On September 18, I was part of a panel that discussed the 8% VAT on fuel that has since been effected.
On September 15, I sat down with Citizen TV to discuss dynamics between Chinese and Kenyans.
This article first appeared in my weekly column with the Business Daily on September 16, 2018
I recently came back from traveling in the USA after a long time of not having been there. What struck me was the robust presence of small business. Often sitting in Africa, you only here about massive US corporations, and their achievements. However, while I was there it struck me that there are similarities between small business in the USA and here in Kenya.
First, definitions are required so that the terms being used are clear. In the USA, a small business is one that, depending on industry, has a maximum of 250 employees or a maximum of 1,500 employees. Some say a ballpark definition for small business is one with 500 employees or less. However, Kristie Arslan who worked with the Small Business and Entrepreneurship Council in the USA, makes the point that 95 percent of small businesses have fewer than 10 employees. Here in Kenya there are three categories that can be defined as small business namely, micro (less than 10 employees), small (10 to 49 employees and medium (50 and 99 employees). These constitute the Micro, Small and Medium Enterprise (MSME) segment of the economy.
One key point of similarity is that small business in both countries lead in employing people. In the USA, small businesses employ 53 percent of the workforce; in Kenya 83 percent of employed Kenyans sat in the informal sector (which constitutes mainly of MSMEs) in 2017. Further, in both the USA and Kenya, small businesses generate the most jobs. In the USA, Arslan argues that small businesses account for 64 percent of net new jobs created. In Kenya the informal sector, was responsible for creating 89 percent of new jobs in 2016.
The final point of similarity between small business in the USA and Kenya is financial constraints. Whether it was the global financial crisis or the interest rate cap, lenders seem to have a similar attitude to small business, particularly when they are operating in a difficult environment. In the USA, after the global financial crisis, small business access to credit was severely constrained. Fundera points out that small business loans fell more sharply during the crisis relative to the peak—both in absolute and proportional terms—than large business loans, and access has remained relatively constrained during the recovery.
This is exactly what has happened in Kenya when the interest rate cap was introduced. The Central Bank of Kenya report on the cap stated that the number of loan accounts declined significantly between October 2016 and June 2017, and there was lower access to credit by small borrowers. This trend continues and is not without consequence. It is estimated that reduced lending to the MSMEs due to the cap, contributed to a 1.4 percent decline in the growth of GDP in 2017. Clearly small business in both countries are marginalized due to attitudes of lenders, despite the fact that they are the segment of the economy that employ the most people and create the most of the jobs.
However, despite the challenges small businesses face, they aren’t going anywhere. It seems the determination of the entrepreneurial spirit in both countries is alive and well.
Anzetse Were is a development economist; email@example.com
In my new paper for the South African Institute of International Affairs, I suggest that Kenya’s leaders, not China, should be the ones held accountable for borrowing too much money without a detailed, transparent plan on how to repay the loans.
I join Eric & Cobus on the China-Africa Project podcast to discuss the growing anti-Chinese backlash in Kenya and the country’s’ burgeoning economic crisis.
In Kenya, China is everywhere. And with Mandarin schools and massive infrastructure projects, China’s trying to grow its “soft power” throughout Africa. But can China convince Africans to love it? I share my insights in this feature by Quartz News.
On the June 18, 2018 Fanaka TV held a debate in collaboration with the Kenya Bankers Association, The institute of Economic Affairs and Strathmore Business School. The debate engaged both sides of the capping divide with an intention of deeply analysing the impact of capping of interest rates and came up with possible solutions and way forward. I was among the panelists for the debate.
This article first appeared in China Daily on June 1, 2018
A few weeks ago it was revealed that Kenya refused to sign a free trade agreement that China has been negotiating with the East African Community (EAC) since 2016. The core motivation for the rejection seems to be seated in intent to protect Kenya’s nascent manufacturing sector from being dominated by China’s massive and efficient manufacturing sector.
This development highlights the concerns Kenya has with the balance of trade between the two countries. According to The East African newspaper, China accounts for less than 2 percent of Kenya’s exports yet 25 percent of Kenya’s import bill is from China. In 2017, Kenya exported goods worth USD 99.76 million to China but imported goods worth USD 3.37 billion resulting in trade deficit of USD 3.2 billion. Between January and May 2017 alone, Kenya was importing an average of goods worth USD 348.9 million from China per month.
The trade deficit has made Kenya, and many other African countries in a similar position, very uncomfortable. Clearly, the trade deficit path is unwise and presents an additional financial problem the country has to address. There are also concerns by some that such massive trade deficits compromise Kenya’s ability to negotiate trade terms. Sino-phobic narratives will argue that this is a deliberate effort by China to put countries such as Kenya in a position where they cannot protect the country’s interests in trade matters.
However, it ought to be considered that the trade deficit exists between Kenya and China, not necessarily because China is pursuing this deliberately, but because China is better at producing what Kenya wants than Kenya is at producing what China wants. The trade deficit is arguably the result of market supply and demand dynamics. Top products imported from China include machinery, railway stock, iron and steel, vehicles and plastics; these compose more than 50 percent of imports from China. The truth is that Kenya largely doesn’t manufacture these and thus imports them from China.
Sadly with China, Kenya is sticking to the usual yet unwise path of exporting raw materials and importing manufactured goods; a reality that reflects the weakness of manufacturing capacity in Kenya and Africa as a whole. And sadly, even in the export of raw produce such as fish where there is growing demand in China, Kenya is not exploiting the opportunity. Kenya fish output dropped by 10.2 percent in 2016, compromising the country’s ability to exploit demand for fish in China.
The trade dynamics between Kenya and China accentuate the importance for Kenya to shift current behaviour to one that strengthens the country’s position. The first step is to enforce local content laws to limit the importation of goods in public projects and rather, procure goods manufactured locally. The good news is that there seems to be indication that for the next phase of the development of the Standard Gauge Railway, local purchases will not be lower than 40 percent of total procurement. These types of provisions are important because they provide a market for Kenyan manufactured goods thereby boosting manufacturing activity, but they also highlight the extent to which local manufacturers can (or cannot) meet large orders consistently which provides valuable lessons on what the country needs to do to improve industrial capacity.
Secondly, Kenya needs to take advantage of the off-shoring of manufacturing capacity from China to other parts of the world. Partly informed by rising wages, China has been increasingly automating and off-shoring manufacturing; and Africa is benefitting from the latter to a certain extent. A report by McKinsey last year indicated that 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. If Chinese private sector are domesticating manufacturing capacity from China, then indigenous Kenyan firms can do the same. The constraints preventing this ought to be analysed and addressed.
Thirdly, Kenya needs to develop a trade strategy for China. The government needs to audit products with growing Chinese demand and seek to build Kenyan capacity to better exploit market opportunities presented by China. Kenyan producers ought to better leverage opportunities such as the China International Import Expo and work with the Chinese Embassy to exploit opportunities and tap into supplying the domestic market in China, thereby increasing the country’s exports to China.
Finally, Kenya should focus on revenue streams coming from China and strengthen these. Tourism is a massive opportunity for Kenya; hotel bed-nights of Chinese tourists to Kenya have increased 45.8 percent in 2017 compared to 2016, preceded only by Germany, UK, and USA. Government and private sector can be more deliberate in better understanding the needs of Chinese tourists and more aggressively market Kenya as a tourist destination in China.
In short, given Kenya’s concerns with the growing trade deficit to China, the government and private sector ought to become more proactive in meeting market demand in China. The concern should provide impetus for the country to do the hard work of building manufacturing capacity as well as better understanding the Chinese market and leveraging diplomatic and private sector ties to achieve clearly defined trade strategies and goals.
Anzetse Were is a development economist; firstname.lastname@example.org