International Finance

Smart move by China on the Standard Gauge Railway financing

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This article first appeared in my weekly column with the Business Daily on May 5, 2019

Last week, the Chinese government hosted the second Belt and Road Forum, inviting countries around the world to engage in the conversation on the Belt and Road Initiative (BRI). Of course, African countries are key players in the BRI not only because it serves interests from the Chinese government and private sector, but also because the BRI provides what African governments view as an opportunity to meet the continent’s infrastructure deficit. During the Forum, key developments occurred that affect African governments, one of which concerned Kenya.

It was revealed that the Kenyan government failed to secure USD 3.68 billion from China (in loans and grants) to take the Standard Gauge Railway (SGR) from Naivasha to Kisumu, and on to the Malaba border with Uganda. The Kenya government has consistently sold the SGR as a key infrastructure development and investment it has made on behalf of the Kenyan people. And yet, during a conference focused on infrastructure financing from China, their core infrastructure financing objective from China was not met. The question is, why? And what does this mean for Kenya? In my view this is good news and demonstrates a seriousness from the Chinese government that perhaps the Kenyan government didn’t anticipate.

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Firstly, Kenyans seem relieved by this development. Kenyans have grown weary of what they view as a government with fundamental problems with corruption and fiscal accountability, continuing to secure massive amounts of debt. In declining to finance the final stages of the SGR, this seems to signal the Chinese government is coginsant of these concerns. Financial feasibility is a core concern, and given the serious problems with corruption linked to the previous phases of SGR that the Kenyan government has clearly seemed unable to resolve, why should they get more money? So diplomacy issues aside, money is money and it has to be feasibly and prudently used. China has signaled that there are pending issues to be addressed and they have a keen interest on how their money is used.

Secondly, it has given the Kenyan government pause for thought. When what has been profiled as an important diplomatic and developmental project fails to secure financing from the Chinese government, the Kenya government is being asked what went wrong? As a Kenyan economist, this signals that as far as China is concerned, it’s not business as usual. The SGR is an anchor BRI project, and yet it has been put on hold. The Kenyan government needs to use this as yet another signal, that there are fundamental problems with its financial accountability structures. There are no shortcuts on this issue.

Finally, it signals a shift in China’s approach to lending and debt to African governments. While Ethiopia got debt relief, Kenya was unable to secure new debt. So a willingness of China to lend or forgive debt is not the issue. Context is important. In some cases, China has communicated a willingness to forgive debt, in other cases, such as Kenya, China has made it clear that core concerns have to addressed before substantial debt is conferred.

In short, the Belt and Road Forum is a key turning point in how China lends to Africa. It is up to each African government to demonstrate that it is a responsible custodian of public finances. Not because of China or any other external party, but because their countries will never develop as long as African governments continue to misappropriate public funds. Let African governments play this as they will, African publics are watching.

Anzetse Were is a development economist

TV Interview: How to leverage the African Continental Free Trade Area

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On April 4, I was a guest on CGTN’s  Global Business with Ramah Nyang. With 22 countries having ratified the African Continental Free Trade Area (AfCFTA) Treaty, it’s set to take effect from May 30 2019. But will the be just another colossal AU dud? As I suggest, “we’ve got to get rid of the paranoia.”

TV Interview: The Smart Investor

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A few weeks ago I sat with Aly-Khan Satchu  on Metropol TV (Kenya) to discuss the domestic and regional economy. We discussed the Big Four Agenda, factors that prevent EAC economic cooperation, the shifts and emerging economic challenges in Ethiopia, and Ghana.

Need to build coordinated SME ecosystem in Africa

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

The Sankalp Africa Summit 2019 occurred about ten days ago in Nairobi and brought together local and global players active in the development and support of African SMEs. A plethora of entities were present from academic institutions and accelerators to financiers (angel investors, venture capital, private equity), development finance entities, business linkage and networking bodies as well as African SMEs, specifically social enterprises. Those who attended were from countries all over the world in Africa, Europe, USA and Asia. As a speaker and participant of the conference what was abundantly clear was that there is a great deal of interest and activity focused on building responsible business in Kenya and Africa. And support towards this cause ranges from financing, to research and technical support, to supply chain linkages as well as business development support. There are three observations that gave me pause for thought as I interacted with Kenyans, African and global players so passionate about, and also knowledgeable about Africa SME development.

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First is the lack of government presence in the coordination of the demonstrated interest in African SME growth and development. Kenya, for example, lacks a fundamental institutional framework and strategy for the development and growth of SMEs. As a result, all the interest and support implemented by local and global players is being under-leveraged. Kenya, and many African countries which also usually have no government SME development strategies and structures, fail to deliberately aggregate and coordinate the expertise and capacity clearly interested in the African SME space. This leads to a wastage of expertise, replication and subpar peer learning.

Secondly, and linked to the lack of coordination, is the lack of aggregated business deal generation. As someone who interacts with both SMEs and financiers, I’ve seen a clear gap in linking financing needs to financing capacity interested in Africa. During Sankalp what became clear is that such forums are a key space where SMEs meet financiers who could possibly be the right fit for them. But this is not enough. There has to be a more coordinated effort to link SMEs to financiers, as well as graduate SMEs from one type of financing to the next. The lack of such linkages leads to two problems. First, SMEs complain that there are no financiers interested in partnering with them to grow. Second, financiers complain about a lack of a deal pipeline, namely viable businesses that can be credibly financed. This has led to the perception that Africa cannot absorb the scale of capital theoretically available to the continent. This is not true; the problem is linkages and aggregation. What is required are more platforms and entities that link viable SMEs with interested financiers and aggregate business deals.

Finally, is the issue of support structures for SME development; financing is not enough. Many seem to forget that many African countries are very young on their journey in private sector development. So while there is a financing need, an ecosystem that provides niche expertise, long-term partnership and technical/ technological support is also key. Without such an ecosystem of partners, capital will likely be underleveraged.

Anzetse Were is a development economist

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.



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

Toxic public debt a chance for African firms to raise capital

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This article first appeared in my weekly column with the Business Daily on November 25, 2018

Kenya’s public debt stands at over KES 5 trillion. Both last year and this year, international finance institutions and development banks such as the World Bank, African Development and the IMF cautioned Kenya over the pace, composition and terms of public debt accrual. But the appetite for debt continues unabated. And Kenya is not alone. The Brookings Institution makes the point that since 2008, public debt in Africa countries has been rising at an increasingly rapid pace and by 2016, the continent’s gross public debt to GDP ratio had doubled. Countries such as Chad, Sudan, South Sudan, Zimbabwe, Cameroon, Ghana, Eritrea, Ethiopia, Djibouti, Zambia, Zimbabwe, Mozambique and of course Kenya have been warned that their fiscal path and debt pile up is unsustainable.

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The composition of debt is of particular concern. Kenya for example has a domestic to foreign public debt split of about 50-50. With the strengthening dollar, the cost of servicing foreign debt will be increasingly onerous. This is in a context of chronic subpar revenue generation with revenue targets routinely revised downwards year on year. Thus, not only is government unable to raise planned levels of revenue, it will have to figure out how to raise even more local currency to service foreign debt as the dollar strengthens.

Another favourite of African governments has been sovereign bonds, and these too are becoming more expensive. Last week Bloomberg reported that spreads on Africa’s sovereign bonds had widened to 506 basis points (bp) above U.S. Treasuries, the most in two years. Te Velde, an analyst, makes the point that at the current rate at which African countries issue sovereign bonds (USD 14bn in the past year), a 2 percent (500bp-300bp) increase in cost of financing, means an increase in future cost of servicing newly issued bonds at more than USD 250 million a year. Let that simmer for a while.

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Now this would perhaps be fine if there were assurance that African governments were using the debt effectively and in an economically productive manner. But even that is not clear. What is clear is that the rapid accumulation of debt by African governments, partnered with serious questions about fiscal accountability will translate to a massive drop in the popularity African governments have been enjoying in local and international debt markets. And this is good news for the African private sector.

Africa’s private sector continues to be under-capitalised and the past decade or so of considerable appetite for public debt from Africa has left most of the African private sector in the shadows. However, creditors are beginning to understand that debt owed by African governments can be toxic. And this presents the perfect opportunity for private sector in Africa to better position itself to domestic and international players for financing. Let the African private sector grab this opportunity and show the world that much of Africa still has its head on right.

Anzetse Were is a development economist;

The New Face in Stemming Illicit Financial Flows in Africa

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This article first appeared in my weekly column in the Business Daily on October 10, 2018

Recent action in the banking sector in Kenya ought to be noted where the Central Bank of Kenya (CBK) announced that an unspecified number of banks are under investigation with regards to tracing the recipients of the allegedly irregularly acquired funds linked to the National Youth Service (NYS). Media reports indicate that bank accounts of companies and suspects with money believed to have been questionably acquired via the NYS have been frozen for six months. The CBK ought to be commended for taking this step, which is well within its ambit of authority, largely because it has drawn attention to the local articulation of illicit financial flow involvement. The CBK Governor indicated that regulatory guidelines on handling the proceeds of corruption are clear to all financial institutions making chief executive officers of those that ignored the rules personally liable.

The complexity and weight of what it trying to be done should not be underestimated so it would be prudent to start with definitions. Global Financial Integrity defines illicit financial flows (IFFs) as illegal movements of money or capital from one country to another. GFI classifies this movement as an illicit flow when the funds are illegally earned, transferred, and/or utilized. The first point to note is that this definition is insufficient in the African context.  At least three types of IFFs are present in countries like Kenya. The first is the well-known IFF particularly by private sector which transfer fund to tax havens abroad and use strategies such as transfer pricing to under-declare tax liabilities. The second is to do with the funds irregularly acquired from public coffers, through government-financed projects that are transferred from government accounts to local recipients. The third type of IFF is that linked to government-financed projects that are transferred from government accounts to recipients abroad. I have previously noted that African publics have been relatively disinterested in IFFs because they did not see how stemming IFFs would be of benefit to them.

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The action taken by the CBK has changed this because it is the first time, at least in living memory, a regulator has put the banking sector on the spot with regards to how they facilitate and profit from IFFs. Thus, the action from the CBK ought to be positively noted as Kenya is in a region surrounded by countries in conflict which often use Kenya as a centre for illegal financial transactions.

An example of local participation in IFFs involves South Sudan. An investigative documentary, The Profiteers, unpacks how leaders of states in conflict profit from war using the financial systems of neighboring countries. The only way elites can profit from the war is if key regional financial hubs such as Kenya continue to allow apparently illegally acquired wealth move through their financial systems to their profit. The facilitation of such IFFs expose the Kenyan financial system to the risk of financing of war and civil instability. Because despite the presence of anti-money laundering money legislation, if the banking sector is lax with regard to any type of IFF, it exposes the entire financial system to the transfer of illegally acquired funds. IFFs are a national and regional security issue.

In 2020, Kenya will be subject to a review by the Financial Action Task Force which will scrutinise the country’s financial sector. Any abuse of Kenya’s financial system will put the integrity of the country’s financial system in question and undermine Kenya’s international reputation and attractiveness to investors.

Anzetse Were is a development economist;