Forcing tax on informal business a bad idea

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This article first appeared in my weekly column in the Business Daily on December 9, 2018

Last week, the Kenya Revenue Authority (KRA) announced that informal traders will be required to log onto its iTax platform and pay the presumptive tax before county governments can renew their business permits for next year. This means that informal traders who do not pay the tax will not have their single business permits or trading licences renewed in January. While it may look like this move is inspired by the KRA, it is actually an initiative of the National Treasury which is facing pressure to raise more revenue to meet debt obligations in particular. But this move is problematic for several reasons.

Firstly, a key motivation for informality is the tax burden. Informal businesses engage in subsistence business activity, barely able to meet their financial needs let alone tax obligations. The reality is that functioning as a formal business entity is expensive and most Kenyans simply cannot afford the costs linked to formality. It would be more prudent for Treasury to support what other arms of government such as the Ministry of Industry are doing to improve the performance of informal business so that they are more profitable in the long run and in a stronger position to pay tax. Slapping new tax on businesses that are barely staying afloat is insensitive and imprudent and will engender resistance to this move across the country.


Secondly, it is not clear what informal business will get in return for tax compliance. Almost without exception, informal businesses operate in poor quality and insecure physical spaces with no access to decent roads, water and sanitation facilities, electricity or even permanent physical structures. Will paying the presumptive tax change this or will informal businesses have tax eat into their income with no related improvement in their operating environment? Without a clear demonstration of the return informal businesses will get for compliance, there will be little motivation to comply.

Thirdly, this move will atangonise rather than support the sector that is the biggest employer in Kenya. As of 2017, over 14 million Kenyans earn a living in the informal sector. New taxes will place new financial pressure on millions of Kenyans who earn a living in a very difficult environment. In addition to serious problems with physical work space, those who work in the informal sector have lower quality jobs and are more vulnerable to job loss. In trying to force tax compliance without addressing the serious challenges informal businesses face in trying to earn a living, government signals it is out of touch with the reality of most Kenyans.

Finally, Kenya’s fiscal space makes it clear that the move to tax the informal sector is informed more by the need to pay Treasury’s debt binge than improve service delivery to Kenyans. Kenyans are being punished for what has clearly been unsustainable fiscal strategy. The focus of Treasury should be to redress its fiscal missteps, ramp down on expenditure increases, and make sure that public funds are used for their intended purposes. The Kenyan public continues to air its deep concerns with the mismanagement of public funds and forcing the hands of millions of Kenyans to pay taxes when most feel government is not financially accountable to them is unwise. One will likely find that Kenyans will be more willing to pay tax if they are assured they will benefit from compliance rather than public funds being siphoned in illegal and corrupt activity.

In short, this new move to force tax compliance is a bad idea. It will antagonize millions of Kenyans while failing to address the real problem of unsustainable fiscal policy.

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


The Secret Behind the Rise of China in Africa

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This article first appeared in my weekly column with the Business Daily on August 26, 2018

In early September, African Heads of State and Dignitaries will gather in China for the Forum on China Africa Cooperation (FOCAC). Inaugurated in 2006, FOCAC has become a symbol of the strengthening ties between China and Africa. However, it should be asked how Sino-African relations got here in the first place. Given that China is a relative new comer in Africa in terms of sustained engagement, how did China get so big in Africa so quickly?

There are three factors that have informed the rise of China in Africa. The first is the lack of a negative legacy with the continent. Europe and the USA have a fraught history with Africa. The combination of slavery, colonialism, the post-independent era and structural adjustment programs have fundamentally challenged the legitimacy of Euro American engagement with the continent. China doesn’t have this baggage. In effect, China came to Africa with a clean slate with no history of exploitation, savagery or utilitarian tendencies with Africa. This, in itself, gave China an easy way into Africa.

From left-China Africa Correspondent Club chairman Liam Lee,

(source: https://www.businessdailyafrica.com/analysis/ideas/Secret-behind-rise-in-Sino-Africa-relations-/4259414-4729792-hr09baz/index.html)

Secondly, China is not prescriptive in its interaction with Africa and African governments. Often Europe and North America leave the impression that Africans must listen to them if the continent is to ever to ‘develop’. Europe and North American ‘experts’ on Africa both on the continent and abroad have very clear opinions on what Africa ‘needs to do’ to get out of poverty. China does not have this attitude. Despite the fact China has pulled millions out of poverty and become the second largest economy in the world, the Chinese are remarkably humble. In my interactions with both government and private sector from China, there is a humility in the approach they have with Africa. They understand that a unique combination of factors allowed China to become economically dominant fairly quickly, and thus will not push ‘Model China’ on Africa. This is because they seem to appreciate that there are complexities in Africa that may render many elements of China’s path, ineffective in Africa. China could have easily marched into Africa barking orders about what African governments need to do to catch up, but they have not. African governments appreciate this humility and almost feel honoured by it.

Image result for china africa

(source: https://www.businessinsider.com/why-china-has-become-so-big-in-africa-2015-1)

Finally, China doesn’t lecture Africa. African governments have grown weary of lectures about governance, corruption, human rights, autocracy etc. from Europe and North America. There still seems to be a sense in the Global North that they have the right to meddle in what African governments view as the business of African governments. In the same way African governments do not meddle in how Europe and North America run themselves, they wonder why EuroAmerica continues to feel the need to lecture them on how to run their countries. This is not to say that the points raised by the Global North aren’t relevant, it is simply that African governments are tired of what can come across as patronising downtalk. Again, China does not behave in this manner. China accords African governments the dignity to run their countries without interference from China.

These three factors constitute the triple threat that made the rise of China in Africa so auspicious and expedient. It will be interesting to see how the interaction between China and Africa evolves as the ties between the two entities develop and invariably become more complex.

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

Time to Catalyse Micro and Small Enterprise

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This article first appeared in my weekly column with the Business Daily on February 18, 2018

The informal economy consists of micro and small enterprises (MSEs) that are the source of income for 90 percent of employed Kenyans as well as an important economic engine of the country. Indeed, late last year, the Central Bank of Kenya Governor Patrick Njoroge credited small businesses with keeping the economy afloat terming them the backbone of the economy’s resilience in a difficult year.

Despite their importance, MSEs are neglected and economically under-leveraged. The first step to directing MSEs towards optimal performance and strengthened growth is data collection. There is currently no single repository with detailed information on the number, size, geographical footprint, sector composition of MSEs and MSE associations in the country. There should be a drive to register all MSEs and collect data through the registration process. What must be made clear during the registration process is that it will not be used to tax MSEs. If a sense develops that the aim of registration is to put businesses into the Kenya Revenue Authority (KRA) database for taxation purposes, MSEs will not show up for the exercise. Registration ought to be incentivised such that it is linked to financial and non-financial support organised and deployed by government. Indeed, only registered MSEs should be allowed to qualify for government support.

A Jua Kali artisan. Despite their importance, small businesses are neglected by the government. file PHOTO | NMG

(source: https://www.businessdailyafrica.com/image/view/-/4309902/medRes/1888118/-/maxw/960/-/j8qjoc/-/jua+kali.jpg)

The second stage is to develop a fund focused on MSEs; this could fall under the Biashara bank that is being developed by government. The main point is that there should be a facility focused on MSEs. MSE sector organisations and associations should be represented on the board of the fund such that the needs and priorities of the sector inform how the funding is structured and deployed. Through working with MSE sector leaders, the process of developing criteria for qualification of financing can begin such that funds are absorbed and effectively used. Government ought to learn from the challenges faced in the Uwezo, Women and Youth Funds such that the same mistakes are not repeated. Further, there is a need to classify the MSEs such that they align with the Big Four and prepare them to benefit from initiatives in the Big Four sectors of health, manufacturing, agriculture and housing.

A reality that ought to be considered is that there will likely be early stage MSEs that are not ready for debt financing and have to be graduated from grant financing into debt. The financial packages deployed thus can consist of grant and debt as well a blend of both. The crucial element is that financing alone will not suffice. There ought to be deliberate coordination between financial and non-financial interventions such that support sophisticates as MSEs graduate into mainstream debt.

Image result for business financing

(source: https://www.businessexchange.ca/canada-small-business-financing-act-program-ultimate-tool-aspiring-franchise-entrepreneur/)

The bouquet of support linked to financing should include technical training which trains MSEs on up-to-date technical skills of the sector; technology upgrades that modernise technology used by MSEs and train them on their use; and physical Infrastructure upgrades that improve the physical locations in which MSEs operate including ensuring access to water and sanitation facilities as well as electricity. Finally, MSEs should be trained in basic business management training to help them better manage and plan for their business growth and possible expansion. This training must be partnered with business mentorship such that training and upgrades are effectively used.

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


Trump’s Plan for Africa is #MAGA on Steroids

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This article first appeared in my weekly column with the Business Daily on December 26, 2017

About two weeks ago Trump released his national security strategy where, for the first time it seems, Africa was directly addressed. Trump made two intentions clear in the strategy in terms of his economic focus for Africa: the first is that he recognises Africa’s potential as a market for American goods and as a means of building wealth for Americans. Second, he wants a clearer shift from aid to economic partnership. What is not clear is how Africa will benefit from the plan beyond his support for economic integration and an improved business environment (both of which are already priorities for most African governments). His plan puts the USA’s interests first, as per Make America Great Again (MAGA), but it fails to articulate how expanded economic cooperation with the USA will benefit African nations and citizens. In short, Trump’s economic plan for Africa is MAGA on steroids. His obsessive focus with ‘America First’ will clearly extend beyond the borders of the USA, and Africa is a mere player in the larger plan to re-establish the global economic dominance of the USA. Whether Africa will benefit seems to be of little consequence.

President Donald Trump speaks on national security, Dec. 18, 2017, in Washington.

(source: https://www.voanews.com/a/trump-to-unveil-new-national-security-plans/4168148.html)

Another element that is clear in his plan is that he wants to kick China out of Africa and take back dominance on the continent; his distaste with China is clear. Through the plan, Trump seeks to make the USA an alternative to ‘China’s often extractive economic footprint on the continent’. What is not clear is how kicking out Chinese interests and replacing them with those of the USA will be of use to Africa. Will investments from the USA be more generous and attractive than China’s? Will goods from the USA be more competitive than those from China? Will investments from the USA create more jobs for Africans than is the case with China’s? Will credit lines from the USA be more affordable than what China offers? There are no answers to these basics question in the strategy.  Instead what we get is the argument that the USA is inherently better for Africa than China- just because.

As can be expected, the plan is already being criticised. China and Russia take issue with being labelled as competitors that challenge American interests. The language of ‘us versus them’, particularly with regards to China comes out clearly. A pessimist looking through Trump’s strategy would argue that he’s setting up for a proxy war with China over Africa.

Image result for Africa china usa

(source: thenakedconvos.com/wp-content/uploads/2012/09/china_africa_us1.png)

However, the most puzzling feature of the strategy, in terms of the economic focus on Africa, is the language. Aren’t we taught in Strategy 101 that one ought not announce plans for dominance as ‘plans for dominance’? One ought to use amicable language that highlights the benefits of mutual cooperation and economic partnership—which is what China does. Strategic language underplays true intentions of dominance and instead uses language that will put everyone at ease and welcome the player onto the field. However, rather than discretion, Trumps language boldly announces his plans to make the USA boss of Africa again and thus, transparently, makes his strategic objectives obvious to all.

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

The link between the mobile economy and the informal economy

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This article first appeared in my weekly column with the Business Daily on September 11, 2016

The growth in the use of mobile phones in Kenya and indeed Africa has created a mobile economy that is estimated to have generated 6.7 percent of GDP in Africa in 2015. According to GSMA, an association that represents the interests of mobile operators globally, mobile technologies and services contributed about USD 150 million of economic value on the continent. Closer to home, mobile subscriber penetration in East Africa hit 46 percent in 2015 and smartphone adoption is due to hit 54 percent in 2020. Kenya is well aware of how access to mobile phones has deepened financial inclusion through the provision of access to financial transactions. Indeed a study by CGAP, an organisation that seeks to promote financial inclusion, indicated that in Kenya, mobile money transfer has overtaken even informal financial groups as the most used financial service. CGAP found that even in more rural areas, 61 percent of people were registered mobile money transfer users while only 51 percent and 36 percent were using informal financial groups and banks respectively. Indeed by 2014, 58.4 percent of all Kenyan adults had a mobile account and approximately 90 percent of all senders and recipients of domestic remittances used a mobile phone.

Image result for mobile kenya

(source: http://mobileworldcapital.com/wp-content/uploads/2015/09/M-PESA.jpg)

In my view the emergence of the mobile economy and specifically mobile money, mobile banking and mobile lending intersects with the informal economy and indeed enables this section of the Kenyan economy. About 82 percent of Kenyans in employment are employed by informal businesses and organisations across the country which indicates that most Kenyans seem to derive their livelihood from the informal economy. And although the informal economy is not without its challenges, such as serious productivity problems, it is an important part of the story of Kenya’s economy.

There are three ways through which the mobile economy intersects with and enables the informal economy. The first is through facilitating financial transactions that enable informal businesses to receive payments for goods and services from clients and customers. Many informal businesses have a mobile money facility through which they can receive payments in a more secure and convenient manner than cash transactions.

Secondly, mobile money allows informal businesses to communicate with and make payments to suppliers and distributors. This allows informal businesses to manage and coordinate activity and transactions with numerous parties in their value chain across the country. It would be useful for more research to be done on this issue in order to better understand the extent to which the mobile economy has informed improvements in efficiency and productivity in informal firms and how this can be leveraged further.

Image result for mobile money kenya (source: http://ithubkenya.com/wp-content/uploads/2016/09/mobile-money-800×445.png)

Finally, the mobile economy has created an avenue through which informal business people can apply and qualify for loans through their mobile phone. Indeed, it is not unheard of in Kenya for informal businesses in large informal markets to borrow money at the beginning of the business day to purchase stock, and pay the loan off at the end of the day after the sales of the day are complete. Mobile lending offers a convenient alternative to travelling and applying for normal bank loans, particularly for businesses operating in more remote areas far away from brick and mortar banking halls. Further mobile lending may allow informal business people who may not qualify for loans from mainstream banks, to get access to mobile micro-loans thereby boosting informal business activity.

Perhaps the mobile economy, and specifically mobile money and mobile lending, intersect and enable the informal economy effectively because it accommodates informal financial behaviour. However, there is clearly a need to better understand the relationship between the mobile economy and informal economy. Of particular interest would be on how mobile tools and applications can be used to improve the productivity and profitability of informal businesses.

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

Why the recalibration of the banking sector is good for Kenya

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This article first appeared in my weekly column with the Business Daily on April 17, 2016

Kenyans have been shaken by the number of bank closures over the past few months. The first was Dubai Bank in August 2015, Imperial Bank in October 2015 and more recently Chase Bank.

Kenya’s most recent story in the banking sector from a development point of view was how it expanded financial inclusion offering credit lines to a segment of the population that had previously been considered ‘unbankable’. Able to access credit from banks oriented to the low income population and SMEs, many Kenyans found themselves able to use the credit offered to improve their standards of living. However, as we are seeing, perhaps the push for financial inclusion compromised other elements required for a robust and stable banking sector from an ethics and corporate governance point of view. Did the previous push for financial inclusion lead to unintended laxity on the corporate governance element of Kenya’s banking industry?

https://i1.wp.com/www.aadhaarnews.com/wp-content/uploads/2015/12/85916322850b4ba1232345.jpg (source: http://www.aadhaarnews.com/wp-content/uploads/2015/12/85916322850b4ba1232345.jpg)

This question is precisely why the recalibration of the banking sector in Kenya is a positive development in terms of the determination the Central Bank has clearly communicated to ensure all banks adhere to all regulations, stipulations and high quality corporate governance principles. This ongoing correction while painful at the moment, will ensure the sector comes out more robust and with stronger structural integrity. In many ways the order of events has been serendipitous in that this period of realignment to better practices in corporate governance was preceded by a period of financial inclusion. Now, more than ever, one can see that it is truly the common Kenyan that was at risk when dubious practices by some banks were allowed to proceed unchecked. Indeed, because it is small businesses and, low and average income Kenyans who are being affected by the current banks under question, there is great moral impetus to ensure that Kenyans who scraped their savings together, are protected from any vagrancy in poor corporate governance. Thus it is crucial that the sector undergo scrutiny so that any existing laxity is corrected.

Bear in mind that Kenya is not unique in terms of the questions being targeted at the banking sector. The Global Financial Crisis (GFC) in 2007-08, from which the global economy has yet to recover, was informed by dubious practices in the global financial sector. Indeed, a Governor of the Central Bank of Bosnia and Herzegovina made the point that the GFC proved that the principle of responsible finance had not been sufficiently developed with banks and with clients and that the non-transparent and ambiguous lending practices put many customers at risk. Indeed the GFC catalysed a reanalysis of bank governance with a view to improve bank governance particularly in South East Europe (SEE).

(source: http://images.indianexpress.com/2015/01/financial-crisis-main.jpg)

Thus given the current point of development of Kenya’s economy and banking sector, the clear and much needed direction from the Governor of the Central Bank to ensure that the state of ethics and practices in corporate governance of the banking sector in Kenya are robust, is ahead of its time and should be applauded. And it is crucial that as this recalibration occurs, that depositors are protected, a fact of which the CBK seems keenly aware. Further, while the banking sector in Kenya is still viewed as largely stable, even the IFC acknowledges that shortcomings in bank corporate governance can destabilize the financial system and create systemic risks to the economy. Thus, the current dynamics may be the needed corrections required to ensure Kenya’s economic development is based on a solid foundation of a financial sector with integrity.

As senior counsel from the European Bank for Reconstruction and Development (EBRD) stated, banks are in a unique position to influence the corporate governance of their corporate borrowers and can become role models for other companies in implementing high standards and best practices. In this spirit, the EBRD organised a two day workshop aimed at improving the transparency and accountability of the SEE financial sector back in 2009. Perhaps Kenya should follow suit.

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


How Kenya’s economy looks for 2016

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I sat down with CNBC Africa to talk about what to expect in Kenya’s economy this year.

Source: How Kenya’s economy looks for 2016