone, including men and boys, worse off. Africa continues to be foolish in the tolerance of gender inequality. For example, women are crucial investors in their community and spend 90 percent of their revenue on their family or community.

Gender inequality in Africa is a multi-layered and complex issue, and class differences inform the articulation of how inequality is experienced by women.

Low income women are often trapped in an economic and cultural reality where girls are excluded from going to school; according to the UN only 39 percent of girls in rural areas attend high school. Low income pregnant women cannot afford good quality healthcare for themselves and their children and thus often die while giving birth and many of their children die before reaching the age of 5. Further, domestic labour is a grievous burden; African women and girls still carry out 71 percent of water collecting translating to 40 billion hours. While all members of the household, men and boys included, benefit from this female labour, women and girls are never compensated for their contribution. Low income women are also often locked in the informal sector; a sector riddled by a lack of regulation which often engenders gross injustices such as under-compensation, labour law violations and flagrant exploitation, all of which disproportionately affect women.

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(source: https://iycoalition.org/wp-content/uploads/Africa1.jpg)

High-income women who have the opportunity of being educated, can afford decent healthcare and often have help around the home are still affected by gender inequality. In the workplace for example, women are notoriously underrepresented in leadership positions. In Africa, only between 7 and 30 percent of all private firms have a female manager. This is largely due to patriarchal socialisation that conditions populations to prefer male over female leadership. Women are often judged negatively for exhibiting what are deemed to be the male qualities of ambition, assertiveness and even self-confidence. Contributions made by women are often under-appreciated and sometimes bro-propriated, a phenomenon where men take credit for ideas generated by women. And while high income women may have help at home, they are still disproportionately saddled with the domestic responsibilities. These range from ensuring the home looks presentable and ensuring the children do their homework, to the emotional labour of organising daily schedules, and knowing and catering to everyone’s emotional needs.

Africa will continue to lose billions to gender inequality and while this issue is often articulated as a ‘women’s’ issue, the reality is that everyone, including men and boys, are negatively affected by the mistreatment and marginalisation of women and girls.

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

 

Supplementary budget weakens Kenya’s fiscal position

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This article first appeared in the Business Daily on October 17, 2017

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A few weeks ago, the National Treasury presented a supplementary budget cutting development spending for the current financial year by KES 30 billion. Additionally, the IEBC has requested KES 12 billion for the presidential election re-run. These developments are problematic for several reasons.

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(source: https://static.pulselive.co.ke/img/incoming/crop7313340/0094679013-chorizontal-w1200-h630/national-treasury.jpg)

The first problem is Kenya is in an already compromised fiscal position where recurrent expenditure accounts for 58.8 percent of the 2017/2018 budget. We already have a budget with subpar development spending which translates to less money being channelled to productive spending; instead the bulk of funds sit in non-productive recurrent spending. Thus the cut in development spending will skew the development-recurrent ratio even further pushing Kenya into a position where government spending will have an even more muted effect on contributing to the economic growth.

Secondly, the government’s revenue collection for the fiscal year starting July was behind target by KES 29 billion. As much money as possible should stay in the development docket so it is used to spur economic growth and raise domestic revenue to better manage growing spending and debt needs and obligations. The cut in development spending will mean revenue targets will likely not be hit and government will have to borrow aggressively next financial year to plug the fiscal deficit due to subpar revenue generation catalysed by the cut in development spending.

Thirdly, private sector will be negatively affected. The supplementary budget indicates that development plans in roads, water, power plants, real estate projects and electricity transmission, will be affected. Domestic private sector usually contracted to implement such projects will not get contracts which would have ensured they remain productive. Bear in mind, the cut in development spending occurs in a context of muted economic growth due to a combination of election, the drought and the interest rate cap. Thus the development spending cut will exacerbate an already difficult year for many businesses, further compromising economic growth.

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Finally, there is a real risk that the cut in development expenditure will be shifted to recurrent spending. While National Treasury indicates it also seeks to make cuts in recurrent spending by limiting travel of individuals on the government payroll, they will likely be unable to save enough to finance the KES 12 billion requested for the election. It is likely that the election re-run will be partially or fully funded by money previously earmarked for development spending. This is deeply worrying as the government borrows to meet development expenditure. Thus there is an emerging situation where the country will likely use debt to finance recurrent expenditure; this is untenable. This puts the country on an even more precarious fiscal path.

Government seems to have a habit of using supplementary budgets to shift money from development to recurrent spending making it difficult to track the ratio between the two types of spending and analyse the extent to which debt is financing recurrent expenditure. While this year the surprise election re-run has put the National Treasury in a difficult position by generating expenditure momentum in the wrong direction, the features of this supplementary budget are not new. Greater caution needs to exercised in developing supplementary budgets so that this process is used to strengthen, not weaken Kenya’s fiscal position.

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