Kenya

TV Panel: The Interest Rate Debate

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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.

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Dynamics of China-Kenya Trade Relations

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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.

Image result for CHina Kenya

(source: https://hivisasa.com/posts/why-china-remains-best-bet-for-kenya-in-global-trade)

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.

Image result for CHina Kenya

(source: http://studies.aljazeera.net/en/reports/2014/05/2014522115544892973.html)

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; anzetsew@gmail.com

 

Podcast: The Cost of Corruption in Kenya

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The last few weeks have been jarring for Kenyans as we found out that we’d had yet another maize scandal, and this time we lost KES 2 billion at the National Cereals and Produce Board (NCPB) to 21 people. We also found out that we lost KES 9 billion to 10 companies that were irregularly awarded National Youth Service (NYS) tenders. That’s a total of KES 11 billionA few days ago, it also came to light that we had lost between KES 70 – 95 billion at the Kenya Pipeline Corporation (KPC). This scandal is still unfolding.

I join Brenda Wambui of the ‘Otherwise?’ podcast to talk about the cost of corruption on our economy. What does this looting do to our country?

No Justification for Planned Tax Rise

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This article first appeared in my weekly column with the Business Daily on June 3, 2018

The National Treasury tabled the Income Tax Bill 2018 which, among other actions, has the general thrust of taxing individuals and companies at higher rates than previously was the case. The focus here will be on the opposite ends of the financial spectrum: large companies with taxable income of more than KES 500 million and Micro and Small Enterprise (MSE) most of whom have fewer than 5 employees and generally operate informally, outside what government considers to be the tax net.

Treasury’s rationale for the new taxes and tax hikes is simple: government needs to raise more money in order to plug the fiscal deficit and reduce borrowing in the spirit of fiscal consolidation. But the core question should be: Are these tax hikes justified? With regards to the Corporate Tax, while it can be argued that large companies can afford to pay the 35 percent, the core question is, why? What will corporations get in exchange for the additional amount charged? Rather than approaching the income tax bill from a perspective of service enhancement, government is motivated by more aggressive revenue generation. Given the reality of high costs of doing business in Kenya, the proposed increases simply add another stone on an already heavy load. Perhaps if costs such as electricity, land and transport were more manageable, the effect of added costs in the form additional taxes would be less pronounced.

Image result for tax (source: http://pinnaclepac.com/review-of-your-tax-return-by-the-canada-revenue-agency/)

The proposed presumptive tax on the informal sector, of 15 percent payable by individuals with incomes below KES 5 million applying for single business permits, is unfair and short sighted. At the moment, government provides basically no services to MSEs to support their productivity, profitability and growth. Most MSEs operate in dilapidated shacks with no electricity, water and sanitation, and often next to open sewage and piles of garbage. Government, at both national and county level, seem unable to invest in supporting MSEs, yet here is government introducing a punitive new tax. The question MSMEs will have is, again, why? What will MSEs get in return for paying this new tax? The presumptive tax may motivate informal MSMEs to go further underground because they know they are the new tax target, and since most operate at a subsistence level, any additional cost will truly pinch. Thus, rather than creating an enabling environment for MSEs, government introduces a tax that will make it even riskier for MSEs to conduct business in an already difficult environment.

However, the strongest argument against the tax hikes is corruption and the flagrant lack of fiscal accountability. This Bill is being tabled in the context of one of the largest cases of the mismanagement of public funds Kenya has seen in recent years. Ergo, Kenyans will wonder whether these new tax hikes will improve service provision, or whether the money will be used to buy public officials new properties and cars after being diverted into personal accounts.

Image result for corruption

(source: https://www.coe.int/en/web/greco/-/council-of-europe-anti-corruption-body-to-carry-out-urgent-evaluations-of-new-legislation-concerning-the-judiciary-in-romania-and-poland)

Unless government demonstrates that it is a responsible custodian of public funds, tax rates can continue to be escalated without translating into tangible benefits. Rather than scrutinise its own failings, government is being intellectually lazy and increasing tax on an already stretched private sector. Perhaps with some self-reflection and tough action within government itself, government would find it can live within its current means and need not saddle private sector with additional taxes.

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

The China Debt Question

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This article first appeared in my weekly column with the Business Daily on May 20, 2018

There has been clear concern voiced over the sustainability of Kenya’s fiscal path over the past five years. Total debt has risen from KES 1.7 trillion in 2013 to about 4 trillion in 2017. The good news is that there seems to be indication that plans for fiscal consolidation are underway, although these will only be confirmed when the 2018/19 Budget is read.

Embedded in concerns with Kenya’s fiscal path, is a narrative that raises red flags on Chinese debt. If you look at the accrual of public debt owed to China, this stood at 63 billion in 2013 and rose to 479 billion in 2017; China owns about 66 percent of Kenya’s bilateral debt. This has led to alarm about Kenya’s ‘over-exposure’ to Chinese debt. Indeed, there is an emerging commentary that argues that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent.

 Kenya's President Uhuru Kenyatta (left) and Chinese President Xi Jinping  prepare to inspect Chinese honour guards during a welcoming ceremony outside the Great Hall of the People in Beijing on August 19, 2013. AFP PHOTO

(source: https://www.businessdailyafrica.com/analysis/columnists/4259356-4571188-tw2sm7/index.html)

While I agree that there should be concern with debt levels, I think the ‘danger’ of Chinese debt has dubious motives. In fact it is fair to ask if all the hue and cry over debt owed to China would be as pronounced if the debt belonged to another part of the world. The focus on Kenya’s and indeed Africa’s, rising debt needs to be approached in an intellectually honest manner that demonstrates, firstly, that the appetite for debt is coming from Kenya. China is not saddling Kenya with debt, the Kenyan government wants the debt. The Kenyan government has prioritised infrastructure and gone through expansionary fiscal policy to finance this priority. Thus, it is hard to conceive that given the financing demands of infrastructure development, the government would turn down credit lines that can finance this priority.

Secondly, if you look at the portfolio of China’s debt to Kenya, it is focused on infrastructure indicating that perhaps the Kenyan government feels it has found a partner that is willing to invest in its focus on building railways, roads, electricity transmission lines, dams etc. Bear in mind that China is still a developing country with a 2017 GDP per capita of USD8,643, and ranked 75th in the world. However, the Chinese view is that despite this, it will continue to provide sizable development loans to Kenya of which almost half are concessional loans or preferential credit lines with a 2 percent interest rate and 20-year maturity period.

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(source: https://www.diplomaticourier.com/2017/04/29/africa-chinas-human-rights-concerns-dont-apply/)

The point is that, once you find a partner that seems to understand where you are coming from and supports your vision, it is likely that the partnership will grow. Further, if other parts of the world are not offering similar debt packages in terms of scale and conditions, they really are not in a position to criticise. So why do some seem surprised by burgeoning credit lines from China?

Finally, beyond debt sustainability, the core problem with rising debt is less related to from whom Kenya is getting debt, but more about how that debt is spent. The first problem is the question of the management of public finances. If debt does not end up in projects that drive growth and rather is diverted to private pockets, then the country is in serious problems. Debt only makes sense when it is economically productive and thus mismanagement of public monies comprises the ability of debt to inform economic development. Second is the issues of absorption of funds. Government at both national and county level have clear problems with absorbing development financing, and debt sits in that docket. So securing all this debt and failing to ensure it is used correctly and that the funding is absorbed in intended projects is the real problem.

It is important that the country have a sober conversation about debt, because no matter where the debt comes from, if it is mismanaged, Kenya will be in hot water regardless.

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

The Changing Face of Corruption in Kenya

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This article first appeared in  my weekly column with the Business Daily on May 13, 2018

The fact that the Kenyan public is concerned with the perceived mismanagement of public finances is a well-known fact in the country. At both national and county level, Kenyans cite concerns with corruption not only in terms of how public finances are misappropriated, but how bribes are demanded to secure government contracts. You sometimes have to pay government officials in order to provide a service to government it seems. Given how well the negative effects of corruption on development and economic growth have been documented, many may wonder why it persists.

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(source: https://www.weforum.org/agenda/2017/12/four-myths-about-corruption/)

There seems to be an emerging understanding of the psychology of corruption. An understanding that seems to answer why public officials continue to seek bribes and misappropriate funds even though the Kenyan public is outraged by the practice in the country. The psychology of corruption seems to be guided by the logic of self-aggrandisement and gaining financial security for the corrupt individual and his/her loved ones. Indeed, some may reason that engaging in corruption is logical in a corrupt society. It can be argued that some government officials misappropriate funds because they know government is corrupt and will misappropriate funds. Thus, they steal public funds to ensure they benefit from government funds and don’t miss out. They steal public funds to avoid the barrenness corruption brings when you’re not part of the process. They are being corrupt to escape the effects of corruption. This is not a justification of corruption but rather a realisation that when corruption is pervasive, it provides a deeper impetus to engage in corruption. This is not only because one can get away with it, but also because there is an urgency to get to the money first before someone else comes in and takes it instead.

Image result for corruption

(source: https://www.coe.int/en/web/greco/-/council-of-europe-anti-corruption-body-to-carry-out-urgent-evaluations-of-new-legislation-concerning-the-judiciary-in-romania-and-poland)

Devolution is also adding an interesting dynamic to corruption it seems. When Kenya was governed under a centralised system, grand corruption was a distant affair that benefited a limited circle of individuals. A farmer in rural Kenya could not conceive how he/she would ever get a kickback in the circle of corruption. Devolution has changed this. When county officials divert public finances to their pockets, much of that money remains within the county economy. The money can be used to finance household expenses, education and health costs, as well as generally improve the quality of life of the corrupt individual and those in their circle. Diverted public monies also become investment funds, where corrupt individuals suddenly have a supply of cash that can be directed to business activity. I have travelled to counties where I have been openly told that this building or that business belongs to a government official. This government official did not have these assets before gaining office, but suddenly they are serious financiers in the county. And interestingly, these facts are not shared with a tone of bitterness or annoyance, there almost seems to be an appreciation that even if public monies are being stolen, at least they are benefiting the local economy. After all, businesses are being financed, people are being employed to run and manage those businesses and suddenly there is a source of income for many that did not exist before.

This is not a justification of corruption but rather an exploration of how corruption is evolving. We seem to have moved on from the days when misappropriated public finances were sequestered in accounts in distant capitals of Europe and North America. Now when public money is stolen, much of it sticks around. How will this inform the fight against corruption? How do strategies that seek to address corruption need to be updated to become relevant again? These are questions for us all.

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

Fiscal consolidation opportunity to address private sector issues

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This article first appeared in my weekly column with the Business Daily on May 6, 2018

The government seems intent on implementing a course of fiscal consolidation that will put Kenya on a more sustainable fiscal path. While fiscal consolidation is welcome and should be supported, it raises new challenges with which the country has to grapple. The intent of government is to ramp down spending, reduce borrowing, bring down the fiscal deficit and raise revenues. The combination of these factors translates to the reality that government will not be able to finance its new agenda, particularly the Big Four, as robustly as perhaps was initially intended.

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(source: http://www.thebluediamondgallery.com/handwriting/f/fiscal-budget.html)

As a result, government has already began calls for the private sector to actively engage in the Big Four. The Budget Policy Statement has made it clear that Public Private Partnerships (PPPs) will be fast tracked in order to fully leverage private sector engagement. However, there are realities of which we ought to be aware as government makes the call to private sector to help realise and frankly, co-finance, the Big Four.

Firstly, over 90 percent of the Kenyan private sector consists of Micro, Small and Medium Enterprise (MSMEs). While the presence of the large companies is dominant and well publicised, the reality is that the engine of the economy is run by smaller businesses that sprawl across the formal and informal economy. MSMEs are thought to contribute at least 30 percent to GDP and employ over percent of employed Kenyans. However, MSMEs work in an environment, and have internal firm dynamics, that negatively inform their productivity and economic strength. The fact that they constitute over 90 percent of business in the country yet only contribute about 30 percent to GDP signals serious productivity problems.

Thus, while government intends to pull in the private sector to work on their agenda, they ought to be cognisant of the composition of private sector in the country. I am of the view that MSMEs can be engaged to deliver on government projects, but the nature of the engagement will likely be more involving than government initially envisioned.

Linked to the point above is the issue of the capacity and experience of indigenous firms. Given that foreign firms are angling for Big Four projects, the question of the competitiveness of domestic private sector becomes important. Will government deliberately reserve a portion of projects for indigenous private sector to ensure local participation? If not, does Kenya risk outsourcing the bulk of government projects to foreign companies, and what would be the implications?

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(source: http://kassweekly.co.ke/KW/?p=1021)

Linked to the point above is the issue of PPPs, where it has been widely noted that domestic firms do not have the financing, experience, and enablers that foreign firms do. For example, domestic firms get credit at 14 percent while this figure can be as low as 2 percent for foreign firms; this reduces the former’s competitiveness. Government seeks efficiency in the context of limited funds thus the question becomes how domestic private sector can secure contracts and competitively deliver on them in the context of international competition.

In truth, fiscal consolidation will shine a spotlight on the domestic private sector and the factors that inform their ability and competitiveness. Government and private sector ought to use this opportunity to address key issues decisively, such that the process strengthens the domestic private sector.

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