Kenya

TV Interview: Kenya’s Debt Question

Posted on

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.

 

Advertisements

Leverage devolution to make Kenya’s economy more resilient to politics

Posted on

This article first appeared in my weekly column with the Business Daily on November 12, 2017

A few weeks ago the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.  The economy’s performance this year is weaker than last year. The economy expanded 4.7 percent in Q1, down from 5.9 percent 2016, with Q2 at 5 percent, down from 6.3 percent last year. Previous analysis indicates that the Kenyan economy tends to slow down in an election year by about 1.2-1.4 percent. Of the 10 elections the country has had, 7 have been associated with slower economic growth and it takes about 26 months for the economy to fully recover from an election.

While there is warranted concern about the extent to which economic performance is tethered to politics and elections, other dynamics in the country have also negatively informed growth this year. These include the drought which led to a contraction in agriculture which constitutes about 30 percent of the economy. Additionally the interest rate cap negatively affected the financial sector which constitutes about 10 percent of the economy with knock-on effects felt in a contradiction in access to credit particularly to SMEs. Thus even without the effects of the election, at least 40 percent of the country’s economy was struggling this year.

Image result for Kenya economy

(source: https://softkenya.com/kenya/wp-content/uploads/2011/11/Kenya-Economy.jpg)

That said, there does need to be an examination as to why economic performance during election years tends to be more muted than would have been the case if there were no election. Clearly key investment decisions from the private sector tend to be deferred in an election year while any decisive action in policy is deferred by government. The question now becomes what can be done to make the economy more resilient to politics and elections such that Kenyans are buffered from related uncertainties. Leveraging devolution with a focus on county governments and county private sector is key to achieving this.

The first step in building resilience is by encouraging a fundamental shift in the mind-set of county governments. At the moment county governments seem to view themselves primarily as expenditure units, not development units. Rather than obsessing over what allocations have or have not been made to them, county governments have to enter a mind-set where every penny is targeted at ensuring they drive economic development in their counties.

Secondly, county governments ought to listen to concerns of the private sector in their counties. Kenya’s private sector is dominated by informal businesses as 90 percent of Kenyans are employed in this sector and rely on it for their income. Yet the informal sector does not truly feature in county development documents, this needs to change. County governments, perhaps with the support of the Ministry of Trade ought to create a robust informal sector strategy that works to address structural weaknesses that compromise the sector’s robustness. These could include piloting formalisation schemes, improving technical and business management skills, and creating financial structures that provide patient capital to informal businesses. The aim should be to stabilise informal businesses so that they continue to perform even during difficult political times.

Image result for Kenya counties

(source: https://i1.wp.com/kenyanlife.info/wp-content/uploads/2016/11/Counties-in-kenya.png)

Finally, county fiscal policy must be deliberately development oriented. Dockets such as agriculture, health and devolved education functions ought to feature prominently in county government allocations. By investing in food security through agriculture and human capital through education and health, counties can play a powerful role in building a population that is healthy and educated, and thus better able to identify and exploit economic opportunities that build income.

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

Kenya can do more on Ease of Doing Business

Posted on

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.

Related image

(source: primer.com.ph/blog/wp-content/uploads/sites/14/2016/10/doing-business.jpg)

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.

Image result for informal business Kenya

(source: https://kenya.oxfam.org)

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; anzetsew@gmail.com

 

 

TV Interview: Effect of the elections on the Kenyan economy

Posted on

On November 2, 2017 I was part of a panel on Citizen TV that analysed the effects of the elections on the Kenyan economy.

Supplementary budget weakens Kenya’s fiscal position

Posted on

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.

Image result for National treasury Kenya

(source: https://static.pulselive.co.ke/img/incoming/crop7313340/0094679013-chorizontal-w1200-h630/national-treasury.jpg)

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.

Image result for business Kenya

(source: https://www.matchdeck.com/uploads/image/asset/10018/large_Nairobi_NIGHT.jpg)

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; anzetsew@gmail.com

Education misalignment costly for Kenya

Posted on

This article first appeared in my weekly column with the Business Daily on October 15, 2017

There is a story of bright young person in Kenya who studied biochemistry in university and graduated with first class honours. The young person was passionate about biochemistry and was determined to pursue a career in scientific research. After applying for and being turned down from several jobs with various scientific organisations, the young person gave up and decided to start a business in the transport sector. The only problem is that that he had not studied transport and logistics nor business management and thus did not have a clear idea about what starting a business in the transport sector entailed. To this day this young person ekes out a measly living in a business venture at which he’s not very good, all because he couldn’t pursue the career for which he was trained.

The story above mirrors the life of millions of Kenyans. They study hard, parents and loved ones save up to take them through to university and in the end, they end up unemployed, underemployed or mis-employed. Quality of education aside, this type of educational misalignment is costing Kenya billions in several ways.

Image result for university education Kenya

(source: http://www.dhahabu.co.ke/2016/05/27/assessing-state-university-education-kenya/)

The first is that Kenyans are spending billions getting educated in fields they end up abandoning. The hours, efforts and money spent to attain secondary and tertiary education is all wasted when the young Kenyan discovers there are no jobs in his/her area of interest and expertise. This is despite the fact that from an economic point of view, the country needs that expertise to diversify the economy and start or strengthen numerous industries. Thus, the millions poured into the education of young Kenyans go to waste as they are forced to move away from their knowledge base to pursue careers in other fields for which they did not study.

Secondly, because young people often turn to self-employment in order to survive they often end up running businesses badly because they have neither the aptitude, training or interest to run and manage a business. Not everyone is an entrepreneur, yet millions are forced to become entrepreneurs. The informal economy, where most Kenyans are employed, is full of Kenyans who turned to entrepreneurship as an act of desperation. For most, running their business is not a well thought through and strategic venture for which they have been trained, it is the final push for survival. The result is that millions of businesses are not functioning at optimal levels, indeed many are being run very badly, providing subsistence living for those running the business.

Image result for technical training Kenya

(source: https://softkenya.com/education/wp-content/uploads/2016/03/Technical-Training-Institutes-photo.gif)

This leads to the final point; the presence of millions of poorly managed businesses all of which undermine economic growth. The economy not only misses out from the economic contributions of the knowledge base of millions of Kenyans, billions of manhours are committed to badly run businesses. It’s a double whammy for the economy because the investment in education is wasted and businesses that should have never started are created out of desperation. This all leads to wasted training, poor business performance and subpar economic growth.

There is a need to address the education misalignment beleaguering the country if Kenya is to tap into the potential of its population and spur sustainable income growth and economic activity.

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

 

The intelligence of inclusive business

Posted on

This article first appeared in my weekly column with the Business Daily on October 8, 2017

Last week Safaricom launched its 6th Sustainability Report detailing the company’s performance on sustainable business targets based on the UN Sustainable Development Goals (SDGs). The report highlighted Safaricom’s gains made over the year as well as areas for improvement. For example, while Safaricom’s use of water and electricity increased, Safaricom contributed an annual average of 6.5 percent to GDP and 98 percent of their suppliers had signed up to a Code of Ethics. What was striking was that the report was thorough and transparent, detailing strengths as well as ongoing areas for improvement. Such detailed reporting is not a legal requirement and it should be noted that KCB and Safaricom are the only Kenyan corporate companies that deliberately and comprehensively report on sustainability. Many businesses seem to find such reporting not only onerous but also appear to be of the view that acknowledging low points in performance is unnecessary and risky.

Another clear point that came across in the report is that triple bottom line performance that seeks to generate financial, social and environmental return, is possible. Inclusive businesses reject the notion that business is about choosing between having a purpose or making a profit as both can be achieved; Safaricom’s consistent performance is evidence of this. Thus, given that there is a business case for being inclusive and sustainable, why hasn’t the sustainability movement gained traction in Kenya? There are three realities informing this reality; realities that pull against each other.Image result for sustainable business

(source: https://www.unf.edu/uploadedImages/aa/coggin/about/business_centers/Center_for_Sustainable_Business_Practices/Diagram.jpg)

The first reality is that it is possible to engage in dubious business practices in the country and still generate immense profits. The culture of bribery and corruption in the country has created a sense in some quarters that unethical business practices are a necessary evil to ‘survive’ in Kenya. Some companies even set aside funds to grease the necessary wheels that facilitate the continuation of their business model. They consistently break laws, take shortcuts and generate negative externalities all in the name of profit.

The second reality is that of an inauthentic commitment to sustainability where the companies function within the law but do not have a sincere commitment to being inclusive. The principles of people, purpose and planet are seen as external to core business. These are companies that know that they can be seen to be making impact through carefully orchestrated photo ops and PR gimmicks. So, while they understand that brand value can be enhanced by being seen to be responsible, they do not put a great deal of money or effort in that direction.

The final reality is that of companies that are authentic in their commitment to being inclusive, sustainable and holistically responsible. They are willing to put energy and effort into being sustainable and have a culture of consistently improving their triple bottom line performance.

Image result for sustainable business

(source: http://www.everbluetraining.com/sites/default/files/u42494/sustainable-business.gif)

While all three realities exist in Kenya, only the third is truly intelligent. In a world of social media and citizen reporting, it is becoming increasingly difficult for companies to either flagrantly flout the law or inauthentically masquerade as inclusive. The sooner companies in Kenya understand this, the better it will be not only for themselves but the country as a whole.

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