Politics

Factors that will inform the cost of living in 2018

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

This year started with the news that price for maize flour has increased from KES 90 to KES 115 after the stock Government subsidised flour ran out. Understandably, Kenyans are complaining with many asking how they are going to manage rising costs of living, particularly in urban areas.

There are several factors informing the increase in the cost of living the first of which is that the country has not fully recovered from the 2017 drought. The short rains have not been as robust as hoped and thus food production is till sub-par. As a result, until the country fully recovers, Kenyans can expect to continue to face upward pressure on food prices.

Image result for maize flour kenya

(source: https://www.foodbusinessafrica.com/wp-content/uploads/2017/09/MaizeonShelfKenya.jpg)

Linked to the point above is continued aggressive inflation. During the last four months of 2017, average inflation was between 7.98 and 8.4 percent- well above the preferred government ceiling of 7.5 percent. Thus inflation will mean money does not stretch as far as it used to, and thus Kenyans will find basic items eating into their household budgets significantly.

Third is the reality that 2017 was a tough year for the economy due to several factors, the first of which was a struggling agriculture and financial sector. Agriculture which is about 30 percent of the economy was hit by the drought and the financial sector, which is about 10 percent of the economy, was hit by the effects of the interest rate cap. Finally, the prolonged election period affected the economy and GDP growth was revised downward from 5.9 percent to an actual growth of 4.4 percent in Q3 of 2017. Elections have tended to have a negative effect on economic growth and 2017 was not an exception. Suspended investment decisions and disrupted business activity led to the reality that Kenyans did not make as much money as they would have had it not been an election year. As a result, Kenyans are feeling the pinch of muted economic growth as having less money in their hands leaving them feeling more broke than usual.

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(source: https://www.bizmalawi.com/sites/default/files/images/news/inflation1.jpg)

Fourthly, as I have stated before, the interest rate cap led to a contraction in credit growth as banks became more hesitant to extend credit in the context of capped loan pricing. Sadly, credit growth may be further stymied by the onset of the new International Reporting Financial Standard 9 (IFRS 9) where banks are required to switch from an incurred to an expected loss model. Without getting into much detail, IFRS will mean that, at least in the short term, banks will be more risk averse as they reduce lending periods to high-risk borrowers to limit the probability of default. Thus Kenyans may find that it will be even harder to get access to credit due to both the cap and adoption of IFRS. This will lead to less money in the hands Kenyans which will make them to more acutely feel the cost of living.

Finally, the cost of oil is set to rise in 2018, which is not good news for Kenya which imports oils products. Increases in oil prices will likely drive inflation upward exacerbating the already high inflation status the country is in at the moment.

In short, Kenyans should brace for a high cost of living in the short term. It is hoped that a return to stability will allow the economic engine to get back to normal and create channels through which Kenyans can earn an income to adequately meet their cost of living.

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

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TV Interview : Cost of Living in 2018

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On January 10, 2018 I was part of a panel discussing the cost of living in Kenya in 2018

 

How the interest rate cap has helped banks

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This article first appeared in my weekly column with the Business Daily on December 17, 2017

The interest rate cap and the effects it has had on the financial sector, specifically banks, has been a consistent feature in discussions about business and economics in Kenya this year. The main effects of the cap have been a notable contraction in liquidity particularly to SMEs. Banks are of the view that the cap has limited their ability to build risk into loan pricing and thus prefer to lend to government and larger companies. However, there are ways through which the interest cap, perhaps inadvertently, helped banks given the turmoil it has created in the sector.

Firstly, the cap has forced the sector to become more efficient. In order to cut costs to, partly, manage the effects of the cap, banks have put in several measures such as closing branches, reducing employee numbers and leveraging automation. Technology has been aggressively brought on board via new features, such as PesaLink, that reduce the need for staff to receive and process payments. Low performing branches seem to have been shut down and over 2,000 staff have been laid off. Perhaps the cap fast-tracked these efficiency measures since it was clear that automation, for example, had been part of long term plans for the sector. That said, the cap has forced banks to become leaner and more efficient entities in order to protect profit margins.

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(source: https://securecdn.pymnts.com/wp-content/uploads/2017/01/mobilebankingkenya.jpg)

Secondly, the cap may well have started a conversation among bank management on their risk assessment tools. It is an open secret that banks in Kenya are risk averse and generally want security in the form of assets or a monthly pay cheque against which they issue credit. Perhaps the cap has forced banks to rethink their risk assessment tools in order to better delineate high versus low risk clients. It is time the banking sector created more sensitive tools that look beyond assets and monthly salaries to determine whether credit will be offered or not. The reality is that there are relatively high income Kenyans who would likely be safe bets but have ‘informal’ sources of income that tend to be immediately classified as high risk by banks. It is time banks sophisticated their risk assessment tools to more clearly determine to whom they should lend. Hopefully the cap catalysed a conversation in this direction.

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Finally, the cap has perhaps woken the sector up to the need to be seen as an ally of the Kenyan people. One of the factors that informed the implementation of the cap was the widespread feeling among Kenyans that banks were greedy shylocks that deliberately over-priced loans with little concern over the onerous weight such pricing placed on Kenyans. Indeed disgruntlement with the banking sector is what led to popular support for the cap in the first place. Thus, hopefully the cap has made the sector more fully appreciate the need to be an ally of the Kenyan people by pricing loans more reasonably in the future.

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

Autocracy and Democracy in Africa: China’s Influence

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This article first appeared in my weekly column in the Business Daily on December 10, 2017

I’ve been thinking about China’s growing influence in Africa, and whether it is linked to growing autocracy on the continent, especially the East Africa region. However, it is not China alone that seems to be informing a move towards authoritarianism in the region. When Africa is given examples of countries that managed to catch up economically, the Asian bloc is often presented as the case study. Look at Singapore, Vietnam, China, Malaysia, Japan and South Korea, we’re told, they all managed to pull millions of out poverty and substantially improve the quality of life of their citizens in a relatively short period of time. What is not mentioned is that, for the most part, these countries were developed or are still developing under an autocratic state-led capitalism model where government drives and leads the articulation of capitalism and, to a greater or lesser extent, monitors and guides its evolution.

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(source: www4.pictures.zimbio.com/gi/Beijing+Municipal+Congress+Communist+Party+AYzoNUVRU8Al.jpg)

Africa is also not told that even Europe and North America made significant economic gains using models that were not democratic. The USA relied on the slave trade and slave labour to build wealth that was then used to drive industrialisation. Much of Europe relied not only on financial involvement in the slave trade to amass wealth, but also colonialism which played an important role in providing colonial powers with land and labour that generated immense profits that were then repatriated to European metropoles.  So some are asking: Why is Africa being told that the continent must develop under a democracy when so many others haven’t? And is this the most efficient path towards economic development?

In East Africa, we can see a move towards autocracy; indeed it can be argued that Kenya is the only viable democracy left. Ethiopia and Rwanda have made no secret of the fact that they are essentially autocratic states. Uganda has been under the hand of Museveni for well over 30 years and in Burundi President Nkurunziza seems bent on retaining control and extending his autocratic rule beyond constitutional provisions. In Tanzania, signs of autocracy are emerging given that the chief whip of the opposition party was shot, and President Magafuli shut down several newspapers.

China has been making aggressive inroads in Africa with mega project deals. FILE PHOTO | NMG

(source: http://www.businessdailyafrica.com/image/view/-/4222430/medRes/1832547/-/maxw/960/-/g7bbas/-/china.jpg)

Beyond philosophical questions as to why there seems to be growing autocracy in the region, international dynamics are also playing a role, specifically growing insularity in Europe and North America. The Trump Administration hasn’t even bothered to table a strategy for Africa and Europe seems preoccupied with Brexit, anti-immigration sentiment, and calls to use European money on Europe rather than on ‘others’. As a result, the voice from the global north that lectures Africa on the merits of democracy is receding and the power vacuum is intensifying the influence of autocratic China in Africa. Indeed, the autocracy that is emerging in Africa seems to be modelled more against the technocratic autocracies of Asia rather than the old African autocratic model exemplified by leaders such as Idi Amin, Mobutu, Mengistu and more recently, Mugabe.

It seems it is time for Africa to ask itself some tough questions: Should growing autocracy be encouraged? And if so, what will it cost Africans in terms of freedom of expression, human rights and political freedom? Or is democracy, despite all its problems, still the best way forward for the continent?

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

Podcast: China and the rise of Africa’s new autocrats

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On December 3, 2017 I featured on the China Africa Project Podcast with Eric Olander and Cobus van Staden where we discussed growing authoritarianism, in East Africa in particular, and the role of China in challenging the notion that democracy is the best governance model for Africa.

 

 

How Kenya can recover in 2018

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This article first appeared in my weekly column with the Business Daily on December 3, 2017

After what has been widely noted as a difficult year for Kenya, the conversation must now turn to how Kenya can recover. The first step to doing so is acknowledging the factors that held economic growth back and those that sustained and propelled growth.

The first sector that was hit was obviously agriculture, due to the drought which made many Kenyans food insecure, hit forex earnings from the export of agricultural commodities and of course led to aggressive inflation. The financial sector was negatively affected by the continued unfolding effects of the interest rate cap and linked to that, credit growth, particularly to SMEs shrunk considerably. Finally, a great deal of investment was held back over the course of the year. Indeed, 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.

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(source: https://agra.org/news/wp-content/uploads/2016/11/MWfarmer-maize-green-790×527.jpg)

It is important to unpack the impact of deferred investment because there are negative ripple effects linked to this, particularly in the African context. When investors choose to hold off on investing, several entities are hit. These include market research companies, product developers, manufacturers, advertising companies, suppliers, and distributors. The entire ecosystem around investors suffers as investors make the decision to postpone or defer investment. As a result, the multiplier effect of suspended investment has left many Kenyan feeling particularly financially strapped this year.

On the bright side, Micro, Small and Medium Enterprises (MSMEs), most of whom actually sit in the informal economy, proved to be hardy. The Central Bank of Kenya (CBK) stated that MSMEs showed ‘extraordinary resilience’ and helped cushion the economy. The factors behind this resilience has not been formally unpacked but studies on the informal economy reveal an nimbleness, flexibility and litheness that larger, more formal businesses may find difficult particularly within short time frames. Challenges aside, informal businesses have an ability to change their business models and adapt to a changing environment much faster than formal businesses with more rigid structures and processes.

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(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

Going forward, it is important to take remedial action on what emerged as weak spots. This will begin by ensuring better coordination between national and county government on the management of agriculture in the country as well as serious consideration of the repeal or adaptation of the interest rate cap. In terms of positive aspects, MSMEs ought to be prioritised going forward and given the necessary support by government, financiers and business development agencies to scale formal MSMEs with promise, and support informal MSMEs on the journey of sustained profitability and formalisation.

Finally, both government and domestic private sector have to give candid and honest signals on the state of the political economy in Kenya. Investors need to be given a clear indication of when and where to invest such that the investment ecosystem is sustainably revived.

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

 

TV Interview: The Economic Empowerment of Women in Kenya

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On Thursday November 30, I was part of a panel on Victoria’s Lounge discussing the dynamics and factors that inform the economic status of women in Kenya.