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.
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.
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.
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; email@example.com
On November 2, 2017 I was part of a panel on Citizen TV that analysed the effects of the elections on the Kenyan economy.
This article first appeared in the Business Daily on October 17, 2017
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.
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.
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; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on September 17, 2017
In August, the Brookings Institution released its Financial and Digital Inclusion Project report which evaluates access to and usage of affordable financial services by underserved people across 26 countries. The 2017 report assessed financial inclusion ecosystems in terms of country commitment, mobile capacity, regulatory environment, and adoption of selected traditional and digital financial service. Kenya was ranked number one for the third consecutive year. Kenya’s top rank was driven by its robust commitment to advancing financial inclusion, widespread adoption of mobile money services among traditionally underserved groups, an increasingly broad range of mobile money services (including insurance and loan products), and an enabling regulatory environment for digital financial services.
The UN defines financial inclusion universal access, at a reasonable cost, to a wide range of financial services, provided by a variety of sound and sustainable institutions. A key is to ensure that all households and businesses, regardless of income level, have access to, and can effectively use, the appropriate financial services they need to improve their lives. According to the Brookings report, 75 percent of adult Kenyans have a financial account, and 71 percent of women own financial accounts.
This is welcome news for Kenya because, as a study by the University of Nairobi argues, without inclusive financial systems, the poor must rely on their own limited savings and earnings to pursue growth opportunities which can contribute to persistent income inequality and slower economic growth.
However, there are gaps in the report that understate factors that hamper actual and lived financial inclusion in Kenya. While the report acknowledges that Kenya can make further improvements in consumer protection, better regulation of FinTech, improving cybersecurity, enhancing digital infrastructure and promoting financial education among underserved populations (particularly women), other factors were not addressed.
Firstly, as a UN report points out, innovative and inclusive finance, is not a ‘silver bullet’ to get people out of poverty. If efforts are not made to improve income levels of the economically marginalised, then access to financial services is of limited use. Financial inclusion is not useful in and of itself as it can only be leveraged when income levels allow robust use of systems established.
Secondly, is the issue of risk profiling in existing financial systems that may lock out the poor from actual access to financial services. The availability of numerous financial products is useless to those who are denied access to products due to their risk profile. Now that the network of inclusion exists, affordable financial products ought to be created for the financially marginalised so that digital platforms become a more effective means of expanding economic empowerment.
Finally is the interest rate cap and how it has affected lived financial inclusion in Kenya. The cap has been associated with a notable decline in credit growth particularly in ‘high risk’ segments such as SMEs, the self-employed and informal businesses. What is the use of having a financial account if in reality, one cannot qualify for the financing that makes having the financial account useful in the first place? While there are welcome signs that the cap may be reversed in the near future, the report ought to better incorporate the interrogation of domestic factors that regress progress made in terms of actual, lived financial inclusion.
Kenya ought to be proud of achievements garnered in terms of financial inclusion yet remain aware of further improvements that ought to be made to better link financial inclusion with economic empowerment and development.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on September 10, 2017
Earlier this year, McKinsey and Company, released a report on Sino-African relations that assessed the activities of Chinese businesses in Africa as well as Sino-African economic partnerships. There are about 10,000 Chinese-owned firms operating in Africa today and about 90 percent of these are privately owned debunking the myth that Chinese business activity in Africa is dominated by State Owned Enterprises and overly influenced by state craft. Of particular interest is understanding how the Chinese presence is informing industrial development, a chronically underdeveloped sector on the continent.
31 percent of Chinese firms in Africa are in manufacturing and they already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion; revenues in manufacturing outstrip that of any other sector listed. Chinese factories are focused on Africa’s domestic markets, 93 percent of revenues come from local or regional sales in Africa.
One third of Chinese firms report profit margins of over 20 percent in 2015. In manufacturing this is attributed to ample pricing headroom in Africa; prevailing market prices for manufactured products are so high that Chinese firm earn comfortable profits and their profit levels are higher than those of African firms. Interestingly although manufacturing is capital investment and commitment heavy, 31 percent of firms made investment decisions within a week. 67 percent of firms investments are self-financed and Chinese companies are optimistic about the future of the African market with most firms indicating plans for expansion.
Chinese firms are also generating local employment as 89 percent of employees are African; this figure is 95 percent in the manufacturing sector. 61 percent of firms upskill African employees through professional training and/or apprenticeships, an indication that Africa is poor at educating Africans with skills relevant for employment. In terms of management, 44 percent of managers are African, this figure is 54 percent in the manufacturing sector. Chinese firms contribute to African markets mainly by introducing new products, services, technologies and methods.
The report is clearly optimistic of Chinese firm activity in Africa, for example more content is focused on detailing the benefits than to delineating the costs; one wonders why. And the costs are significant, there are concerns of Chinese firms engaging in dumping where they sell products in export markets at prices below those in domestic markets. This may be leading to ‘unfair’ capture of export markets from African firms. Breaches of labour regulations are more common among Chinese firms than in other foreign-owned firms. These include inhumane working conditions, work without contracts, exceeding legal limits on work hours and threatening to fire workers who refuse to work in unsafe conditions.
Clearly Chinese firms will continue to make inroads into Africa and the continent will accrue many benefits from this but will also have to vigilantly manage the costs. With regards to industrialisation, it will be interesting to see how African industrial policy will be structured to encourage a stronger indigenous presence in the sector given the ability, innovation, efficiency and commitment of Chinese manufacturing firms, firms which also benefit from African trade deals as they are domicile here. Chinese firms make it clear that there is a lucrative domestic market that indigenous firms have failed to fully tap and thus African firms have a lot to learn from Chinese firms. If trends continue, a situation may emerge where African industrialisation is owned and dominated by Chinese firms. While this is welcome in terms of contributions to Africa’s development, can it then be termed ‘African’ industrialisation?
Anzetse Were is a development economist; firstname.lastname@example.org