debt

Smart move by China on the Standard Gauge Railway financing

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This article first appeared in my weekly column with the Business Daily on May 5, 2019

Last week, the Chinese government hosted the second Belt and Road Forum, inviting countries around the world to engage in the conversation on the Belt and Road Initiative (BRI). Of course, African countries are key players in the BRI not only because it serves interests from the Chinese government and private sector, but also because the BRI provides what African governments view as an opportunity to meet the continent’s infrastructure deficit. During the Forum, key developments occurred that affect African governments, one of which concerned Kenya.

It was revealed that the Kenyan government failed to secure USD 3.68 billion from China (in loans and grants) to take the Standard Gauge Railway (SGR) from Naivasha to Kisumu, and on to the Malaba border with Uganda. The Kenya government has consistently sold the SGR as a key infrastructure development and investment it has made on behalf of the Kenyan people. And yet, during a conference focused on infrastructure financing from China, their core infrastructure financing objective from China was not met. The question is, why? And what does this mean for Kenya? In my view this is good news and demonstrates a seriousness from the Chinese government that perhaps the Kenyan government didn’t anticipate.

Image result for SGR Kenya

(source: https://www.standardmedia.co.ke/business/article/2001288399/kenya-railways-revises-sgr-train-schedule)

Firstly, Kenyans seem relieved by this development. Kenyans have grown weary of what they view as a government with fundamental problems with corruption and fiscal accountability, continuing to secure massive amounts of debt. In declining to finance the final stages of the SGR, this seems to signal the Chinese government is coginsant of these concerns. Financial feasibility is a core concern, and given the serious problems with corruption linked to the previous phases of SGR that the Kenyan government has clearly seemed unable to resolve, why should they get more money? So diplomacy issues aside, money is money and it has to be feasibly and prudently used. China has signaled that there are pending issues to be addressed and they have a keen interest on how their money is used.

Secondly, it has given the Kenyan government pause for thought. When what has been profiled as an important diplomatic and developmental project fails to secure financing from the Chinese government, the Kenya government is being asked what went wrong? As a Kenyan economist, this signals that as far as China is concerned, it’s not business as usual. The SGR is an anchor BRI project, and yet it has been put on hold. The Kenyan government needs to use this as yet another signal, that there are fundamental problems with its financial accountability structures. There are no shortcuts on this issue.

Finally, it signals a shift in China’s approach to lending and debt to African governments. While Ethiopia got debt relief, Kenya was unable to secure new debt. So a willingness of China to lend or forgive debt is not the issue. Context is important. In some cases, China has communicated a willingness to forgive debt, in other cases, such as Kenya, China has made it clear that core concerns have to addressed before substantial debt is conferred.

In short, the Belt and Road Forum is a key turning point in how China lends to Africa. It is up to each African government to demonstrate that it is a responsible custodian of public finances. Not because of China or any other external party, but because their countries will never develop as long as African governments continue to misappropriate public funds. Let African governments play this as they will, African publics are watching.

Anzetse Were is a development economist

Kenya’s fiscal missteps must be corrected

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This article first appeared in my weekly column with the Business Daily on November 4, 2018

Last week the International Monetary Fund raised Kenya’s debt distress warning level from low to moderate. This is partly informed by the rapid increase in debt level as well as Kenya’s breach of debt sustainability measures such as the external debt service to both the export and revenue ratios There are three factors to bear in mind as one assesses Kenya’s public debt and general fiscal path.

The first is that Kenya’s public debt is understated because it is not clear the extent to which official figures factor in debt accrued by county governments. For example, the County Government of Nairobi alone is said to have a debt of KES 57 billion. Bear in mind, county governments tend borrow from commercial banks with high interest rates and shorter loan tenures. At the moment there is no clear documentation available as to the scale and terms of all county government debt. This makes is difficult to systematically ensure that all debt owed by county governments is reflected in official public debt figures. Thus, at this stage, it is safe to surmise that Kenya’s debt distress levels are more onerous than official figures suggest and that national debt figures understate the scale of total public debt owed.

Debt-Rising (2)

(source: https://enterprisetv.tv/rising-africa-debt-distress-risks-economic-recovery-imf-says/)

Secondly, the government has a chronic problem with revenue generation. In late October government cut the revenue projection downward by KES 96 billion for FY 2018/19 and by KES 42 billion for 2019/2020. Revenue targets are only revised downwards when it is clear that the original target cannot be met. The reality is that Treasury continues to accrue debt while clearly knowing government is not generating enough revenue. This alone makes it clear that Kenya’s fiscal path is not sustainable. The irony however is that, the Kenya Revenue Authority just released a report indicating that Kenya may have lost up to KES 270 billion in tax over the past 3 years due to tax exemption provisions. It is in the interest of government to better coordinate expenditure with sustainable revenue generation that does not stifle economic growth. Though slower, developing a shrewder tax regime that actually stimulates business activity would be better in the long term rather than slapping a new VAT on a basic commodity such as fuel, as this increases the cost of doing business and production which have negative effects on profit margins and thus taxes paid.

Image result for small business debt distress Africa

(source: https://www.theeastafricanreview.info/op-eds/2018/09/15/between-the-hammer-of-the-markets-and-the-anvil-of-politics-mr-kenyatta-in-debt-distress/)

Finally, government at both national and county levels continue fail to pay their suppliers; this is leading to fiscal problems. As of July 2018, the government was said to owe SMEs KES 200 billion. The failure to pay for goods and services rendered is not only morally abhorrent, it is crippling the ability of SMEs to remain commercially viable. As a result, SMEs affected are making losses which then translates to lower (if any) tax payments. So again, government behavior is causing problems for itself.

Kenya’s fiscal problems are becoming structural in nature. The concern is that the fiscal structure is unsustainable. One wonders at what stage the seriousness of Kenya’s fiscal missteps will be comprehensively addressed so as to address the negative fiscal momentum currently being generated.

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

The Fallacy of China Debt Trap Diplomacy

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This article first appeared in my weekly column with the Business Daily on October 28, 2018

Last month, the South African Institute of International Affairs published my policy insight on the Chinese Debt Trap. In short, Africa’s growing public debt has sparked a renewed global debate about debt sustainability on the continent. This is largely due to the emergence of China as a major financier of African infrastructure, resulting in a narrative that China is using debt to gain geopolitical leverage by trapping poor countries in unsustainable loans. It essentially argues that African governments are being deliberately lured into debt by the Chinese government through debt trap diplomacy and that China has an ominous plan to mire the continent in debt in order to gain economic and geopolitical control of Africa.

See the source image

(source: http://www.leeabbamonte.com/asia/how-china-is-taking-over-the-world.html)

My counter-argument is simple: The debt trap narrative undermines the decision-making power and agency of African governments. Even worse, the debt trap narrative infantalises African governments, painting them as little more than overgrown children who have to be constantly supervised by other powers if there is any hope of them getting anything right.

More seriously, the debt trap narrative is deeply worrying because it is deeply dangerous. Arguing that African governments are being lured or tricked by China actually begins the process of preventing sovereign African governments from being held accountable for the financial commitments made on behalf of the African people. The narrative gives wiggle room for some governments to become intellectually dishonest and say that they did not know what they were getting into as they signed multi-billion dollar deals with China, rather than stand up and be counted. The narrative, in its determination to paint China as the ‘bad guy’, actually begins to absolve African governments of their fiscal responsibility and obligations. It creates space for some African governments to avoid hard questions from their publics about how debt is used, accounted for and whether the debt has led to economic gains and development.

(source: https://www.panafricanvisions.com/2018/op-ed-african-women-even-politics/)

Last week, the Financial Times (FT) took this argument further, pointing out that the heaviest cost for African countries comes from private lenders, not the Chinese. Nearly a third of African governments’ debt is owed to private creditors, but they account for 55 percent of interest payments. By contrast China, is owed about 20 percent of African nations’ external government debt, and receives just 17 percent of interest payments.

And to be honest even if that number were higher and Africa owed China far more, the responsibility for that rests squarely on the shoulders of the Ministries of Finance/ Treasuries of African governments, not China. African governments have demonstrated tremendous appetite for debt and have not only gone to China looking for it, they have floated sovereign bonds and continue to borrow from their traditional partners.

Frankly, the debt trap narrative seems motivated more by frantic Sinophobia than any genuine concern for the economic and fiscal health of African countries. Africans are worried about growing public debt, period. After all, it is the African people alone who will have to pay back all the debt in question. Thus, let the concerns of the African people about the fiscal accountability of their governments take centre stage in the conversation about public debt on the continent.

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

Podcast: A frank discussion on Sino-Kenya Relations

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In my new paper for the South African Institute of International Affairs, I suggest that Kenya’s leaders, not China, should be the ones held accountable for borrowing too much money without a detailed, transparent plan on how to repay the loans.

I join Eric & Cobus on the China-Africa Project podcast to discuss the growing anti-Chinese backlash in Kenya and the country’s’ burgeoning economic crisis.

 

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

New Dynamics Emerge Between East and West in Race for Africa

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This article first appeared in my weekly column with the Business Daily on September 2, 2018

Last week President Kenyatta went to the USA to meet with Donald Trump. This was followed by a trip to Kenya by British Prime Minister Theresa May, and this week Kenyatta is attending the Forum on China Africa Cooperation (FOCAC). This flurry of diplomatic activity spotlights the ongoing interest in Africa and Kenya by both the West and East, as well a growing sense within the West for renewed relevance on the continent.

Kenyatta is the second African leader to meet with Trump at the White House, following a visit by Nigeria’s Buhari earlier in the year. Following the meeting, investments worth USD 237 million were committed to wind power and food security, signed with companies in Kenya and facilitated by the Overseas Private Investment Corporation (Opic) which is a U.S. Government agency that helps American businesses invest in emerging markets.

President Uhuru Kenyatta with British Prime Minister Theresa May

(source: https://www.businessdailyafrica.com/analysis/ideas/New-dynamics-emerge-between-East-and-West-in-race-for-Africa/4259414-4740406-d4i2oaz/index.html)

On Thursday, Ms May and Mr Kenyatta held their bilateral meeting in Nairobi, where Kenya was able to secure a deal to continue quota-free exports of horticulture produce to Britain after it leaves the European Union (EU). From her visit to South Africa, May pledged GBP 4 billion in support for African economies, which is expected to be matched by the private sector. May’s focus is on job creation for African youth and she signalled an intent of British government to focus more on long-term economic challenges rather than short-term poverty reduction. In her speech, the emerging rivalry for Africa within the West itself became evident when May stated that she wanted the UK to overtake the US and become the G7’s biggest investor in Africa by 2022.

There are several points to note in the patterns emerging in the renewed push into Africa by the West. Firstly, there seems to be a difference with US versus UK style in economic deals; what is common however is the focus on private sector. The US let private sector take front and centre in the deals announced so far. Opic facilitated the process, and the role of the Kenyan government in all this is not clear yet. It seems that the Kenyan private sector, not government, is the focus of US interests.

In the case of the UK, there seems to be a blend of both public and private sector funding, with public engagement leading. Again, the extent to which deals will be signed directly with the Kenyan government is not clear perhaps indicating that the UK is also more focused on private sector engagement than on large programs with the Kenyan government.

Image result for focac 2018

(source: https://africa.cgtn.com/2018/09/02/talk-africa-focac-beijing-summit-2018/)

The style of the US and UK contrasts starkly with that of China. Sino-African deals are a government to government affair with no clear articulation of how African private sector will benefit from the engagements, or even link to the private sector in China. Interestingly, the focus on the private sector and Foreign Direct Investment (FDI) by the US and UK complements China’s focus on debt and African governments. This emerging complementarity can create a powerful blend of financing for the continent going forward.

It will be interesting to see what key deals emerge from FOCAC this week and whether China will begin to shift from being debt-focused, to FDI- focused given concerns with growing indebtedness to China.

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

Three Options for Fiscal Policy

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This article first appeared in my weekly column with the Business Daily on March 4, 2018

The Cabinet Secretary of Treasury, Henry Rotich, it putting together the budget for 2018/19, the first in the second era of devolution, being developed in a context where a second Eurobond has been issued and there is growing concern about the sustainability of Kenya’s debt. This is also the first budget in the second and last term for President Kenyatta and thus can give an insight into the type of fiscal legacy the president intends to leave. Fiscal policy over Kenyatta’s first term has been defined by three main features. The first is subpar revenue generation; while revenue generation has been growing, revenue targets are often not met, and revenue is not growing at a rate that can effectively fund expenditure. The second feature is aggressive growth in expenditure where the 2018/19 budget looks to be about KES 2.5 trillion, up from KES 1.6 trillion in 2013/14. This has led to the final feature of fiscal policy which is an expanding appetite for debt. Rotich has three main options for fiscal policy the 2018/19 financial year.

Treasury CS Henry Rotich can change tack and truly implement aggressive austerity measures. file photo | nmg

(source: https://www.businessdailyafrica.com/image/view/-/4327964/medRes/1899647/-/maxw/960/-/8ncmewz/-/rotich.jpg)

Firstly, the budget can be more or less what has been done in the past. And if one looks at the February 2018 Budget Policy Statement (BPS), it seems as though this year’s budget will be more of the same. Allocations to dockets are within similar ranges as in the past, expenditure has grown aggressively and the aggressive appetite for debt continues. Should Rotich choose to stick to this fiscal path, concerns over the country debt growth will continue to be voiced as it is precisely this fiscal path that has gotten Kenya to the stage at which we are now.

Secondly however, Rotich can change tact and truly implement aggressive austerity measures in the context of fiscal consolidation where concrete policies are created to reduce government deficits and debt accumulation and results tracked. Several bodies have called for fiscal consolidation and thus it would be prudent for the Treasury to heed that call. The concern with previous budgets is that Treasury asserts that austerity measures will be implemented and spending cut, but budget implementation indicates that this does not actually happen. Rotich has a chance to make significant cuts in unnecessary spending, enforce fiscal discipline, allocate more money to development spending and implement measures to ensure development funds are absorbed.

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(source: https://aarwinsworldoffinance.com/2016/09/fiscal-policy-action-cfa-level-1.html)

The final path is one where Rotich puts significant funds into President Kenyatta’s Big Four and uses expenditure to finance the sectors of health, industrialisation, housing and agriculture in order to catalyse economic growth, create jobs and reduce poverty. Rotich can present the argument that prudent and disciplined spending targeting the four dockets will put Kenya on a growth path where the country hits the Vision 2030 growth rate of 10 percent. Sadly, however, there is no indication of notable fiscal support to the Big Four in the February BPS. There is a section dedicated to the Big Four in the BPS but if one takes a close look at allocations, one finds no difference in allocation patterns that would indicate that the fiscal process is focused on the Big Four.

In short, the budget for 2018/19 will set the tone of fiscal policy making for the next four years and let Kenyans and the world know, the extent to which government will leverage fiscal policy to put the country on a dynamic growth path that is fiscally sustainable and catalytic.

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