This article first appeared in my weekly column with the Business Daily on December 3, 2017
After what has been widely noted as a difficult year for Kenya, the conversation must now turn to how Kenya can recover. The first step to doing so is acknowledging the factors that held economic growth back and those that sustained and propelled growth.
The first sector that was hit was obviously agriculture, due to the drought which made many Kenyans food insecure, hit forex earnings from the export of agricultural commodities and of course led to aggressive inflation. The financial sector was negatively affected by the continued unfolding effects of the interest rate cap and linked to that, credit growth, particularly to SMEs shrunk considerably. Finally, a great deal of investment was held back over the course of the year. Indeed, a few weeks ago, the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.
It is important to unpack the impact of deferred investment because there are negative ripple effects linked to this, particularly in the African context. When investors choose to hold off on investing, several entities are hit. These include market research companies, product developers, manufacturers, advertising companies, suppliers, and distributors. The entire ecosystem around investors suffers as investors make the decision to postpone or defer investment. As a result, the multiplier effect of suspended investment has left many Kenyan feeling particularly financially strapped this year.
On the bright side, Micro, Small and Medium Enterprises (MSMEs), most of whom actually sit in the informal economy, proved to be hardy. The Central Bank of Kenya (CBK) stated that MSMEs showed ‘extraordinary resilience’ and helped cushion the economy. The factors behind this resilience has not been formally unpacked but studies on the informal economy reveal an nimbleness, flexibility and litheness that larger, more formal businesses may find difficult particularly within short time frames. Challenges aside, informal businesses have an ability to change their business models and adapt to a changing environment much faster than formal businesses with more rigid structures and processes.
Going forward, it is important to take remedial action on what emerged as weak spots. This will begin by ensuring better coordination between national and county government on the management of agriculture in the country as well as serious consideration of the repeal or adaptation of the interest rate cap. In terms of positive aspects, MSMEs ought to be prioritised going forward and given the necessary support by government, financiers and business development agencies to scale formal MSMEs with promise, and support informal MSMEs on the journey of sustained profitability and formalisation.
Finally, both government and domestic private sector have to give candid and honest signals on the state of the political economy in Kenya. Investors need to be given a clear indication of when and where to invest such that the investment ecosystem is sustainably revived.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on August 13, 2017
With elections complete, it is time to focus on how the next five years can be fully leveraged towards making concrete socioeconomic gains in the three main sectors of Kenya’s economy.
The first economic setor is agriculture which constitutes 35 percent of the GDP and 61 percent of total employment. One problem with this sector is that on one hand the export-oriented segment of sector is very productive and profitable, yet domestic food security is still a major concern. Tea was the largest export earner for the country in 2016 alongside coffee and horticulture, yet domestic food consumption is constrained by subpar production exemplified by the maize crisis which was exacerbated by a severe drought. The next administration should focus on several issues: first is increasing allocations to the sector from the current 1.8 percent of the budget to, at a minimum, the African average of 4.5 percent. Secondly, effort must be made to address the challenges in sector coordination between national and county governments; clear roles and responsibilities must be delineated for each level of government. Finally, there ought to be a focus on active learning from productive agriculture sectors and lessons shared with less productive sectors with a focus on smallholder farmers.
The second sector is manufacturing which is a mere 9.2 percent of GDP; the share of manufacturing in GDP has actually declined over the last five years and the sector formally employs only 300,000 people. Manufacturing can play a central role in driving economic transformation and job creation in Kenya as there is a window of opportunity for Kenya to capitalise on positive underlying factors in the global economy, including rising wages in Asia, the rebalancing underway in China, and expand Kenya’s capabilities and presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years. The incoming administration ought to make sure that the country’s manufacturing strategy as articulated in the Kenya Industrial Transformation Programme be prioritised in the implementation of the third Medium Term Plan of Vision 2030 due to start in 2018.
The third sector is services which is currently driving Kenya’s economic growth, constituting about 55-60 percent of GDP. Leading sub-sectors include food and accommodation, ICT, real estate and, transport and storage. However, the key service sub-sectors that ought to be prioritised are education and healthcare. Interventions in health should focus on better fiscal support to the sector. In FY 2017/18 donor funding of development expenditure in healthcare is estimated to be up to 63 percent; such dependence is concerning. Secondly, there should be an emphasis on building the capacity of county governments, especially in terms of technical and administrative human resources, to better meet the health needs of their constituents. In education the focus should be on better aligning curricula and training to better meet labour market needs as well as reorient the country’s economic structure to one in which manufacturing plays a larger role. Finally, county governments ought to be supported in better equipping and expanding the reach of Technical and Vocational Educational Training Institutions (TVETs) and link students to practical apprenticeships at county level.
Anzetse Were is a development economist; email@example.com
This article first appeared in the Business Daily on July 16, 2017
A few weeks ago East Africa Breweries Limited (EABL) announced it would set up a KES 15 billion brewery plant in Kisumu which is anticipated to help create at least 110,000 direct and indirect jobs. This investment in this factory is crucial for the country and region for several reasons.
Firstly, EABL’s investment is an investment into industry and manufacturing. A 10 point plan to catalyse industrialisation in Kenya was developed by the Overseas Development Institute (ODI) and the Kenya Association of Manufacturers (KAM) which points to the significance of industrialisation to any economy in the world. Many economic development success stories owe a great deal to the role of the manufacturing sector. Manufacturing can play a crucial role in Kenya’s inclusive growth by absorbing large numbers of workers, including by creating many jobs indirectly through forward and backward linkages to agriculture, raising exports and transforming the economy through technological innovation. This investment is important as a significant private sector player that has been in the region for a truly long time, views investment into industry and manufacturing as a viable and solid investment option. This is good news for Kenya.
Secondly, this investment into manufacturing is important as it is occurring in the context of a sector that has been financially neglected. As the ODI and KAM piece points out, although aggregate finance for manufacturing has benefited from an increased stock of bank lending to manufacturing, from USD 0.8 billion in 2006 to USD billion in 2015, the share of manufacturing in total lending declined from 15 to 11 percent over the same period. Thus EABL’s investment should indicate to local and global investors that the manufacturing sector is financially attractive when the right investment decision is made.
Thirdly, investment in the food and beverages (F&B) sector is a significant job creator. USA’s food and beverage companies are the biggest source of the country’s manufacturing jobs. The advent of a manufacturing facility out of Nairobi will create viable, good quality jobs for the millions of Kenyans in the region who are unemployed, under-employed or employed in the informal sector. The quality of jobs, particularly the direct jobs created by this investment, will allow numerous households in the region and country to benefit from the stability that comes from a stable and well-informed investor.
Fourthly, EABL’s investment has clear linkages to agriculture. As Kisero points out, it was David Mwiraria when he was Finance minister, who first to come up with the idea of introducing tax remission for beer made from sorghum, millet and cassava. The remission is only valid if the company develops and invest in a comprehensive value chain for these food crops. Thus EABL, knows that it is obligated to invest in agriculture that will feed into its investment. This presents a huge opportunity, particularly for small holder farmers, to diversify into more profitable crops; an option that did not previously exist. Thus the effect of EABL’s investment may well reap dividends for the local community in agriculture.
Fifthly, as an investment in 2017, EABL will likely invest in a state of the art facility that will encourage a reorientation of skills required to service the factory. In Trinidad, a survey on their F&B industry revealed that technology has led to an increase in automation in the manufacturing process. This engendered a shift for skills in manufacturing process away from manual labour to skilled machine operators. EABL’s investment will play a role in pointing to the skills deficit and skills requirements for F&B manufacturing in the Kenya. As a result, the local and national labour market could make good use of this opportunity to re-skill or up-skill for the development of a labour pool skilled for an industrialised Kenya in the 21st century. To be clear, this will not be easy as education policy and educational training is still largely outdated, oriented towards social sciences and not linked to industry needs. EABL’s investment presents an opportunity, along with other new investors in manufacturing, to get a true grip of the types of skills required to drive F&B manufacturing forward in the country.
And finally, this is the first new investment in the Nyanza region for a significant period of time. Western and Nyanza have long complained of being neglected in terms of significant investments. And although efforts have been made to revitalise Mumias Sugar Factory and Pan Paper, the economic logic of these investments have been questioned, and rightly so. EABL’s investment is being made with a clear vision of return, and this will extend beyond financial returns. While the bottom line is likely a focus for the EABL team, the investment will generate forward and backwards linkages into the local and national economy in a manner that grows income for the local communities. Thus, it would be an interesting exercise to analyse not only the financial, but also social returns created by this investment.
Bear in mind that Kenya has the Kenya Industrial Transformation Programme (KITP) developed by government to catalyse industry in the country. The EABL investment should be one of many aimed at pulling Kenya into an industrial age of prosperity and engender economic growth in a manner that informs economic development and regeneration.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on June 16, 2017
It is not a secret that Kenya has been suffering the consequences of a ravaging drought for about a year now. Q1 2017 GDP growth stood at 4.7 percent largely due to a notable contraction in agriculture. The 1.1 percent contraction in agriculture is obviously informed by the drought. For example, the drought has decimated the production of tea one of Kenya’s key exports; production is expected to drop by 12 to 30 percent. Livestock production has also been devastated with estimated losses of 40 to 60 percent of livestock assets particularly in the North East and Coast. Maize farmers in Uasin Gishu continue to generate measly yields from their farms.
The question becomes, how did this happen? This is the first major drought to affect the country since the advent of devolution. Are there issues that have emerged in the context of devolution that allowed the drought to grip the country to the extent it has? The answer seems to be yes.
The first issue is budget allocations to agriculture. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are sub-par. These paltry allocations may be due to the fact that that agriculture isn’t an attractive sector to finance. Infrastructure remains a priority for national and (it seems) county governments because physical assets can be pointed to as proof of ‘development’. The same cannot be done with agriculture, as a result agriculture seems to wallowing in financial neglect.
The second concern is the lack of coordination between county and national government. It is still not clear who is responsible for what in the agriculture sector. While agriculture has been devolved, the truth is that the national government through the Ministry of Agriculture, is still a key player in the sector. In the work I have done at county level, it has become abundantly clear that neither county nor national government are of the view that they are fully in charge of the sector. As a result, the sector is wallowing in a lack of ownership riddled by a lack of collaboration and coordination between the two levels of government. This is surely a contributing factor that allowed the drought to reach the scale it did.
The third is a breakdown in support services to small holder farmers and poor early warning systems; both of which should sit in the county government. It has been noted that extension services that rural farmers in particular used to enjoy are no longer there. Aside from subsidies in fertiliser for example, small holder farmers on whom most Kenyans rely for food, need continuous support to make their farms more productive, limit post-harvest loss and make sure their products reach markets. County governments also seem to have failed in the early warning systems that should have signalled the crisis as they are present at grassroots levels. County governments seems to be having difficulty in playing their role in the sector and it is not clear why. Perhaps it may be a combination of a lack of technical capacity as well as limited financial allocations to the sector.
What is clear is that the situation detailed above cannot continue to happen. National and County government need to not only prioritise agriculture in terms of budget allocations but also solve the coordination problem that is so clear.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on July 2, 2017
Kenya’s annual GDP growth rate has been ticking along steadily at between 4 to 7 percent over the past five years. At no point has it hit the Vision 2030 target of 10 percent. Why not? Was Vision 2030 a pipe dream littered with deliberately illusory goals and targets? Why has the 10 percent target not been reached, and how can this be changed? There are three factors that can unlock the country’s economic growth at a fundamental level in both the long and short term.
The first is the long term issue of agriculture. The agriculture sector is a conundrum; on one hand Kenya’s agricultural sector is very efficient and profitable. Kenya is one of the leading exporters of black tea in the world, and the country’s floriculture and horticulture sector are important economic players in the sector. On the other hand, the country continues to struggle with food security as the maize price dynamic has illustrated. The ILO makes the point that the agricultural sector employs 61 percent of Kenya’s workforce, yet only contributes 30 percent to GDP.
This conundrum can be rectified through a multi-pronged approach that links productive sectors to less productive ones, more effective deployment of agricultural subsidies to farmers (particularly small holder farmers), and the revival of technical skills transfers to farmers at county and ward levels. Doing so will allow the labour locked in the sector to enter profitable activity either in agriculture or other sectors.
The second factor is the interest rate cap which is an overarching, hopefully short-term, constraint to meeting the 10 percent target. Earlier this year the World Bank made the point that Kenya faces a marked slowdown in credit growth to the private sector. At 4.3 percent, this remains well below the ten-year average of 19 percent and is weighing on private investment and household consumption.
Part of this massive slowdown can be attributed to the interest rate cap which has compromised two fundamental levers that support economic growth: access to credit and monetary policy. The interest rate cap has engendered a contraction in liquidity to SMEs in particular, essentially slowing down the country’s economic engine. Due to the cap, SMEs are unable to get the liquidity they need in order to expand and generate more jobs as well as income. The second lever compromised by the interest rate cap is monetary policy, reducing its ability to buffer Kenyans from economic volatility. With inflation standing at 11.7 percent in May, the cap has made it almost impossible for the CBK to step in with remedial measures such as raising interest rates as the consequences of doing so are unclear. Thus, in the short term, the interest rate should be reversed so that monetary policy can play the role it ought to, and robust credit access is restored to Kenyans.
The third factor is the informal economy which is not only important for economic growth but also engendering equitable growth. 90 percent of employed Kenyans earn a living in the informal sector, yet it continues to be neglected. Too much of the country’s labour is locked in micro-businesses with low levels of productivity, too inadequately skilled and resourced to drive the country’s equitable growth. Thus financial, skills and technological resources ought to be directed to the sector to catalyse the ability of informal businesses to graduate into authentic profitability, sustainable job creation and robust income growth.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on June 11, 2017
Last week I attended a meeting organised by the Overseas Development Institute (ODI), the Africa Centre for Economic Transformation (ACET) and the Government of Ethiopia aimed at analysing and sharing lessons on the development of light manufacturing in Africa.
The development of light manufacturing is an important part of Kenya’s plan for industrialisation as articulated in the Kenya Industrial Transformation Programme (KITP) developed by the Ministry of Industry. The Special Advisor to the Prime Minister of Ethiopia, Arkebe Oqubay, made some interesting points about key features of light manufacturing of which countries should be cognisant as they implement industrialisation plans.
The first is no secret; light manufacturing is labour intensive. This feature makes light manufacturing attractive for African countries as an entry point into industrialisation as it has the ability to absorb large pools of labour. While this is attractive, it seems to me that it can create considerable pressure to rapidly skill up a relatively low skilled labour pool. Human and technical resources have to directed to a young and inexperienced labour pool in order to develop a sector with high labour productivity and high profit-making potential. Clearly it can be done, but has to be well thought out with clear links to education policy.
The second point made was that countries cannot implement a light manufacturing strategy without addressing issues in agriculture. Whether it is textiles and apparel, leather and leather products, or food and beverages (F&B) manufacturing, agricultural inputs are crucial. In this sense Kenya faces a conundrum because certain segments of the agricultural sector such as tea, horticulture and floriculture are highly productive, but the rest of the sector wallows in poor productivity and considerable inefficiencies. It is no secret that textile and apparel firms in the EPZs in Kenya import their fabric from abroad, a factor that dampens the ability of this value chain to be an even bigger employer and income earner for Kenyans. The leather value chain in the country is also sub-par and the production capacity for domestic agricultural input into F&B manufacturing is lacklustre. What is clear is that Kenya cannot make serious forays into light manufacturing until the issues in the agricultural sector and value chains are fundamentally addressed.
The final point Oqubay made was that the sector should be export-oriented if scale is to be achieved in a manner that restructures the economy. Insights from ODI on this issue point to the importance of conducive trade rules and trade facilitation measures that lower trade costs both in terms of accessing inputs and export markets. If manufacturers cannot get the inputs they require and reach target export markets, the sector cannot effectively scale.
Other factors important in industrial policy, as pointed out by ODI, is collaboration and coordination between public and private sector in a manner that creates consensus on the strategic direction of the sector and country at large. When coupled with effective investment facilitation, SEZ creation/industry cluster development, and infrastructure development, it creates an environment where light industry can take off.
Kenya can build on the successes being registered in infrastructure development and expedite the creation of SEZs, learning from countries like Ethiopia. However, the country needs a sharper focus on improving agricultural productivity, a more coherent skills development strategy, vastly improve investment facilitation and more effectively encourage public-private dialogue on the development of light manufacturing in the country.
Anzetse Were is a development economist; email@example.com
This article first appeared in my column with the Business Daily on March 30, 2017
Someone once told me that there are three types of foreign investors in Africa. The first are those who invest in the country in order exploit raw natural resources and direct them to their projects outside the country. The second are those who invest in countries in order to flood the country’s markets with their products. The third are investors who invest in the country for the long-term in a manner that creates employment, builds incomes, contributes to GDP growth and of course, generates profits. Africa seems to have little problem in attracting the first two investor type, but often struggles to secure the third type. The question for Kenya is, which type of investor is the country attracting? And what can be done to attract the third type of investor?
These questions are important in the context of fiscal policy, of which a key event will take place today when the National Budget 2017/18 will be read. Fiscal policy ought to and can play an important role in attracting the right type of investor to Kenya.
Over the past ten years, the government has been on an investment drive to build the country’s infrastructure. In principle, efficient public investment in infrastructure can raise the economy’s productive capacity by connecting goods and people to markets. The national budgets over the past few years have thus has allocated significant amounts to energy and transport infrastructure such as LAPSSET, the Standard Gauge Railway (SGR), Rural Electrification and the Last Mile Project. With the SGR due to be completed this year, it will become clear what dividends the country will reap from such heavy fiscal commitment to infrastructure. That said, infrastructure investment is a prerequisite to attract the third investor type as the ease and cost of transporting goods are an important business cost and variable.
The second fiscal strategy that can bring long term investors as well as bolster food security and manufacturing is tax incentives to create productive agricultural value chains. Fiscal policy can more effectively engender a shift from subsistence to commercially productive farming by identifying commercially viable agriculture value chains and linking small holder farmers to manufacturers. Through incentives such as tax remissions along key food and beverage manufacturing value chains, fiscal policy can incentivise higher productivity in farming and contribute to making manufacturing more dynamic than is currently the case. The key however, is consistency in fiscal policy with no abrupt changes in tax remissions or other incentives so as to engender long term investment in food value chains.
Thirdly, the right investor type can be attracted to the country through investment in Kenya’s human capital. As the IMF points out, more equitable access to education and health care contributes to human capital accumulation, a key factor for growth and an improvement in the quality of life. Fiscal policy has two roles here; the first is creating incentive structures for private sector investment into the country’s private and public education and health networks and the second being the country’s own fiscal commitment to health and education sectors. National budget allocations to education stand at about 23 percent, while commitments to health are at about 6 percent of the national budget. Health allocations are paltry and while the education allocations look impressive, a great deal of the funds are directed to free primary education. In order to develop a healthy, highly skilled and productive labour pool, government ought to consider reorienting the almost obsessive fiscal commitment to infrastructure towards more robust allocations to health and post-secondary education. This should be complemented by the creation of incentive strategies that attract investment into national priority nodes for the sectors.
The fourth means through which fiscal policy can attract the right investors is by managing tax rates at national and county levels. At the moment, private sector is facing numerous tax burdens due to the lack of harmonisation of tax rates between national and county governments. Fees and charges at county level are unpredictable, non-standardised and onerous; business face multiple payments for advertising and transporting goods across county borders. While these are not technically taxes, they are a form of tax exerted on private sector with no clear link to the service that should be expected for such payments. At national level, the main concern for private sector beyond VAT refunds, is that a small segment of business and individuals are onerously taxed due to the narrow tax base in the country. Thus national government ought to develop a long-term strategy for broadening the tax base.
A key component of broadening the tax base is addressing informality in the economy where millions of informal businesses do not pay taxes. The aim here is not to tax informal businesses, as most are micro-enterprises barely making profits, but rather creating an ecosystem that encourages the development of informal business. Again, fiscal action can be taken by government to direct financing focused at developing micro, small and medium enterprise through more the strategic deployment of the Youth, Uwezo and Women’s Funds. The financing architecture of these three funds has to be fundamentally rethought to focus on building technical skills and business management capacity, and improving productivity and profitability in the informal sector.
Additionally, the government ought to develop a strategy for Kenya’s cottage industry which is the Jua Kali (informal industry) sector linked to solid fiscal commitments. Through fiscal action, the government should create an investment environment that attracts traditional investors as well as non-mainstream financing such as angel investors, impact investors and venture capitalists to invest in Jua Kali. In this manner, action will not only invest in the informal sector, it will create incentives for investment into a sector in which over 80 percent of employed Kenyans earn a living, in a manner that complements fiscal policy.
Anzetse Were is a development economist; firstname.lastname@example.org