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Logic of tax increases in Africa is weak

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This article first appeared in my weekly column with the Business Daily on February 3, 2019

Last week the World Economic Forum met at Davos in its annual tradition. An interesting conversation that garnered global attention was the panel on global inequality and how this can be addressed. A key theme that emerged during the conversation was taxes and the role they can play in addressing inequality. Key issues emerged that are pertinent for the continent.

Rwandan President Paul Kagame (left) and his South African counterpart Cyril Ramaphosa

(source: https://www.businessdailyafrica.com/analysis/ideas/For-the-continent–tax-rise-no-pill-for-equality/4259414-4964484-4a3atc/index.html)

The first was the private sector and high net worth individuals (HNWI), globally, and their tax liabilities. There is a sense that private sector and HNWIs, are underpaying in terms of tax. This is due to combination of factors: regimes that undertax HNWIs and the private sector, and tax evasion by HNWIs and private sector. In terms of the related issue of tax evasion, in Africa this tends to fall under the broader conversation on illicit financial flows and specific private sector behavior such as transfer pricing. The best known report is that by the United Nations (UN) Africa Renewal project which states that between USD 1.2 trillion 1.4 trillion has left Africa in illicit financial flows between 1980 and 2009- roughly equal to Africa’s gross domestic product, and surpassing by far the money it received from outside over the same period. So what is being argued is that both HNWIs and private sector, particularly large players such as multinational corporations (MNCs), use existing legal loopholes to circumvent their tax obligations to governments. Combine that with the ease with which tax can be evaded in many African countries, and the conclusion is that African governments are being denied revenue owed to them.

The argument is that is it important to both increase tax especially on HNWIs and stem illicit financial flows to ensure that governments get their due payments and have more revenue at their disposal. Governments would then be able to use this revenue to invest in education, healthcare, infrastructure etc., all of which would drive growth in a more equitable manner. On paper this sounds good, but the reality in Africa is different.

Image result for taxes Africa

(source: https://www.huffingtonpost.co.za/staff-reporter/unpacking-the-latest-tax-hikes-in-south-africa_a_23371888/)

The logic of pushing for higher taxes or stemming tax evasion and illicit financial flows in Africa is weak as long as many African governments consistently demonstrate they are not responsible and accountable custodians of public funds. It will be difficult to convince Africans, private sector and individuals, that they should pay more taxes when it seems they are just providing more public funds to be stolen. In Kenya, the Office of the Auditor General routinely tables billions of shillings that are unaccounted for on a yearly basis. If government cannot account for the funds already under its control, why should they be provided with more? It seems that increased government revenue in many African countries would certainly not translate into public investment in the people and country.

There is a lack of strategic thinking when African governments table tax increases or argue for more revenue but don’t address their ‘expenditure problem’. Do not expect support for increased taxation or revenue inflow as long as Africans continue to feel consistently defrauded by government. The best way for government to incentivise tax payment and increase revenue from tax, is to first consistently demonstrate that they are responsible and accountable custodians of public funds. There are no shortcuts on this one.

Anzetse Were is a development economist

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Implications of the Riverside Attack in Nairobi

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This article first appeared in my weekly column with the Business Daily on January 27, 2019

On January 15, 2019 Kenya was the target of a terrorist attack by Al Shabaab at 14 Riverside in Nairobi. Kenyans were deeply affected; 21 people died, most of whom were Kenyan, as well as foreign nationals. We have lost valuable lives and Kenya seems truly targeted as a key African location for terrorist attacks that garners global attention. To be clear, Kenya is routinely targeted by terrorists, particularly Al Shabaab, and the local news in Kenya often communicates when the country suffers casualties. Sadly, the international community only seems concerned if foreign nationals are killed.

The last time such a globally visible event occurred in Kenya was the attack on Westgate Mall on September 21, 2013 in which 71 people died, where again, most were Kenyan including children. The economic and geopolitical implications of such highly visible terrorist attacks on Kenyan soil is important. After all, Kenya will continue to exist in its geographical location and conduct military, social, political and economic activities in that context. The reality, however, is that the world has changed since 2013. Both Europe and the USA have suffered terrorist attacks and global geopolitical dynamics have changed. There are two key issues to unpack as we come to grips with the reality of living with terrorist attacks targeting Kenya.

Families wait for news of their loved ones at 14 Riverside Drive Complex

(source: https://www.businessdailyafrica.com/analysis/ideas/What-14-Riverside-attack-means-for-the-country/4259414-4953464-155fdt3z/index.html)

The first is the internal shift. The response of the Kenyan government, particularly in terms of the security action, seemed more quick to respond than was the case in Westgate. It seems security forces learnt from Westgate and did what they could to apply the learning to the Riverside attack. The response from Kenyan security forces seemed more sophisticated and saved many lives.

The second issue is travel advisories as they have real economic consequences in terms of both business and leisure tourism which are major contributors to the Kenyan economy. In terms of Westgate, the USA gave a full travel advisory and the UK gave travel advisories to parts of Kenya; the EU didn’t communicate a travel advisory. This time the UK seems to indicate that it does not expect to state that UK nationals not visit Kenya. The EU stated that Nairobi is safe despite the attacks and that the handling of the siege should offer EU nationals an assurance of safety when visiting the country. The USA has not issued a travel advisory but has advised vigilance. The response of the Chinese government to both attacks was a condemnation of the attacks with no travel advisories issued.

In closing, the reality is that Kenyans are concerned that we will continue to be targets of terrorist attacks. Negative travel advisories only exacerbate the impact of attacks by crippling key sectors of Kenya’s economy. The personal, social and economic consequences of being a target of terrorism are real for Kenyans. It is hoped that global players continue to stand with Kenya and demonstrate a sophisticated understanding of the effects of their military and economic diplomacy in particular.

Anzetse Were is a development economist

China-Africa relations complex and nuanced

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This article first appeared in my weekly column in the Business Daily on January 20, 2019

Last week Dr. Haabazoka, president of the Economics Association of Zambia wrote an  insightful article in Bloomberg reflecting on Zambia’s relationship with China. He made several interesting points the first of which addressed the asset seizure narrative that Europe and North America have espoused with regards to China’s activities in Zambia. This narrative argues that the Chinese government deliberately traps African governments with unsustainable debt in order to seize their national assets such as strategic infrastructure. He reiterated what the Zambian government had already stated numerous times, that Zambia has not offered any state-owned enterprise to any lender as collateral for any borrowing, nor does it ever have plans to do so. He also went on to point out that Chinese firms have acquired stakes in eight maritime ports in Belgium, France, Greece, Italy, the Netherlands, and Spain.

Image result for china zambia

(source: https://www.znbc.co.zm/market-zambia-china/)

The main point he was making, as many Africans have made in the past, is that it is, ‘patronizing to act as though Zambia is either victim or reckless in allowing Chinese investment’ going on to say that Zambia has made a strategic decision, that in order to secure a stable economy that provides world class services and infrastructure, they are going to have the Chinese invest in their country and that they were not tricked into it. His position reflects the nuanced view many Africans have on China. The simplistic binary ‘good vs. bad’ thinking that some encourage Africa to take with regards to China is simply not practical. There are pros and cons to working with the Chinese and any other lender in the world including Europe and North America, the latter of whom position themselves as the good guys in Africa and the Chinese as the bad guys. Africa has been stating for years, that it is not that simple and such simplistic framing is not useful.

While the continent values the support Africa gets from Europe and North America, their funding focus and style has left serious gaps, particularly in infrastructure financing, that China is filling. Now, there have been fair questions as to the transparency of the deals made between African governments and the Chinese government. Fiscal opacity tends to be the norm in most Sino-African deals. This is not healthy and has to change for sake of both the Chinese and Africans, particularly given the push back African publics are exerting in the spirit of demanding accountability from their governments. But that in itself does not automatically make Chinese financing evil. It is simply a problem that has to be fixed.

A key factor in this conversation has been the ability of African governments to negotiate fair deals with the Chinese. And this is where it gets complex because there are two key factors that inform the extent to which African governments get reasonable deals from the Chinese. These factors are capacity and corruption and operate almost on a sliding scale. In some African governments capacity gaps preponderate and compromise the ability of the government to effectively negotiate. With other African governments corruption is the issue and the moral bankruptcy of some government officials lead them to deliberately negotiate subpar deals for their countries because of the individual kickbacks they get that they have built into the deals they make.

The point is that Africans are multidimensional and complex, and this is reflected in how they interact with the Chinese and all other powers in the world. Let no one be under the impression that relationships between sovereign nations are simple and can be condensed into a good/bad model. The reality is far more nuanced.

Anzetse Were is a development economist

 

 

Key focus points for Africa in 2019

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This article first appeared in my weekly column with the Business Daily on January 13, 2019

Last year was a dynamic year for Africa in both positive and challenging ways. The Africa Continental Free Trade Area (AfCTA) was effected; Nigeria showed signs of moving out of recession with risks of going back, South Africa dipped into recession and the growing debt burden of African governments was brought into focus. In terms of economic diplomacy, 2018 saw China announce a USD 60 billion package for Africa during FOCAC, the USA passed the BUILD Act which saw the creation of the International Development Finance Corporation, an agency that can invest up to USD 60 billion in the developing world; further the Trump Administration announced USA’s new strategy for Africa. The EU proposed a new Africa-Europe Alliance for Sustainable Investment and Jobs involving a 25 percent hike in the EU Africa budget for 2021-27 to about €40 billion. Given all these factors, what are the key focus points for Africa in 2019?

Image result for africa business

(source: https://www.africanexponent.com/post/there-are-numerous-business-opportunities-in-africa-1610)

Firstly, the indebtedness of African governments will be watched in 2019. The pace at which African governments are accruing debt is causing concern. The IMF points out that Sub-Saharan Africa public debt was at 57 percent of its GDP in 2017, an increase of 20 percentage points in just five years. In other words, Africa as whole, owes more than half the value of its economic output (GDP).  In terms of Kenya, in October the IMF raised Kenya’s risk of defaulting on debt repayments from low to moderate, forecasting Kenya’s total public debt will reach 63 percent of GDP in 2018. Rapid debt accrual by African governments juxtaposed with serious concerns about the mismanagement of public funds will be watched and be a key point of interest in 2019.

Secondly, the stakes of a geopolitical focus on Africa will be heightened in 2019. The three economically dominant regions in the world all have plans for Africa: the EU, USA and China.  The EU continues to pursue bilateral deals and EPAs as it gears up for the Africa-Europe Alliance. The USA has both a new Africa strategy and new development financing capabilities. China has tweaked FOCAC with a facility for both SMEs and encouraging African imports into China. The basic point is that all three powers are learning and their strategy into Africa is informed by their new insights, for better or worse. Thus, enlightened African agency is needed in 2019. African governments will have to ramp up their economic diplomacy and negotiation capacity; African private sector will have the opportunity to use their agency to expand in light of the focus from three economically powerful regions; and the African public will need to continue to use their agency ensure they get fair deals given all the aforementioned dynamics.

Image result for africa crowd

(source: https://medium.com/@UNICEFNZ/making-sense-of-africas-population-explosion-750cb66c5353)

Finally, internal African dynamics will be key in 2019. AfCTA is already indicating the potential of Africa as well as the issues Africa has with itself. The performance of South Africa and Nigeria will be in focus, even as the East Africa region continues to power African growth forward. Given the renewed focus on Africa, 2019 may well be a year where the complexities of Africa will be highlighted. Africa, like any other continent, is multidimensional and complex; 2019 may well be the year where this is truly better understood.

Anzetse Were is a development economist

 

Key lessons for Kenya and Africa in 2018

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Last year was an economically dynamic year for Kenya with both positive and negative elements that provided key lessons for the country. The first lesson for Kenya in 2018 is that strong GDP growth does not necessarily translate to robust business activity. It is true GDP growth in 2018 was stronger than in 2017; Q1 was at 5.7 percent compared to 4.8 percent in 2017, and 6.3 percent in Q2 compared to 4.7 percent in 2017.  This was however juxtaposed with poor business performance felt by both large companies and SMEs. Several large companies have already issued profit warnings, and non-performing loans rose to KES 326 billion from KES 260 billion in 2017 driven by significant defaults from small businesses. Thus 2018 was a year of mixed fortune; some sectors were able to thrive but fundamental structural issues continued to dampen business growth and development.

Image result for business in kenya

(source: http://www.herbusiness.co.ke/how-the-business-plan-for-a-retail-business-in-kenya-should-look-like/)

A second lesson for 2018 was the effect of fiscal policy, particularly public debt accrual, on the lived reality of Kenyans. Kenya’s public debt stands at over KES 5 trillion with no reduction in debt appetite on the horizon. Treasury introduced new taxes targeting Kenyan’s across the board to raise revenue undoubtedly informed by the need to service debt obligations. Thus a new tax on fuel was implemented and later in the year government announced that it seeks to implement presumptive tax on informal businesses. Thus the link between growing debt and taxation became a lived reality and painful lesson for Kenyans.

Third, on a positive note, and ironically, 2018 signaled a new recognition of the importance of small business or Micro, Small and Medium Enterprise (MSMEs). Government held an inaugural SME conference attended by both the President and Deputy President and other senior officials. Further, senior government officials attended MSMEs fairs and exhibitions in Kenya and the region. The irony however, is that while one segment of government has become more alive to the importance of and need to support MSMEs, it was met by insensitivity in other arms of government in the form of presumptive tax on the very same sector. It is hoped that government will better coordinate itself going forward and focus on the development and strengthening of the MSMEs rather than extracting revenue from a neglected sector surviving through subsistence business activity.

Image result for business in kenya

(source: https://mobile.nation.co.ke/lifestyle/Seeds-of-growth-Sources-of-cash-for-startups-and-SMEs/1950774-2090440-format-xhtml-rbwckyz/index.html)

Finally, the year revealed renewed global interest in Africa, particularly private sector development.  China unveiled a USD 60 billion plan for economic engagement with Africa including a Special Loan facility for the development of African SMEs. The USA created the USD 60 billion International Development Finance Corporation mandated to spearhead private sector investment through both debt and equity; and the European Union (EU) proposed the € 40 billion Africa-Europe Alliance for Sustainable Investment and Jobs. This is not to say African governments were ignored, but there is fresh interest in partnering on the development of private sector in Africa.

In short 2018 was a mixed bag. On one hand there were painful lessons that will hopefully inform economic strategy going forward, but there were important positive elements that Kenya and Africa can leverage to build a more prosperous 2019.

Anzetse Were is a development economist

 

 

 

Africa not a priority in new USA Strategy

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This article first appeared in my weekly column with the Business Daily on December 23, 2018

On December 13, John Bolton, National Security Advisor to the President of the United States of America (USA), announced the Trump Administration’s New Africa Strategy. The new strategy is aimed at furthering USA priorities which he identified as: advancing USA trade and commercial ties in Africa; countering the threat from radical Islamic terrorism, and ensuring that USA taxpayer dollars for aid are used efficiently and effectively. However, a significant portion of his announcement was focused on primarily attacking China and secondarily Russia. He stated China uses bribes, opaque agreements, and the strategic use of debt to hold states in Africa captive to Beijing’s wishes, and that China employs predatory actions to advance Chinese global dominance. The focus of this article will be on the economic and political economy elements of the announcement. There are both positive and negative elements in the outlined strategy.

Image result for USA flag in Africa

(source: https://www.redbubble.com/people/theshirtyurt/works/13039066-african-american-africa-united-states-flag?grid_pos=65&p=canvas-print)

In terms of the positives, the USA seems to have woken up to the reality that economic and commercial ties between the USA and Africa can be significantly strengthened. The new strategy will focus on new bilateral trade agreements and ensure that economic ties apply positive pressure towards improving governance and business practices in Africa. This is welcome. The USA recently announced the establishment of the U.S. International Development Finance Corporation which has new finance capabilities and higher lending limits than its predecessor OPIC. While financing will target US entities, the reality is that this can have a positive knock on effect on providing creative financing options for the African private sector and thus positively inform private sector development in Africa.

However, there were many problematic elements to the announcement. The first is that the announcement was made by the National Security Advisor, not the State Department. The contextualization of the Africa strategy in this manner insinuates that US Security priorities are the primary motivation for the strategy.

Secondly, the content and tone of Bolton’s speech used such biased language against China in particular that it made it seem as though the US administration views Africa as a pawn in its larger anti-China global strategy. The speech left the feeling that the USA wants African governments to choose between Washington and Beijing, and that if the latter is chosen, retaliatory action should be expected. Such simplistic, binary thinking is outdated and out of place in a complex multipolar world where Africa has numerous economic and development partners from across the globe Indeed, the editorial board of the Financial Times picked up on this and stated that, ‘It is unlikely many Africans will welcome the prospect of returning to the era of “us or them” depicted in this vision, or feel much sympathy if America is the one left behind’. Africans are already linking the speech to the dark days of the Cold War where millions of Africans suffered and died in proxy wars on the continent.  But the world has changed since the Cold War, the speech seemed to miss that point.

President Donald Trump

(source: https://www.businessdailyafrica.com/analysis/columnists/African-welfare-nonpriority-in-new-United-States/4259356-4907684-51k4ez/index.html)

Finally, the announcement unnecessarily underplayed significant strengths the USA has in Africa. At the moment, the USA is the top FDI player in Africa, way ahead of China for example. The US government and private sector have significant experience in Africa and working with African private sector in truly creative and useful ways. This should have been highlighted and strengthened under the new strategy. Further, where is AGOA in all this?

In short, the new strategy is blinkered by China and does not appear to have African welfare as a key consideration. In fact, it seems as though it is America First, China second and Africa last.

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

The importance of African agency in modern times

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This article first appeared in my weekly column with the Business Daily on December 16, 2018

A few weeks ago I attended a seminar organised by the South African Institute of International Affairs (SAIIA) on African agency in the context of Sino-African relations. What became clear over the course of the conversation is that African agency is important in any relationship the continent has with others. ‘African agency’ partly drawn from the paper by SAIIA, can be defined as Africa’s ability to make independent decisions, strengthen its bargaining power and pursue its interests. There are several issues of which to take note when African agency is discussed.

China’s President Xi Jinping (centre) with

(source: https://www.businessdailyafrica.com/analysis/ideas/African–agency–crucial-as-foreigners-court-continent/4259414-4897734-1sh00y/index.html)

Firstly, there are numerous centres of African agency; government, private sector, civil society, communities, and academia and think tanks for example. And within each of the centres are sub-centres where specific thematic areas of interest and priorities emerge. Further, each centre of agency has differing abilities to exercise and voice their agency. African governments, due to the way modern countries are structured, are often the most obvious centre of agency.  And foreign governments use African governments as key centres of interaction thereby amplifying the power of the agency of African governments. However, the agency of African governments may not necessarily reflect the interests and priorities of African publics as a whole. A key example is with regard to the increase in public debt across the continent. In my view this is a direct reflection of the debt appetite and agency of African governments, not African publics. In countries like Kenya, there is clear disgruntlement with how this government agency is being used to accrue public debt in a context of financial mismanagement and corruption.

Secondly, African agency is not always a good thing; agency can be predatory or emancipatory, for example. For instance, certain segments of the African private sector routinely exercise their agency to contribute to illicit financial outflows from the continent. In short, certain elements of African private sector exercise their agency in a predatory manner that denies Africans of revenue that should rightly be theirs. Thus, just because an African actor is exercising agency, one cannot assume that this it is good for the continent.

Image result for Africa EU governments 2018

(source: https://www.dw.com/en/chancellor-angela-merkel-holds-berlin-summit-for-compact-with-africa-project/a-46065155)

Thirdly, because there are so many different types of actors with agency in Africa, there can be disagreement within Africa as to whose agency is best for the continent. Further, because there are so many centres of agency, their interests can be pitted against each other. For example, African governments can disagree with each other and exercise their agency in manners that undercut each other, and the agency of certain elements of private sector may not align with the interests of government, for example. Thus, it is crucial that different African actors understand the importance of being clear as to what their priorities are and expect resistance for other African actors. This is not to say there are no key issues on which some consensus can be found, but the effort to create this has to be deliberate as it will likely not emerge organically.

Finally, African agency is growing in importance as Africa functions in a world where not only China is demonstrating interest in Africa, other developing economies from Asia, Gulf States and South America are too. Further, Africa’s traditional partners in the forms of Europe and North America are re-focusing on Africa as a key point of interest. Thus, let Africans know that they will only be heard if they are organised, because it is only through deliberate organisation that key agents of interests from Africa will emerge.

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