How Kenya can make use of European Quantitative Easing

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This article first appeared in my weekly column with the Business Daily on June 28, 2015

In December 2013, the US Federal Reserve began to taper its quantitative easing (QE) programme and made a final $15 billion (Sh1.4 trillion) purchase in October 2014. Africa benefited from the QE—the purchase of securities from the market to lower interest rates and boost money supply—as cash was being pumped into the US and the global economy. And because yields in Europe and North America were not attractive, yield hunters with excess liquidity turned to countries such as Kenya. One can argue that is the reason behind Kenya’s Eurobond oversubscription.

Although Kenya benefited from QE, we did not strategise on leveraging QE largely because it had never occurred before. As a result, Kenya could not plan how to optimally tap into American QE. This is not the case with the European Central Bank (ECB) QE, which launched its 60 billion euro-a-month ($66.3 billion) bond-buying QE programme in March this year.

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It is important that Kenya learns from the experience of the American QE to effectively leverage (or not) the European QE. There are both pros and cons with the QE which is expected to seed inflationary pressure, weaken the euro and increase global liquidity.The pros include that excess liquidity will be looking for attractive yields again and since European markets are still depressed, emerging markets such as Kenya with relatively healthy yields will remain attractive.Analysts argue that Europe QE has brought a new round of fresh financial market liquidity to Africa.

However, the attractiveness of Africa and specifically Kenya will be hampered by the recovery of the US economy which will continue to become more attractive to investors. Kenya is still attractive, but the recovery of the US means Kenyan markets are not as attractive as they were when the momentum in the US economy was downward.

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The cons, as some analysts argue, is that European yields are going to rise as a result of Europe QE. It has been noted that there had been an upward movement in US Treasury yields when QE started in the US, thus the same is expected in the euro zone. This means that countries such as Kenya will become even less attractive for yield hunters who will have both recovering US and European economies presenting better yields. We have to present significantly attractive yields to attract investment.

An ongoing issue we need be aware as Europe QE proceeds is that because Kenya was seen as an attractive investment target during American QE, the government was able to attract investment and as a result the country has higher than usual dollar denominated debt.This poses two problems for Kenya that may be mimicked with Europe QE. The first issue is that Kenya is an import economy and typically has to sell shillings to buy dollars in order to make payments. This would not be such a serious issue if the shilling was strong, and this leads to the second issue.

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Recently, the shilling has depreciated against the dollar to the extent that the Central Bank of Kenya (CBK) raised interest rates to try and stem its free-fall. A weak shilling means repayments to dollar-denominated debt will be expensive for government. Thus, if more yield hunters come to Kenya as a result of Europe QE, Kenya may take on more foreign-denominated debt that will be expensive to repay due to a weak shilling.

Thus the combination of being an import economy coupled with a weak and depreciating shilling may halt taking on more foreign-denominated debt.

Europe QE is a mixed bag for Kenya and the strategy should reflect this. Already, the country is relying on robust economic growth (rather than raising exports, for example) to meet debt repayments. With robust growth Kenya can afford to tap into ECB QE liquidity. But without growth and with more debt, Kenya may find itself in a position where debt repayment is impossible.

Ms Were is a development economist. E-mail: anzetsew@gmail.com twitter: @anzetse

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Development yet to get right fuel in yearly allocations

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This article first appeared in my column with the Business Daily on June 21, 2015

The 2015/16 Budget of more than Sh2 trillion indicates the government will raise expenditure by 17 per cent. But is the budget pro-development? A useful way of determining whether development is the focus of a Budget is looking at allocations to health, education, water and youth.Health and education are important as they invest in the country’s human capital that often drives economic growth and development. Water is important as a basic human right.

Given that more than a third of the population is youth (aged 18-35), it is important the segment get budget support to build up skills, employability and employment opportunities for Kenya to reap the youth dividend of innovation, energy and affordable labour.

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In addition to this, one should take note of the ratio between allocations and expenditure related to recurrent versus development costs; a pro-development budget has higher outlay for development.

A quick analysis of the key sectors reveals education previously got 26 per cent of the total; in this Budget that figure is 22 per cent. The last budget allocated four per cent to health; it is unchanged. Water (and regional development) got four per cent in both budgets. In the last budget, youth (alongside gender and culture) received less than one per cent, the same as this year.

Juxtapose these percentages with security (15 per cent) and infrastructure and energy (27 per cent), both of which the government openly stated are top priorities.

Although one can argue peace and infrastructure are the foundations of development, but shouldn’t the focus be promoting and defending national economic development? Because without defeating poverty, Kenya will remain weak and vulnerable, no matter how many roads and fighter jets it has.

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(source: http://www.kenyanaviation.com/wp-content/uploads/2012/10/KAF_Harbin_Y-12_by_Antoisurf_sm.jpg)

The 2015/16 Budget seems to say development-related sectors are becoming less of a priority for government. However, there are some steps the Budget takes that are pro-development; for example, an additional pro-youth element of the budget is rebates to corporate bodies hiring new graduates and supporting them to build the relevant skills and experience.

To qualify, employers must provide internships/apprenticeships to a minimum of 10 youths for a period of six to 12 months. Although this is commendable it may be a misplaced strategy because it doesn’t get to the root of the problem: the failure to offer relevant curricula.

Perhaps, the government should consider deploying strategies to revamp training offered in the first place.

One also has to analyse allocations to recurrent versus development expenditure and audit that spending.

International Budget Partnership (IBP) indicates that in 2013/14, the government allocated 58 per cent of the Budget to recurrent but spent 78 per cent on the same. In 2014/15, recurrent was allocated 58 per cent but IBP projects government will eat into 63 per cent of the Budget.

This year, the recurrent versus development stands at 52 per cent to 48 per cent. In short, in all the past three budgets, recurrent allocations trump development and even worse, actual recurrent is higher than what was allocated. This is a concern.

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Also note that an analysis of Q4 2014 of the budget by the Institute of Economic Affairs (IEA) revealed a failure to spend 48 per cent of the development budget.

So, the government is overspending on recurrent expenditure such as salaries but underspending on development. The government would do well to push for more austerity in recurrent expenditure.

Ms Were is a development economist. anzetsew@gmail.com; @anzetse

Targets Kenya must aim for in Agoa renewal

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This article first appeared in my weekly column with the Business Daily on June 14, 2015

The African Growth and Opportunity Act (Agoa) is set to expire this September. Agoa provides about 6,500 African products with a preferential quota and duty-free access to the United States market. Over the past 13 years, Agoa has been important to Kenya and Africa because unlike economic partnership agreements, the Act is non-reciprocal and unilateral – preferences apply only to African imports entering the US and not US exports into African countries.Basically, African products are allowed to enter the US with limited tariffs which makes them more marketable.

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Kenya has already benefited from Agoa through textiles, spices, coffee, tea, fruits and nuts exports. The textile and apparel industry has reaped significant benefits through Agoa and contributes 85 per cent of the jobs created in the export processing zones (EPZ).

Over the Agoa period, the Institute of Economic Affairs says, the value of our exports to the US increased from $109 million (Sh10.5 billion) to $433 million (Sh42 billion) per annum. Part of that can be attributed to Agoa.Luckily for Kenya, the Obama administration seems keen on renewal. However, it is clear that the partnership will be reviewed. Already there are signals from Washington that the US is getting anxious about its economic position globally. It is in the process of negotiating the Trans-Atlantic Trade and Investment Partnership (TTIP) with the EU which will give EU products top preferential access to US markets.

The US has good reason to grant such access to the EU because the pact will be reciprocal. The negotiation of such a partnership gives clear signals that the US is looking out for itself and Kenya should watch out. Secondly, as Kenya becomes a stronger economy, the baby-sitting treatment Africa has traditionally received aimed at rectifying trade imbalances will happen less. Over the past few years Kenya and Africa have been saying, “Stop giving us aid, we’ve grown up; we’re ready for investment, trade and being treated as equals.” Kenya ought to realise that the US is listening and this new ethos of equal partnership, not preferential access, may inform Agoa’s renewal. Already, there are plans to amend Agoa to put pressure on South Africa to open its market to American poultry producers and Kenya can expect similar changes.

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So what should Kenya aim for in the renewal of Agoa? The first is to push for the maintenance of preferential access with limited or no expectation of reciprocity. This case will be harder to make now than it was 13 years ago, but the government ought to make the case that Kenya should continue qualifying for unreciprocated access.

Secondly, we should push for value addition. In the case of textiles and apparel, for example, Kenya should make the case for adding value to the skins and hides before export. This will add value to textile exports, deliver greater financial returns and support economic growth more strongly.

Thirdly, expand Kenya’s export profile. The Brookings Institute suggests that we should set up a task force to identify products for which the country has a comparative advantage in producing, and then export these through Agoa. South Africa has diversified its exports to include agricultural products, chemicals, minerals, machineries and energy-related products. Kenya can learn from its experience.

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Finally, high transport costs to the US are a non-tariff barrier translating into weak price competitiveness of our products. We need to negotiate a bilateral agreement for air freight transportation via direct flights into the US.

Were is a development economist. Twitter: @anzetse, email: anzetsew@gmail.com

How opposition parties can drive national growth

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This article firs appeared in by column with the Business Daily on June 7, 2015

All ruling parties and coalitions in healthy democracies have to regularly contend with opposition parties. While the Opposition can play a useful role in ensuring government keeps its commitments to the populace, sometimes it can degenerate into verbal brawls that politicise every issue under the sun and, not always constructively.

It would be useful if the Opposition in Kenya engaged with government in a manner that adds value to the information base of the electorate so as to build a culture of interrogation that goes beyond allegations and counter-allegations.  There are a few core roles that the Opposition could play in building a conversation that drives the country in a better direction in regards to economic development.

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One is creating a shadow Cabinet that mirrors the role of Cabinet secretaries of central government ministries pertinent to the economy such as the National Treasury, ministry of Industrialisation and Enterprise Development, ministry of East Africa Affairs, Commerce, and Tourism as well as key economy-related government bodies such as the Central Bank of Kenya.

However, under the current Constitution that is largely presidential, unlike a parliamentary system where ministers are selected from the House—which now makes the Budget—this is currently not very viable.

They can still create something akin to this. There can be a core team of advisors who critique the administration and policies of government in particular departments or portfolio pertinent to economic robustness and development. For example, what is the opposition’s advice and critique on why the value of the Kenya shilling is falling and what should be done to arrest the decline?  How can government effectively service the high levels of foreign-denominated debt it currently holds? How can government manage and eventually reduce the currently prohibitive levels of recurrent expenditure? Even basics should be addressed such as: what should government do to reduce unemployment? How can the upward pressures on the cost of living and inflation be managed? These are all biting questions to which opposition can apply itself.

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To add healthy competition to the mix, the opposition should ideally elect all the members of their shadow teams, with the leader of the opposition perhaps having the final input on who should head the teams. This can be a useful experiment that the opposition can use to test the competence of its members and determine their level of commitment and intellectual dexterity in the docket for which they contested.

Further, this is an effective means through which government can call for engagement and seek specific and constructive input from the opposition in a manner that adds value to the development of the country. The opposition can make clear suggestions to the government with input and new ideas for the benefit of all Kenyans.

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Ultimately, the point is that there is a clear role for the opposition through which they can take on the government to ensure that promises made are being kept. Creating such teams is an effective means through which the opposition can move away from the current verbal battles that tend to be deeply viral and ethnic-based. The interaction can be more constructive. It’s time to evolve, Kenya.

Ms Were is a development economist. Email: anzetsew@gmail.com; twitter@anzetse

Why Africa must keep an eye on new US, EU trade bloc

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This article first appeared in my column with the Business Daily, on May 31, 2015

The European Union and the United States are negotiating the Trans-Atlantic Trade and Investment Partnership (TTIP) which should create the largest free trade zone in the world, accounting for a third of global commerce.

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Of course the question is how will this affect Africa and how can we benefit? Well, as it is currently structured, the rules of origin section of the TTIP will heighten the barriers faced by African countries exporting processed goods to the zone because at least 50 per cent of the value addition in a product must be produced in a TTIP state to benefit from tariff reductions. Such clauses discourage Africa from industrialising yet industrialisation is considered one of the most viable means of pulling millions of Africans out of poverty. Basically it’s the same old bias.

The TTIP also aims to harmonise product standards to a very high level. This is a mixed bag for Kenya which has significant horticultural exports into the TTIP zone. High standards may be a barrier at first as it will be more difficult for poor countries such as Kenya to comply with them; this may lock out African exporters. But eventually it will be of benefit for Africa to produce internationally competitive goods. Why should Africa be allowed to lag behind in the pursuit of excellence?

There are already calls for third party countries, particularly developing economies and Africa, to contribute to the TTIP and make recommendations that ensure they benefit.

But even such a position fails to realise a basic truth: the TTIP is not about creating an equitable and fair world, it’s about strengthening the Euro-American power. So while the specifics of the agreement matter, what the TTIP is truly saying is that the US and the EU are finally admitting and recognising the erosion of their control and influence over the global economic, political and social landscape. The TTIP is an attempt to rebalance the scales and make Euro-America economically all-powerful again.

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The TTIP is an indirect admission by both parties that their influence and clout has been receding in what has increasingly become a multipolar world with the emergence of competition from China, Brazil, India and even Russia in economic and political spheres. It will be interesting to see how China responds to this mega regional trade agreement and whether it leads to consent or contest of the new norms and rules. Africa should keep an eye on this.

So, how will the TTIP affect the continent? Well, we can only really begin to answer that question once we analyse the specifics but there is already one message Africa should get loud and clear: integrate economically.

The TTIP provides yet another compelling reason for the economic integration of the continent. But, as the outgoing president of the Africa Development Bank states, there are far too many regional and sub-regional funding initiatives that they can never gain critical mass and foster continental economic integration. The TTIP should provide an even deeper impetus for Kenya to push for intra-regional integration where the EAC integrates with Comesa and SADC and Ecowas. Integration should become an even stronger mission for Africa. Only then perhaps can Africa begin the process of agglomerating economic and socio-political clout in a New World order.

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Ms Were is a development economist; email: anzetsew@gmail.com; twitter: @anzetse

Why a focus on wealth is killing Kenya’s development

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This article first appeared in my column with the Business Daily on May 24, 2015

Kenya has essentially been capitalistic since its inception as a nation-state in 1963. At no point did the country seriously dabble with socialism or communism like some of our east African neighbours. Many are of the view that this ultimately did Kenya good. After all the country is the economic forerunner in the region and a major player in the continent.

To be honest, this thinking is bolstered by the fact that almost every nation on earth has bought into the notion that capitalism is the best economic system humans have devised so far in our history.

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Some regimes may be more autocratic than others but a core belief in capitalism persists.But has this mass buy-in into capitalism led to a focus on wealth rather than development?

Is economic power a necessary and sufficient precursor to or foundation for development? Further, as the World Bank asks: Is the goal of development merely to increase national wealth, or is it something more subtle?

In Kenya, accumulating wealth has become the life goal of many citizens. So ingrained is this notion that it no longer matters whether one has beaten, robbed or stolen one’s way into wealth. As long as one is wealthy, respect, power and access to opportunities often follow.

The obsession with wealth fuels corruption at both the macro- and micro-level because individuals want to save money or make money by dabbling in what is essentially immoral and/or illegal behaviour. The mantra seems to be “accumulate” rather than “develop”.

Interestingly, even if one is not willing to engage in corruption to accrue wealth, a focus on money alone can lead individuals to sacrifice development for the sake of financial gain.

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Behavioural ethicality

Studies that explore the subconscious link between money and corruption called behavioural ethicality, illustrate this point. One study by Harvard University found that even subtle exposure to the concept of money, in and of itself, may be a corrupting influence that leads to a focus on financial accumulation rather than ethical good.

This may be explained by the possibility that money triggers a business decision mind-frame and a focus on a cost-benefit analysis where benefit is defined in purely financial terms.

However, in an underdeveloped country such as Kenya, sometimes long-term good may be more expensive in the short term, fail a financially focused cost-benefit analysis but have greater developmental benefit. For example, in order to build capacity to craft basic infrastructure for itself, Kenya may need to make the short-term costly investment of integrating inexperienced engineers into infrastructure projects. This may be expensive and inefficient in the short term because it takes time and money to ensure technical skills transfer truly happens, but it would ultimately be for the greater good of the country as we will have the home-grown capacity to manage and implement projects.

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 A focus on financial efficiency alone often makes government cast aside the greater good achieved from strategies that are costly in the short term but push the country up the development path in the long term. The government tends to adhere to selecting the most financially “efficient” short term solution. The point is not to encourage poor investment decisions but rather highlight that a focus on money and accumulation alone is not serving the country well.

As it stands, the current fixation on money is doing two things: First, exacerbating the culture of corruption at both institutional and individual levels and, second, compromising the nation’s long-term development in order to ensure short-term financial gains.It is time the country grappled with how wealth can used to pursue the goal of development rather than being the end goal itself.

Ms Were is a development economist. Email: anzetsew@gmail.com, twitter@anzetse

Burundi should ask Kenya about the cost of chaos

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This article first appeared in my column with the Business Daily on May 18, 2015

Last week, there was a coup attempt in Burundi linked to President Pierre Nkurunziza’s bid for a third term.

For heaven’s sake, has the region not learnt that, one, there is a delicate political balance underpinning regional stability and, two, political stability is a prerequisite for economic development? Whether one agrees with Mr Nkurunziza or not is not the issue but, as usual, the region and particularly the people of Burundi will accrue the collateral damage of this political instability.

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Academic research has established that recurrent episodes of social unrest affect households and their incomes, and that political instability plays a large role in economic underdevelopment. Burundi should dig a little and look into all the research done on how Kenya’s post-election violence (PEV) cost the country, not only in lives, but also economically.

One can argue the economy has not fully recovered. In fact, it would be useful to do an audit of just what PEV cost the economy as an illustrative example for the region. According to The Economist, PEV led to financial losses of approximately Sh22 billion (£145 million), around one per cent of the country’s gross domestic product. Further studies estimate PEV had long-term effects and over the period 2007-2011 per capita GDP was reduced by an average of Sh8,200 per year, which is massive considering Kenya’s per capita averaged about Sh94,000 during the period.

Another study suggests that in 2009, the GDP was estimated to be about six per cent lower than if the chaos had not occured. Further, in 2007 (before the violence) foreign direct investment (FDI) stood at Sh70 billion and dropped almost 75 per cent to Sh18 billion in 2008. The latest figures (2013) put FDI at Sh50 billion. Clearly, Kenya is yet to fully recover.

Studies strongly indicate economic growth for countries with a high propensity of government collapse is significantly lower; even frequent Cabinet changes can reduce the annual real GDP per capita growth rate by 2.39 percentage points according to studies. Internal political instability (not associated with outside threats like terrorist groups) is particularly harmful through its adverse effect on total factor productivity growth and by discouraging physical and human capital accumulation. More specifically political instability cost Kenya international trade and reduced the country’s capacity to earn foreign exchange, especially in the cut-flower sector.

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During the PEV, the short-term effect was a 24 per cent reduction in flower exports, a 38 per cent reduction in exports for firms in conflict-affected areas and a 50 per cent increase in worker absence. However, there were long-term consequences as well in that flower exports to the EU went from a growth rate of approximately three per cent annually to minus 2 per cent, a loss of Sh4 billion in 2010 alone.

The reality is that the relatively brief PEV led to significant shifts with long-term repercussions for international trade for the country; in the cut flower industry there was a decline in trust in Kenya on the part of the EU.

In short, it is clear Kenya and the region simply cannot afford political instability. It will be interesting to see how the attempted coup in Burundi plays out economically, but it will not be good news.

Ms Were is a development economist; email: anzetsew@gmail.com; twitter: @anzetse