International Finance

How Kenya can industrialise in 5 years

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This article first appeared in my weekly column with the Business Daily on June 18, 2017

Manufacturing can play a crucial role in Kenya’s inclusive growth by absorbing large numbers of workers, creating jobs indirectly through forward and backward linkages to agriculture, raising exports and transforming the economy through technological innovation.

It is with this in mind that the Overseas Development Institute and the Kenya Association of Manufacturers coordinated a multi-stakeholder process to determine how the manufacturing sector can create 300,000 jobs and increase the share of manufacturing in GDP to 15 percent in 5 years.

A plan titled ‘10 policy priorities for transforming manufacturing and creating jobs’, has been developed focused on key actions that can be taken to build the manufacturing sector and achieve the aforementioned goals. The plan is rooted in the Kenya Industrial Transformation Programme and the Vision 2030 Manufacturing Agenda targeted at priority sectors of both formal and informal manufacturers (jua kali) as both sectors need support if Kenya is to industrialise equitably.

Image result for manufacturing Kenya

(source: http://www.industrialization.go.ke/images/kenya_manufacturing.jpg)

The first issue to address is the business environment in Kenya. While Kenya has moved up 21 places, in its position World Bank’s Ease of Doing Business Rank, considerable constraints exist particularly in dealing with construction permits, paying taxes and registering property. Thus further action is needed to improve the business environment. Additionally, for manufacturing to flourish the country needs a fiscal regime that is more articulated to support the sector. Fiscal policy at both national and county level needs to be more deliberately leveraged to support industrialisation through, for example, developing fiscal incentives that drive investment into manufacturing.

The third action point concerns making land more accessible and affordable. Research by Hass Consult reveals that the price of land in and around Nairobi has increased by a factor of 6.11 to 8.05 since 2007. Aggressive increases in land price dampen investor appetite for investment in manufacturing which tends to be land intense. Thus there is a need to prevent inflationary speculation on land prices, and develop government land banks earmarked for industry.

Energy costs continue to be punitive in the country and make Kenya’s manufacturing sector less competitive than even its East African neighbours. Government efforts need to not only target increasing energy generation but also lower energy prices and increase the quality and consistency of energy to the industrial sector. This should be coupled with a key gap constraining the sector- access to finance. Manufacturing companies, particularly SMEs and informal industry, are undercapitalised and face multiple obstacles to obtaining access to finance. Bespoke financing mechanisms aimed at the sector, such as through an Industrial Development Fund, need to be fast-tracked.

Image result for manufacturing Kenya

(source: https://newsghana.com.gh/wp-content/uploads/2015/01/wpid-manufacturing150115.jpg)

Kenya cannot leverage manufacturing for economic development without creating a more aggressive export push into regional and international markets. Kenya’s exports to the EAC are declining and opportunities such as AGOA can be tapped into more effectively. Additionally, Kenya needs to reorient education policy and skills development towards STEM subjects so that the skills in the labour pool drive the growth of manufacturing.

Finally, overall coordination in the sector is crucial. An agency in government should be created that coordinates all government entities relevant to industrialisation such as agriculture, education and the National Treasury. The private sector also needs to better coordinate particularly along value chains to drive sub-sector growth in a more robust and targeted manner. Finally, there is a need for better coordination between public and private sector through fostering trust and reciprocity to drive industrialisation forward.

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

Podcast: Chinese debt in Africa

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I talked with Eric Olander of The China Africa Project on growing Chinese debt in Africa.

 

What China’s One Belt, One Road initiative means for Africa

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This article first appeared in my weekly column with the Business Daily on May 21, 2017

Last week China announced a plan to build a vast global infrastructure network linking Africa, Asia, Europe and the Middle East into ‘One Belt, One Road’. China plans to spend up to USD 3 trillion on infrastructure in an effort that seems to be centred more on linking 60 countries in the world with China, not necessarily each other. This One Belt initiative is perhaps part of China’s determination to position itself as the world’s leader in the context of Trump’s insular USA. This initiative has two-fold implications for Africa: the opportunities and potential problems that it creates.

One belt, one road

(source: https://qz.com/983581/chinas-new-silk-road-one-belt-one-road-project-has-one-major-pitfall-for-african-countries/)

In terms of opportunity, obviously African needs continued financial support in infrastructure development. The Africa Development Bank (AfDB) estimates that Africa’s infrastructure deficit amounts to USD 93 billion annually until 2021. In this sense any effort to support the development of Africa’s infrastructure is welcome.

Secondly, this is an opportunity for Africa to negotiate the specifics of the type of infrastructure the continent requires and create a win-win situation where Africa leverages Chinese financing to not only address priority infrastructure gaps, but also better interlink the continent.

However there are multiple challenges the first of which is that Europe, India and Japan seem edgy about this initiative and have distanced themselves from it. According to India’s Economic Times, India and Japan are together embarking upon multiple infrastructure projects across Africa and Asia in what could be viewed as pushback against China’s One Belt initiative. The countries have launched their own infrastructure development projects linking Asia-Pacific to Africa to balance China’s influence in the region.

Europe is also edgy because the initiative has not been collaborative and comes across as an edict from China; countries in the initiative were not consulted. Europe is also uneasy with the lack of details and transparency of the initiative seeing it as a new strategy to further enable China to sell Chinese products to the world.

Secondly, analysts have pointed out that from an Africa perspective, the One Belt seems to continue the colonial legacy of building infrastructure to get resources out of the continent, not interlink the continent. Will the initiative entrench Africa’s position as a mere raw material supplier to China and facilitate the natural resource exploitation of the continent?

Image result for Africa infrastructure

(source: africanbusinessmagazine.com/wordpress/wp-content/uploads/2017/01/Africa-infrastructure-1k.jpg)

Additionally, there are concerns with how the financing will be structured and deployed. Will financing be debt or grants? It can be argued that China needs to increase its free aid toward Africa in order to build its image as a global leader. Further, who will build the infrastructure? Africa has grown weary of China linking its financing to the contracting of Chinese companies. Will this infrastructure drive employ Africans and use African companies? If not, then it can argued that Africa will merely be borrowing money from China to pay itself back.

Linked to the point above, is the fact that Africa is already deeply indebted to China. In Kenya, China owns half of the country’s external debt. Kenya will pay about KES 60 billion to the China Ex-Im Bank alone over the next three years.  Kenya and Africa do not need more debt from China, and if this initiative is primarily debt-financed (in a non-concessionary manner), it will cause considerable concern in African capitals.

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

The cost of living question in Kenya

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


Over the past few weeks there has been deep concern voiced by Kenyans with regards to the rising cost of living in the country. Kenyans want to know why their money doesn’t go as far as it used to in the past.

There are several variables at play here the first of which is a no-brainer: the drought. The drought has had the effect of destroying food crops and livestock leading to cuts in the supply of food products. Yet the demand for food expands each year as new Kenyans are born. The drought has created a situation where food demand far outstrips supply leading to an increase in food prices and food price inflation.

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(source: worldteanews.com/wp-content/uploads/2016/11/WTN161031_KenyaDrought_tumblr_lqip385wlz1r1r5rno1_500-lo-res.jpg)

The second factor at work is the fact that Kenya is an import economy of which food products are a key import. With the strengthening of the dollar as the US economy recovers, the relative depreciation of the shilling (albeit marginal), is making imported goods more expensive and slowly exerting inflationary pressure on food prices.

Thirdly, the interest rate cap has led to a noticeable decline in lending. And although the cap counters inflationary pressure through a contraction in liquidity, the cap means the small loans Kenyans used to qualify for to meet urgent expenses are no longer coming in. As a result, the reduced cash flow for the average Kenyan means that they have to make the little they earn stretch even further as they do not have the cushion of short term loans on which to rely. The effect is that Kenyans feel more broke now than they did last year.

Image result for interest rate cap

(source: https://i1.wp.com/chetenet.com/wp-content/uploads/2017/04/Interest-Rate-Caps-Effects.jpg)

Finally, it would not be a stretch to surmise that there are more Kenyan Shillings moving around in the economy due to the election. Money is being spent on election related expenses that are not present during a non-election year. To be clear, there is no hard data on this which is a shame; there should be a study to assess the extent to which election spending pushes up inflation. I raised this concern with an expert a few years ago; I asked him how the government will manage the likely inflation linked to ‘artificial’ election-related spending. He told me that it would correct itself in the medium to long term as that extra liquidity leaves the economy post- election.

The factors detailed above inform why there seems to a money crunch for many Kenyans. And sadly, the interest cap has shut off the tap of liquidity on which Kenyans use to rely in times like this.

The truth of the matter is that there are no quick and ready solutions to this issue and short term remedial action will not address the structural problems of Kenya being an import economy and the ravaging effects of the drought where millions, if not billions, of shillings in agricultural assets have been lost. And since it is an election year, the related spending will continue and there will likely not be the will to reverse the interest rate cap–not until elections are over.

Government and non-government actors should take this time to assess the various issues elucidated above and develop strategies to buffer Kenyans from the confluence of factors currently making life difficult for so many Kenyans.

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

TV Panel feature on the cost of living in Kenya

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On May 11, 2017 I was interviewed on cost of living issues in Kenya.

Use Public Private Partnerships to reduce debt burden

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This article first appeared in my column with the Business Daily on April 9, 2017

When the budget was read two weeks ago, one of the key questions that kept coming us was the issue of growing public debt in Kenya.  In the 2017/18 National Budget, the Kenya government plans to borrow KES 524.6 billion (6 percent of GDP).

Views differ on whether Kenya’s debt is sustainable. Some are of the view that given the massive gaps in key sectors such as energy and transport infrastructure, the country must continue to do everything possible to finance and address the gaps and that debt accrued now will pay off in the long term. Further, they argue that at a debt-to-GDP ratio of about 53 percent, Kenya is still well below the World Bank ceiling (or tipping point) of 64 percent. And while the IMF has raised concerns about Kenya’s public debt, it is below what they view as the applicable ceiling for Kenya at a 74 percent debt-to-GDP ratio. Others are of the view that a debt-to-GDP ratio beyond 40 percent for developing and emerging economies is dangerous. Further, at about 53 percent, the debt-to-GDP ratio is above the government’s preferred ceiling of 45 percent raising questions as to why this ceiling is being openly flouted.

https://i1.wp.com/www.worldbank.org/content/dam/Worldbank/Feature%20Story/Debt/Debt_Ladder-400X269.jpg

(source: http://www.worldbank.org/content/dam/Worldbank/Feature Story/Debt/Debt_Ladder-400X269)

Beyond the number crunching on debt figures, the broader concern for the country is that the substantial investment requirements for the country cannot be met by debt alone. This is where Public Private Partnerships (PPPs) come in. PPP refers to a contractual arrangement between a public agency and a private sector entity in which the skills and assets of each sector are shared in delivering a service or facility for the use of the general public. In short, government teams up with private sector to finance, manage and operate projects that are for public use.

There are numerous forms of PPPs ranging from projects where government owns the project and private sector operates and manages daily operations, to where private sector designs, builds, and operates projects for a limited time after which the facility is transferred to government. As the Africa Development Bank points out, PPPs are a useful means through which investment in development can continue in the context of growing pressures on government budgets. But as the World Bank points out, for PPPs to work the private sector needs political stability, a pipeline of bankable projects, transparent and efficient procurement, risk sharing with the public sector and certainty of the envisaged future cash flows.

Image result for public private partnership

(source: http://www.neoias.com/index.php/neoias-current-affairs/617-public-private-partnership)

The good news is that the Kenyan government seems to be aware of the importance of PPPs at both national and county level. Numerous county governments are working with development partners to build their PPP capacity as well as identify viable county-level PPP projects. At national level, the government seeks to lock in investment through PPPs worth about USD 5 billion between 2017 and 2020. This will be important in managing the growth of public debt in the medium and long term. Through the intelligent use of PPPs, government can put the country on the path of sustainable development financing.

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

How fiscal policy can attract the right type of investment for Africa

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This article first appeared in my column with the Business Daily on March 30, 2017

Someone once told me that there are three types of foreign investors in Africa. The first are those who invest in the country in order exploit raw natural resources and direct them to their projects outside the country. The second are those who invest in countries in order to flood the country’s markets with their products. The third are investors who invest in the country for the long-term in a manner that creates employment, builds incomes, contributes to GDP growth and of course, generates profits. Africa seems to have little problem in attracting the first two investor type, but often struggles to secure the third type. The question for Kenya is, which type of investor is the country attracting? And what can be done to attract the third type of investor?

These questions are important in the context of fiscal policy, of which a key event will take place today when the National Budget 2017/18 will be read. Fiscal policy ought to and can play an important role in attracting the right type of investor to Kenya.

Over the past ten years, the government has been on an investment drive to build the country’s infrastructure. In principle, efficient public investment in infrastructure can raise the economy’s productive capacity by connecting goods and people to markets. The national budgets over the past few years have thus has allocated significant amounts to energy and transport infrastructure such as LAPSSET, the Standard Gauge Railway (SGR), Rural Electrification and the Last Mile Project. With the SGR due to be completed this year, it will become clear what dividends the country will reap from such heavy fiscal commitment to infrastructure. That said, infrastructure investment is a prerequisite to attract the third investor type as the ease and cost of transporting goods are an important business cost and variable.

Image result for infrastructure kenya

(source: http://footprint2africa.com/wp-content/uploads/2016/11/construction.jpg)

The second fiscal strategy that can bring long term investors as well as bolster food security and manufacturing is tax incentives to create productive agricultural value chains. Fiscal policy can more effectively engender a shift from subsistence to commercially productive farming by identifying commercially viable agriculture value chains and linking small holder farmers to manufacturers. Through incentives such as tax remissions along key food and beverage manufacturing value chains, fiscal policy can incentivise higher productivity in farming and contribute to making manufacturing more dynamic than is currently the case. The key however, is consistency in fiscal policy with no abrupt changes in tax remissions or other incentives so as to engender long term investment in food value chains.

Thirdly, the right investor type can be attracted to the country through investment in Kenya’s human capital. As the IMF points out, more equitable access to education and health care contributes to human capital accumulation, a key factor for growth and an improvement in the quality of life. Fiscal policy has two roles here; the first is creating incentive structures for private sector investment into the country’s private and public education and health networks and the second being the country’s own fiscal commitment to health and education sectors. National budget allocations to education stand at about 23 percent, while commitments to health are at about 6 percent of the national budget. Health allocations are paltry and while the education allocations look impressive, a great deal of the funds are directed to free primary education. In order to develop a healthy, highly skilled and productive labour pool, government ought to consider reorienting the almost obsessive fiscal commitment to infrastructure towards more robust allocations to health and post-secondary education. This should be complemented by the creation of incentive strategies that attract investment into national priority nodes for the sectors.Image result for health kenya

(source: https://investinkenya.co.ke/components/uploads/0942a7f713ab6801a17e2cfb325fc99c.jpg)

The fourth means through which fiscal policy can attract the right investors is by managing tax rates at national and county levels.  At the moment, private sector is facing numerous tax burdens due to the lack of harmonisation of tax rates between national and county governments. Fees and charges at county level are unpredictable, non-standardised and onerous; business face multiple payments for advertising and transporting goods across county borders. While these are not technically taxes, they are a form of tax exerted on private sector with no clear link to the service that should be expected for such payments. At national level, the main concern for private sector beyond VAT refunds, is that a small segment of business and individuals are onerously taxed due to the narrow tax base in the country. Thus national government ought to develop a long-term strategy for broadening the tax base.

A key component of broadening the tax base is addressing informality in the economy where millions of informal businesses do not pay taxes. The aim here is not to tax informal businesses, as most are micro-enterprises barely making profits, but rather creating an ecosystem that encourages the development of informal business. Again, fiscal action can be taken by government to direct financing focused at developing micro, small and medium enterprise through more the strategic deployment of the Youth, Uwezo and Women’s Funds. The financing architecture of these three funds has to be fundamentally rethought to focus on building technical skills and business management capacity, and improving productivity and profitability in the informal sector.

Image result for jua kali kenya

(http://www.afroautos.com/wp-content/uploads/2014/04/Jua-Kali3.jpg)

Additionally, the government ought to develop a strategy for Kenya’s cottage industry which is the Jua Kali (informal industry) sector linked to solid fiscal commitments. Through fiscal action, the government should create an investment environment that attracts traditional investors as well as non-mainstream financing such as angel investors, impact investors and venture capitalists to invest in Jua Kali. In this manner, action will not only invest in the informal sector, it will create incentives for investment into a sector in which over 80 percent of employed Kenyans earn a living, in a manner that complements fiscal policy.

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