Manage Risks Raised by Oil Exports

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This article first appeared in my weekly column with the Business Daily on June 10, 2018

Last week Kenya became the first country in East Africa to export oil. Media reports indicate that the crude oil was transported in the Early Oil Pilot Scheme and will be kept in Mombasa as the country looks for viable international markets. While Kenyans may be jubilant at the prospect of earning revenue from oil, and hope that those proceeds will lead to prosperity and an improvement in their quality of life, key risks have to managed.

First is the Presource Curse. We are all familiar with the resource curse where natural resources such as oil lead to conflict, facilitate corruption and generate an immense income divide with most citizens failing to benefit from the process of natural wealth. The presource curse, as the IMF points out, indicates that on average after major oil discoveries, growth underperforms post-discovery forecasts. The presource curse is especially pronounced in countries with weaker political institutions. These countries not only fail to meet growth forecasts, their average growth rate is lower than before a discovery.

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(source: http://www.littlegatepublishing.com/2014/01/tullowoil/)

IMF points out that an oil discovery should increase output, and hence growth; oil discoveries are worth 0.52 percentage point a year in higher growth over the first five years. Kenya has only transported the oil to port, whether a buyer has been found is unclear and raises questions as to whether the country has the expertise to consistently find good quality buyers as well as ensure consistent supply. In the presource curse, countries are tripped up by the steps needed to turn discoveries into dollars. Time will tell whether Kenya will buck this trend.

The second risk is to manage profligate spending linked to an anticipation of oil-related revenue. Ghana is an example of a country that went on a borrowing spree based on overly optimistic revenue projections linked to generous oil barrel prices. When the commodity slump emerged, Ghana found itself unable to generate the revenue projected and service new debt obligations. Kenya has to manage this dynamic carefully because, as the IMF points out, if oil prices fall enough, Kenya may see projects cancelled and miss out on anticipated investment, taxes, and jobs. And even if prices go higher, Kenya may only get a share of the increased profits through taxes. Overly rosy expectations may lead to overly optimistic borrowing and risk over-exposure for both the lender and borrower. Thus, there is a need to manage exactly what oil can deliver in terms of revenue.

Tullow Crude Oil

(source: https://www.businessdailyafrica.com/analysis/ideas/Manage-risks-raised-by-oil-exports/4259414-4604952-pw40k2/index.html)

Finally, is the global tide away from fossil fuels; Kenya faces a conundrum. As the IMF points out, if there is no progress in combating climate change, poor countries are likely to be disproportionately harmed by the floods, droughts, and other weather-related problems. But if global actions to address climate change are successful, poorer countries that are rich in fossil fuels will likely face a steep fall in the value of their coal, gas, and oil deposits leading to a massive reduction in the value of their natural wealth.

In short, let Kenya be realistic that as a latecomer to the oil game, there are important risks to manage. And if we fail to manage these risks, the oil-related jubilance will fade very quickly.

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

 

 

 

 

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Podcast: The Cost of Corruption in Kenya

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The last few weeks have been jarring for Kenyans as we found out that we’d had yet another maize scandal, and this time we lost KES 2 billion at the National Cereals and Produce Board (NCPB) to 21 people. We also found out that we lost KES 9 billion to 10 companies that were irregularly awarded National Youth Service (NYS) tenders. That’s a total of KES 11 billionA few days ago, it also came to light that we had lost between KES 70 – 95 billion at the Kenya Pipeline Corporation (KPC). This scandal is still unfolding.

I join Brenda Wambui of the ‘Otherwise?’ podcast to talk about the cost of corruption on our economy. What does this looting do to our country?

No Justification for Planned Tax Rise

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This article first appeared in my weekly column with the Business Daily on June 3, 2018

The National Treasury tabled the Income Tax Bill 2018 which, among other actions, has the general thrust of taxing individuals and companies at higher rates than previously was the case. The focus here will be on the opposite ends of the financial spectrum: large companies with taxable income of more than KES 500 million and Micro and Small Enterprise (MSE) most of whom have fewer than 5 employees and generally operate informally, outside what government considers to be the tax net.

Treasury’s rationale for the new taxes and tax hikes is simple: government needs to raise more money in order to plug the fiscal deficit and reduce borrowing in the spirit of fiscal consolidation. But the core question should be: Are these tax hikes justified? With regards to the Corporate Tax, while it can be argued that large companies can afford to pay the 35 percent, the core question is, why? What will corporations get in exchange for the additional amount charged? Rather than approaching the income tax bill from a perspective of service enhancement, government is motivated by more aggressive revenue generation. Given the reality of high costs of doing business in Kenya, the proposed increases simply add another stone on an already heavy load. Perhaps if costs such as electricity, land and transport were more manageable, the effect of added costs in the form additional taxes would be less pronounced.

Image result for tax (source: http://pinnaclepac.com/review-of-your-tax-return-by-the-canada-revenue-agency/)

The proposed presumptive tax on the informal sector, of 15 percent payable by individuals with incomes below KES 5 million applying for single business permits, is unfair and short sighted. At the moment, government provides basically no services to MSEs to support their productivity, profitability and growth. Most MSEs operate in dilapidated shacks with no electricity, water and sanitation, and often next to open sewage and piles of garbage. Government, at both national and county level, seem unable to invest in supporting MSEs, yet here is government introducing a punitive new tax. The question MSMEs will have is, again, why? What will MSEs get in return for paying this new tax? The presumptive tax may motivate informal MSMEs to go further underground because they know they are the new tax target, and since most operate at a subsistence level, any additional cost will truly pinch. Thus, rather than creating an enabling environment for MSEs, government introduces a tax that will make it even riskier for MSEs to conduct business in an already difficult environment.

However, the strongest argument against the tax hikes is corruption and the flagrant lack of fiscal accountability. This Bill is being tabled in the context of one of the largest cases of the mismanagement of public funds Kenya has seen in recent years. Ergo, Kenyans will wonder whether these new tax hikes will improve service provision, or whether the money will be used to buy public officials new properties and cars after being diverted into personal accounts.

Image result for corruption

(source: https://www.coe.int/en/web/greco/-/council-of-europe-anti-corruption-body-to-carry-out-urgent-evaluations-of-new-legislation-concerning-the-judiciary-in-romania-and-poland)

Unless government demonstrates that it is a responsible custodian of public funds, tax rates can continue to be escalated without translating into tangible benefits. Rather than scrutinise its own failings, government is being intellectually lazy and increasing tax on an already stretched private sector. Perhaps with some self-reflection and tough action within government itself, government would find it can live within its current means and need not saddle private sector with additional taxes.

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

Risks to manage in the African Free Trade Area

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This article first appeared in my weekly column with the Business Daily on May 27, 2018

The Africa Continental Free Trade Area (AfCTA) seeks to integrate African economies and pull together a market with a consumer spending power of USD 1.4 trillion by 2020 and increase intra-African trade by USD 35 billion by 2022. While some countries may have issues with the AfCTA, most African governments are behind it and momentum will continue to build to make it a reality. AfCTA is viewed as a game changer that will allow the free movement of goods and services across the continent, allowing African businesses to tap deeper into the sizeable and growing African markets. However, there are a few risks that ought to be managed going forward.

Delegates during the African Continental Free Trade Area Business Forum in Kigali, Rwanda, in March. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/columnists/Risks-manage-African-Free-Trade-Area-/4259356-4582538-46rg8n/index.html)

The first risk is to do with the financing of infrastructure that will interconnect the continent. Africa has an annual infrastructure financing deficit of about USD 93 billion. An obvious next step will be the business of raising funds to build the infrastructure Africa needs because without infrastructure, AfCTA will remain a good idea with no lived benefits on the ground. Given concerns with rising debt levels of African countries, coupled with queries on the management of public funds, there is a risk that AfCTA can facilitate a debt binge to finance infrastructure in a context of poor institutional controls and capacity to ensure infrastructure projects are efficiently financed and developed. African governments have to manage this by ensuring infrastructure plans are financed responsibly, that money reaches the infrastructure projects and the projects are completed in a timely manner. Without these controls, the sheer scale of financing that can be attracted to finance infrastructure in the context of AfCTA may trigger debt distress in many African countries.

The second risk is that given Africa’s underdeveloped manufacturing and propensity to export raw commodities; without coordinated policy change, AfCTA may entrench and enable this dynamic. A cynic will point out that given where Africa is now, AfCTA may do more harm than good. By opening up Africa’s borders and markets, AfCTA will make it easier than ever to extract even larger amounts of raw materials from even more of the continent. AfCTA can also open African markets even further to others and unintentionally facilitate the dumping of manufactured goods into Africa by other countries. Is Africa able to process all its oil, gold, coltan, titanium, copper, agricultural produce etc? If not, to whom is AfCTA really opening up Africa? And who will actually capture market share in Africa via AfCTA?

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(source: http://www.decode.co.za/home/clients/)

This leads to the final point which is that the implementation of AfCTA must be correlated with focused and coordinated action across Africa to industrialise. Let African industries and manufacturers get the attention required to catalyse their development. The African Development Bank has just released a report on strategies, policies, institutions and financing required to industrialise Africa. Let governments draw from such documents as they develop and implement their industrialisation policies and strategies. In doing so, Africa will be in a much stronger position to leverage AfCTA and ensure African companies capture market share in a manner that propels wealth creation and development in Africa.

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

The China Debt Question

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This article first appeared in my weekly column with the Business Daily on May 20, 2018

There has been clear concern voiced over the sustainability of Kenya’s fiscal path over the past five years. Total debt has risen from KES 1.7 trillion in 2013 to about 4 trillion in 2017. The good news is that there seems to be indication that plans for fiscal consolidation are underway, although these will only be confirmed when the 2018/19 Budget is read.

Embedded in concerns with Kenya’s fiscal path, is a narrative that raises red flags on Chinese debt. If you look at the accrual of public debt owed to China, this stood at 63 billion in 2013 and rose to 479 billion in 2017; China owns about 66 percent of Kenya’s bilateral debt. This has led to alarm about Kenya’s ‘over-exposure’ to Chinese debt. Indeed, there is an emerging commentary that argues that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent.

 Kenya's President Uhuru Kenyatta (left) and Chinese President Xi Jinping  prepare to inspect Chinese honour guards during a welcoming ceremony outside the Great Hall of the People in Beijing on August 19, 2013. AFP PHOTO

(source: https://www.businessdailyafrica.com/analysis/columnists/4259356-4571188-tw2sm7/index.html)

While I agree that there should be concern with debt levels, I think the ‘danger’ of Chinese debt has dubious motives. In fact it is fair to ask if all the hue and cry over debt owed to China would be as pronounced if the debt belonged to another part of the world. The focus on Kenya’s and indeed Africa’s, rising debt needs to be approached in an intellectually honest manner that demonstrates, firstly, that the appetite for debt is coming from Kenya. China is not saddling Kenya with debt, the Kenyan government wants the debt. The Kenyan government has prioritised infrastructure and gone through expansionary fiscal policy to finance this priority. Thus, it is hard to conceive that given the financing demands of infrastructure development, the government would turn down credit lines that can finance this priority.

Secondly, if you look at the portfolio of China’s debt to Kenya, it is focused on infrastructure indicating that perhaps the Kenyan government feels it has found a partner that is willing to invest in its focus on building railways, roads, electricity transmission lines, dams etc. Bear in mind that China is still a developing country with a 2017 GDP per capita of USD8,643, and ranked 75th in the world. However, the Chinese view is that despite this, it will continue to provide sizable development loans to Kenya of which almost half are concessional loans or preferential credit lines with a 2 percent interest rate and 20-year maturity period.

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(source: https://www.diplomaticourier.com/2017/04/29/africa-chinas-human-rights-concerns-dont-apply/)

The point is that, once you find a partner that seems to understand where you are coming from and supports your vision, it is likely that the partnership will grow. Further, if other parts of the world are not offering similar debt packages in terms of scale and conditions, they really are not in a position to criticise. So why do some seem surprised by burgeoning credit lines from China?

Finally, beyond debt sustainability, the core problem with rising debt is less related to from whom Kenya is getting debt, but more about how that debt is spent. The first problem is the question of the management of public finances. If debt does not end up in projects that drive growth and rather is diverted to private pockets, then the country is in serious problems. Debt only makes sense when it is economically productive and thus mismanagement of public monies comprises the ability of debt to inform economic development. Second is the issues of absorption of funds. Government at both national and county level have clear problems with absorbing development financing, and debt sits in that docket. So securing all this debt and failing to ensure it is used correctly and that the funding is absorbed in intended projects is the real problem.

It is important that the country have a sober conversation about debt, because no matter where the debt comes from, if it is mismanaged, Kenya will be in hot water regardless.

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

The Changing Face of China-Africa Relations

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This article first appeared in the China Daily on May 11, 2018

The relationship between China and Africa is one that generates immense interest and debate in both countries and around the world. The combination of strengthening economic growth in both China and Africa, particularly in the context of an increasingly insular USA and Europe means that the relationship between the two parties will play a progressively important role in their development and global dynamics. There are three factors to consider as we unpack Sino-African relations.

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(source: http://africanleadership.co.uk/china-open-to-president-weahs-view-on-china-liberia-relations/)

First is the leadership of China where Xi Jinping is redefining China’s presence on the global stage. In the context of the trade spat between the USA and China, Xi Jinping continues to emphasise China’s commitment to globalisation and free trade perhaps best demonstrated in his massive Belt and Road Initiative. In early April, Jinping restated his commitment to continue to open the nation’s economy affirming that China will open its doors wider to foreign investment. While some may argue that China does not walk the talk and that the country’s economy remains very protected in some ways, what is clear is that Xi Jinping is positioning himself as a global leader and one who encourages global cooperation both economically and diplomatically. Whereas in the past it seemed China was happy being a leading economy but not necessarily a leading voice in global interactions, Jinping is redefining how China positions itself globally. As Europe and the USA turn inward, he emphasises that China continues to look outwards and seeks to lead global conversations.

The implications for Africa in this regard is that Africa can expect initiatives under Jinping to deliberately foster deeper collaboration and cooperation. These will not only be from an economic standpoint but politically and militarily as well. Geopolitical dynamics in Africa will be informed by a leadership in China that seeks to strengthen its global presence and reputation and Africa will be an important party in how this plays out globally.

Secondly and linked to the point above, Jinping is actively rebranding China. Brand China has both positive and negative elements. The key negative elements particularly with regards to Brand China in Africa, is that China is corrupt and environmentally destructive. It seems China is aware of these negative elements of its brand because the Two Sessions addressed both these issues. A key focus of Two Sessions was to ratify a law to set up a new powerful anti-corruption agency. Africa’s struggle with corruption is a well-known fact, and Brand China has been seen to tolerate or even facilitate this corruption. Thus, the announcement of steps that will be taken to stem corruption in the Chinese government may have an impact on Africa in the form of new rules and requirements linked to Chinese funding. The two Sessions also revealed the growing importance of environmental concerns as a government priority in China.  This seems to stem not only from an understanding in the Chinese government that environmental degradation must be addressed as a strategic concern for the country and economy, but also as a response to growing demands from the Chinese public for responsible environmental behaviour and action as part of the country’s development model going forward. Again, it will be interesting to see if this shift will be reflected in how the Chinese government interacts with Africa going forward. The point is that Jinping’s administration is taking clear and bold steps to address the negative aspects of the country’s brand as he seeks to position China as a powerful and responsible global leader.

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(source: https://www.irishtimes.com/business/economy/chinese-trade-unexpectedly-speeds-up-but-is-expected-to-drop-1.3112037)

Finally, as China continues to strengthen economically, and as Jinping strengthens China’s global influence, we will likely see a heightening of Sinophobic narratives on China’s presence in Africa by Europe and North America in particular. One key feature of EuroAmerican analysis of China in Africa has been notable Sinophobia; and we have seen an evolution in this Sinophobic commentary. The narrative started with Europe and North America warning Africa that China is the new colonial power and that China will subjugate Africa with colonial-like behaviour that undermines Africa’s sovereignty. This then shifted to the Africa being warned that China only wants to exploit the continent’s natural resources in a rapacious relationship that will suck Africa dry. This was coupled with accusations that China facilitates and participates in corruption in Africa and that Chinese investment has poor social and environmental standards and indeed kills the continent’s environment in the form of unregulated pollution and destruction of wildlife. Now, the narrative is that China is saddling Africa with unsustainable debt and seeks to use indebtedness to further its geopolitical control over the continent. China should expect more aggressive Sinophobic commentaries coming out of Europe and North America as an ideological battle is waged on African hearts and minds.

However, despite the fact that the Sinophobic narrative will continue to be generated by Europe and North America, the reality is that China is not good at communications. China does not do a good job at sharing its contributions to Africa’s development in a strategic and sustained manner both inside and outside Africa. Whereas Europe and North America have sophisticated communications strategies both as government and private sector, the same cannot be said of China. Both the Chinese government and private sector ought to be cognisant of these dynamics and generate positive counter-narratives on China’s presence in Africa. Africans ought to also be aware of the ideological battle on the continent and generate informed narratives that analyse China-Africa relations from an African perspective.

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

 

The Changing Face of Corruption in Kenya

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This article first appeared in  my weekly column with the Business Daily on May 13, 2018

The fact that the Kenyan public is concerned with the perceived mismanagement of public finances is a well-known fact in the country. At both national and county level, Kenyans cite concerns with corruption not only in terms of how public finances are misappropriated, but how bribes are demanded to secure government contracts. You sometimes have to pay government officials in order to provide a service to government it seems. Given how well the negative effects of corruption on development and economic growth have been documented, many may wonder why it persists.

Image result for corruption

(source: https://www.weforum.org/agenda/2017/12/four-myths-about-corruption/)

There seems to be an emerging understanding of the psychology of corruption. An understanding that seems to answer why public officials continue to seek bribes and misappropriate funds even though the Kenyan public is outraged by the practice in the country. The psychology of corruption seems to be guided by the logic of self-aggrandisement and gaining financial security for the corrupt individual and his/her loved ones. Indeed, some may reason that engaging in corruption is logical in a corrupt society. It can be argued that some government officials misappropriate funds because they know government is corrupt and will misappropriate funds. Thus, they steal public funds to ensure they benefit from government funds and don’t miss out. They steal public funds to avoid the barrenness corruption brings when you’re not part of the process. They are being corrupt to escape the effects of corruption. This is not a justification of corruption but rather a realisation that when corruption is pervasive, it provides a deeper impetus to engage in corruption. This is not only because one can get away with it, but also because there is an urgency to get to the money first before someone else comes in and takes it instead.

Image result for corruption

(source: https://www.coe.int/en/web/greco/-/council-of-europe-anti-corruption-body-to-carry-out-urgent-evaluations-of-new-legislation-concerning-the-judiciary-in-romania-and-poland)

Devolution is also adding an interesting dynamic to corruption it seems. When Kenya was governed under a centralised system, grand corruption was a distant affair that benefited a limited circle of individuals. A farmer in rural Kenya could not conceive how he/she would ever get a kickback in the circle of corruption. Devolution has changed this. When county officials divert public finances to their pockets, much of that money remains within the county economy. The money can be used to finance household expenses, education and health costs, as well as generally improve the quality of life of the corrupt individual and those in their circle. Diverted public monies also become investment funds, where corrupt individuals suddenly have a supply of cash that can be directed to business activity. I have travelled to counties where I have been openly told that this building or that business belongs to a government official. This government official did not have these assets before gaining office, but suddenly they are serious financiers in the county. And interestingly, these facts are not shared with a tone of bitterness or annoyance, there almost seems to be an appreciation that even if public monies are being stolen, at least they are benefiting the local economy. After all, businesses are being financed, people are being employed to run and manage those businesses and suddenly there is a source of income for many that did not exist before.

This is not a justification of corruption but rather an exploration of how corruption is evolving. We seem to have moved on from the days when misappropriated public finances were sequestered in accounts in distant capitals of Europe and North America. Now when public money is stolen, much of it sticks around. How will this inform the fight against corruption? How do strategies that seek to address corruption need to be updated to become relevant again? These are questions for us all.

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