Political Economy

Why Africans Seem Unconcerned About Illicit Financial Flows

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This article first appeared in my weekly column for the Business Daily on August 12, 2018

African governments are deeply concerned with the continued scale of illicit financial flows out of the continent. Experts say that Illicit Financial Flows (IFF) from Africa has doubled to USD 100 billion annually. The UN estimates that between USD 1.2 trillion and 1.4 trillion left Africa in illicit financial flows between 1980 and 2009 alone; this is roughly 63 percent of Africa’s Gross Domestic Product, and surpasses the money it received from outside over the same period. IFF far exceeds what the continent receives in aid and the fact that most are not aware of this seeds the impression that the world continues to be altruistic towards Africa when, it can be argued, Africa is financing the world.

Image result for illicit financial flows

(source: https://www.capitalfm.co.ke/eblog/2016/12/07/illicit-financial-flows-development-agenda-africa/)

Not only do African governments view the scale of IFF as morally abhorrent, their concern has a level of pragmatism during a time when many governments seek increased investments into their nations. In order to build infrastructure, stimulate private sector and economic growth, African governments consider these flows to be robbing them of funds that are rightfully theirs, pushing them to enter debt agreements that could have been financed if IFF were stemmed.

However, what is clear in this conversation is that the general African public does not seem to be as concerned about IFF as African governments are. This is due to several reasons the first of which is that some African-owned companies benefit from the loopholes that allow IFF to continue unabated. Through transfer pricing many African companies are able to retain more of their profits; and it’s doubtful they view this as immoral but practical business sense that keeps costs down. One is unlikely to see a strong African private sector push to address IFF.

Secondly, IFF features nowhere near the top of the list of priorities for Africans as most are concerned with basics such as access to clean water, health services, educational facilities and adequate nutrition. It will likely be a long time before African masses begin to picket fence about IFF.

Image result for illicit financial flows

(source: https://www.moroccoworldnews.com/2013/12/117665/illicit-financial-flows-from-africa-track-it-stop-it-get-it/)

Finally, one will likely not see any great pressure put on foreign governments by African populations concerning IFF because African populations generally do not view their own governments as responsible custodians of public wealth. Why should African populations put their weight behind their governments in insisting on an end to IFF when those governments are not financially accountable to them? Until African government stem fiscal indiscipline and mismanagement, IFF will be viewed as a difficulty African governments can grapple with on their own. Indeed, one can argue that the injustice of IFF in the minds of African governments, mirrors the injustice felt by African people when public funds are embezzled. As African governments starve their people of funds that are rightfully owed to the public, IFF can continue to starve African governments of funds they view as rightfully theirs.

In short, African governments ought to clean up their act and demonstrate that they can responsibly manage public funds if they ever hope to get the African public to amplify their push to end IFF.

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

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Era of Non-Reciprocal Trade for Africa Coming to an End

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This article first appeared in my weekly column with the Business Daily on August 5, 2018

Last week, the Trump administration announced the withdrawal of benefits for Rwanda to export apparel duty-free to the US under the African Growth and Opportunity Act (AGOA). This is largely seen as a response to Rwanda’s decision to ban second-hand clothes into its market. However, there is a larger trend at play here. We are in an era of trade wars, and serious global disagreements as to what is deemed fair, or not, in trade practice and agreements.

Economic nationalism has found a new lifeline. Economic nationalism here refers to a situation in which a country tries to protect its own economy by reducing, for example, the number of imports from other countries. The largest proponent is of course the USA, where Trump has made clear that his ‘America  First’ policy means the introduction of targeted protective trade measures against countries seen to be taking advantage of the USA’s ‘generosity’ in trade.

The C&H Garments factory in Kigali.

(source: https://www.businessdailyafrica.com/analysis/ideas/Rwanda-Agoa-exit-signals-era-of-reciprocal-trading/4259414-4698524-7akplbz/index.html)

However the USA is not alone, there is upsurge in nationalistic pride in the Global North aimed at safeguarding national economic sovereignty. The Harvard Gazette makes the point that Trump’s election and Britain’s exit from the EU are very encouraging to nationalist groups across Europe, because for the first time, there’s a shift away from international cooperation, sharing sovereignty, to addressing the sovereign rights of specific countries. This is exemplified in the rise of Marine Le Pen and other European nationalist party figures in the Netherlands, Hungary, and Greece who touted Trump’s win as a positive sign of things to come. Intermingled with nationalism is anti-globalization and anti-immigration policies, and economic nationalism which places the economic welfare of the country above all; especially above African nations. The USA and Europe seem tired of ‘babying’ Africa and being ‘soft’ on sovereign African states. They are acutely aware of the problems and suffering in their own countries and communities, and wonder why these issues remain unaddressed while their governments give Africa generous aid and trade packages.

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(source: https://www.videoblocks.com/video/global-trade-animated-word-cloud-text-design-animation-hpc-hczyzj23uhf6s)

Africa needs to read the signs and prepare for the future. In an era of growing economic nationalism, Africa can expect fewer trade deals that are non-reciprocal where Africa gets access to massive external markets while the other party does not benefit from penetration into African markets. This is not to say there is no concern with the economic nationalist movements. A KMPG survey revealed that two-thirds of UK CEOs are most worried about the growing use of protectionism, which includes measures such as tariffs and quotas on imports, and view populist politics as the greatest threat to their growth.

That aside, Africa must read the signs and note that the era of non-reciprocity is ending. Sadly, and frankly, this trend is emerging during a time when Africa is not prepared either in terms robust trade negotiation teams nor industrialised economic structures that can compete with foreign nations demanding access to African markets. This movement risks relegating Africa to the eternal provider of raw materials as foreign nations push manufactured goods into African markets. It is important that both African governments and private sector begin to address the imminent era of non-reciprocity.

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

Why Africa’s GDP is Understated

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This article first appeared in my weekly column with the Business Daily on July 29, 2018

Last week Ghana announced that it is recalculating its Gross Domestic Product (GDP) based on measurements from 2013 instead of 2006 to more accurately reflect recent activity in the petroleum, communication technology and construction sectors. The rebasing will likely add 30 to 40  percent to the size of Ghana’s economy. The rebasing of Ghana’s GDP is a reflection of how the size of African economies are often understated. This understatement is informed by three factors.

Firstly, the actual number and size of businesses actively operating in Africa and contributing to GDP is unknown. Most African governments do not have the operational muscle to conduct research and analysis on the number of functioning business in the economy, their size, profits, or turnover. This is partly informed by the fact that the private sector in Africa is dominated by informal businesses, most of whom are Micro and Small Enterprise (MSE) primarily engaging in subsistence business activity. The combination of millions of MSEs operating in informality coupled with the lack of data gathering and statistical capacity in African governments to collect business activity data translates to notable inaccuracies in terms of the actual number and size of operational businesses on the continent.

A trader serves customers at the Makola Market in Accra, Ghana.

(source: https://www.businessdailyafrica.com/analysis/ideas/Why-most-African-countries-understate-the-size-of-GDPs/4259414-4687360-apix2iz/index.html)

Secondly, private sector in African tends to understate business size and profit earnings in order to minimise tax liabilities.  Again, African government capacity is limited as African taxmen do not have the ability to ensure all companies are posting accurate tax returns. Most companies on the continent have two books of accounts they keep: the official audited reports that are submitted to investors, tax authorities and government bodies, and the internal books that reflect what is actually going on in the business. Given limited tax surveillance muscle, it relatively easy to dodge tax penalties and, most African taxmen are happy taxes are being voluntarily submitted and thus often do not bother to ensure if profits and tax liabilities are being accurately reported. The effect is again, an understating of how much money businesses are making on the continent.

Finally, there are incentives for African governments themselves to understate GDP size. Dimitri Sanga, ECA Director for West Africa echoes my view that some African countries purposefully avoid rebasing GDP upwards to reflect current realities in order to avoid graduating from low income to middle income countries. Low income status comes with certain perks such as cheap loans, generous aid packages and charitable trade agreements.

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(source: http://cpparesearch.org/nu-en-pl/domestic-gross-domestic-product/)

In short, evidence seems to indicate that there is more money being made in Africa than is being reported and thus GDPs in Africa are probably higher than what is officially captured. And while some countries will rebase GDP upwards in order to access larger loans and shift debt-to-GDP ratios into favourable terrain, it is up to African governments to determine whether rebasing or deliberately understating GDP is in their national interest.

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

TV Interview: Value Addition in Africa

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I was part of a panel on Talk Africa of CGTN, discussing how Africa can build manufacturing capacity and scale value addition.

 

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.

Kenya’s Development Expenditure Problem

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This article first appeared in my weekly column with the Business Daily on July 8, 2018

The budget for FY 2018/19 revealed the divide in expenditure as follows: recurrent expenditure will amount to KES 1.55 trillion, development expenditure is projected at KES 625 billion, and transfers to County Governments will amount to KES 376.4 billion. Development expenditure will only be 24 percent of total expenditure (below the 30 percent threshold), recurrent about 60 percent and transfers to county 15 percent. To be clear, public spending in itself is useful in principle because it increases the level of aggregate demand in an economy and can compensate for failings in other components of aggregate demand, such as a fall in household and private sector spending.

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(source: https://www.vskills.in/certification/blog/meaning-of-government-budget-and-its-objectives/)

That said, government has a development expenditure problem where the development-recurrent ratio always favours recurrent, both at national and county government level not only in terms of allocation but also in terms of actual spending. The first supplementary budget for financial year 2017/18 was submitted to Parliament in September 2017 in which development expenditure was reduced by KES 30.6 billion. As the Parliamentary Budget office points out, this reduction translates to slower implementation of some projects leading to higher project costs and accumulation of pending bills as well as delayed returns on investment. At the same time, net recurrent expenditure increased mostly to cater for the repeat presidential election, enhancement of Free Day Secondary Education, drought mitigation measures as well as the implementation of Collective Bargaining Agreements in the education sector. Thus, the first problem is that the original development-recurrent ratio is not respected or followed.

The second problem is that a reduction in development expenditure juxtaposed with a rise in recurrent expenditure is deeply worrying. Government’s narrow fiscal space has led to a large bulk development expenditure being debt-financed. Thus, it is fair to ask whether if through supplementary budgets, where development spending is reduced and recurrent increased, Kenya is using debt to finance recurrent expenditure. If so, this is going against both basic common sense and fiscal prudence.

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(source: https://www.capitalfm.co.ke/business/2013/11/cabinet-approves-sh116bn-supplementary-budget/)

Finally, the supplementary budget above is not the first time development spending has lost out to recurrent; the question is why? Given deep development needs in Kenya, where the infrastructure deficit alone stands at USD 2.1bn annually, and significant development spending required, why does recurrent remain the winner? The first factor is the bloated wage bill, a reality that is well known and very difficult to change. Another factor is how spending is classified, which can be confusing because it makes the tracking of types of spending difficult. Public debt accrued in the development docket one year is shifted into the recurrent the next year. Development expenditure covers expenses incurred for the purchase or production of new or existing durable goods, while recurrent expenditure, includes wages and salaries, other goods and services, interest payments, and subsidies. Thus, the broadening yearly financial needs of recurrent spending are informed by debt binges of previous years.

As Kenya continues to accrue debt, interest payments on all the debt will be tabled under recurrent leading to a further bloating of this component of spending. This shift in allocations can make it difficult to determine whether development spending is ever used efficiently through its entire project lifetime.

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

Don’t hold your breath for Kenya’s Fiscal Consolidation

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This article first appeared in my weekly column with the Business Daily on July 1, 2018

The budget speech for FY 2018/19 is of interest because desires of government seem to be in opposition. On one hand is the previously articulated intent from government for fiscal consolidation and on the other, the need to finance the Big Four. This article will focus on fiscal consolidation and assess the budget using this lens with a focus on planned expenditure, revenue generation and borrowing. Under fiscal consolidation, expenditure should reduce, revenue generation increase and borrowing reduce.

Budget: Treasury Cabinet Secretary Henry Rotich

(source: https://www.businessdailyafrica.com/analysis/ideas/-Kenya-fiscal-consolidation/4259414-4640846-wga0eu/index.html)

Already we can see that appetite for increased expenditure continues unabated. Planned total expenditure for the FY 2018/19 is Ksh 2.56 trillion (equivalent to 26.3 percent of GDP). Under the current administration, projected spending has gone up from Ksh 1.6 trillion in 2013/14 to Ksh 2.29 trillion in 2017/18 and now to 2.56 for 2018/19. Clearly, expenditure continues to grow indicating an inability to effect fiscal consolidation measures which are exacerbated by weaknesses in the composition of expenditure. Of planned spending, recurrent expenditure will amount to KES 1.55 trillion, development expenditure is projected at KES 625 billion, and transfers to County Governments will amount to KES 376.4 billion. It seems the element of expenditure that has been cut is the most economically productive, namely development expenditure. Indeed, development expenditure will only be 24 percent of total expenditure (below the 30 percent threshold), recurrent about 60 percent and transfers to county 15 percent. So government seems to be cutting development expenditure while allowing the excesses of recurrent spending to continue. Thus, the government is not leveraging the budget to drive public spending in an economically productive manner.

In terms of revenue generation, the government argues that revenues will rise by 17.5 percent to about KES 1.95 trillion (equivalent to 20 percent of GDP) in the FY 2018/19 from the estimated KES 1.66 trillion collected in the FY 2017/18. Part of the ‘revenue enhancement’ steps include higher corporate tax as well as a tax on the informal economy. What may materialise is not more revenue, but less. Kenya already struggles with high costs of production attributed to high power, transport and labour costs, as well as endemic corruption and rent seeking. These are dynamics that affect both big and small private sector players. Increasing tax on the private sector may well push them to a level where the combined effect of high production costs and higher taxes cut into profits substantially reducing the total government can claim as tax revenue.

Finally, government announced that in the fiscal year ending in June 2018, they estimate a fiscal deficit of 7.2 percent of GDP, down from 9.1 percent of GDP in the previous year. Indeed under, their fiscal consolidation plan, government project the fiscal deficit to narrow to 5.7 percent of GDP in the FY 2018/19 and further to around 3 percent of GDP by FY 2021/22. While this is a step in the right direction, government seems to have a problem in keeping on a disciplined path of fiscal deficit reduction. Last year government’s target for the 2018/19 fiscal deficit was 6 percent, yet here we are at 7.2 percent.

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(source: http://www.theedvantage.org/economics/fiscal-policy)

The fiscal deficit of KES 558.9 billion will be financed by external financing amounting to KES 287.0 billion, while domestic financing will amount to KES 271.9 billion. This clearly indicates that domestic borrowing will be substantial. In the context of an interest rate cap, government knows that continued heavy borrowing in the domestic market squeezes out private sector and places upward pressure on interest rates.

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