debt

TV Interview: The effect of the elections on the economy

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On September 7 2017, I was on a panel on Citizen TV discussing the effect of the elections on the Kenyan economy.

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Mega infrastructure development not silver bullet for economy

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This article first appeared in my weekly column with the Business Daily on August 20, 2017

It is not a secret that the current and previous Kenyan governments (Kibaki and Kenyatta administrations) have prioritised investment in and the development of infrastructure. Kenya has prioritised infrastructure spending and development for the past 15 years. As the Brookings Institution points out, there is the view that investment in infrastructure- energy, transport, communication, irrigation, and water supply- propels economic output. The direct effect is raising the productivity of land, labour, and other physical capital. For example, steady supply of electricity reduces disruptions and time wasted at the work place. It complements the contributions of education, health, marketing, and finance. Infrastructure investment is seen as a foundation for and enabler of economic growth.

Government has allocated a significant percentage of annual budgets to infrastructure. Indeed, between FY 2016/17 to FY 2019/20, the government committed about 30 percent of total budget expenditure to infrastructure; compare this to 2.8 percent to agriculture. The concern is that despite this fiscal commitment, we have not seen the attendant economic growth; the economy has never even pretended to reach the 10 percent target of Vision 2030. So this begs the question as to what Kenya is getting wrong. Why isn’t infrastructure investment notably boosting economic growth? There are several reasons that provide insights to answer this conundrum.

Image result for Kenya infrastructure

(source: http://www.theeastafrican.co.ke/image/view/-/2332200/medRes/528395/-/ssuyxr/-/infra.jpg)

The first, harsh, reality is that the link between infrastructure and economic growth is more tenuous than previously assumed. The London School of Economics points out, the most recent studies on the magnitude of infrastructure’s contribution to growth tend to find smaller effects of infrastructure investment on growth than those reported in the earlier studies; this is linked to improvements in methodological approaches. Kenya shouldn’t assume that infrastructure investment and development will automatically lead to significant improvements in economic growth. Yes there is a link between the two, but less pronounced than was previously assumed.

The second reason that could explain the muted effect of infrastructure spend is that Kenya has such a massive infrastructure deficit that current investment has barely had any notable effect. According to the Capital Markets Authority, Kenya’s current estimated infrastructure funding gap is USD 2-3 billion per year over the next 10 years. However, the reality is that the infrastructure deficit in Kenya’s neighbours is likely more pronounced, yet the fact that countries such as Ethiopia have emphasised infrastructure investment and routinely hit double digit growth questions the plausibility of this argument.

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(source: http://www.kachwanya.com/wp-content/uploads/2015/05/infrastructure-development-in-kenya.jpg)

The final question to ask is: Is Kenya investing in the right infrastructure? The Brookings Institution makes the point that a push for more infrastructure only raises economic growth and people’s well-being if the focus is on quality and impact and not on the quantity and volume of investment. Has Kenya has fallen short here? Has the government conducted an audit of the impact of investment infrastructure investment and development thus far? Has there been an audit on the quality of the infrastructure developed thus far? Is Kenya investing in the right infrastructure? How efficient is our investment into infrastructure? Without an answer to these questions, the country will not learn from past mistakes and thus infrastructure development will not be recalibrated to be more effective.

It is therefore crucial that the government undertakes a thorough analysis on the nature, scale, efficiency and impact of infrastructure investment and developments made thus far so that the required improvements can be effected.

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

Podcast: Chinese debt in Africa

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I talked with Eric Olander of The China Africa Project on growing Chinese debt in Africa.

 

What China’s One Belt, One Road initiative means for Africa

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This article first appeared in my weekly column with the Business Daily on May 21, 2017

Last week China announced a plan to build a vast global infrastructure network linking Africa, Asia, Europe and the Middle East into ‘One Belt, One Road’. China plans to spend up to USD 3 trillion on infrastructure in an effort that seems to be centred more on linking 60 countries in the world with China, not necessarily each other. This One Belt initiative is perhaps part of China’s determination to position itself as the world’s leader in the context of Trump’s insular USA. This initiative has two-fold implications for Africa: the opportunities and potential problems that it creates.

One belt, one road

(source: https://qz.com/983581/chinas-new-silk-road-one-belt-one-road-project-has-one-major-pitfall-for-african-countries/)

In terms of opportunity, obviously African needs continued financial support in infrastructure development. The Africa Development Bank (AfDB) estimates that Africa’s infrastructure deficit amounts to USD 93 billion annually until 2021. In this sense any effort to support the development of Africa’s infrastructure is welcome.

Secondly, this is an opportunity for Africa to negotiate the specifics of the type of infrastructure the continent requires and create a win-win situation where Africa leverages Chinese financing to not only address priority infrastructure gaps, but also better interlink the continent.

However there are multiple challenges the first of which is that Europe, India and Japan seem edgy about this initiative and have distanced themselves from it. According to India’s Economic Times, India and Japan are together embarking upon multiple infrastructure projects across Africa and Asia in what could be viewed as pushback against China’s One Belt initiative. The countries have launched their own infrastructure development projects linking Asia-Pacific to Africa to balance China’s influence in the region.

Europe is also edgy because the initiative has not been collaborative and comes across as an edict from China; countries in the initiative were not consulted. Europe is also uneasy with the lack of details and transparency of the initiative seeing it as a new strategy to further enable China to sell Chinese products to the world.

Secondly, analysts have pointed out that from an Africa perspective, the One Belt seems to continue the colonial legacy of building infrastructure to get resources out of the continent, not interlink the continent. Will the initiative entrench Africa’s position as a mere raw material supplier to China and facilitate the natural resource exploitation of the continent?

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(source: africanbusinessmagazine.com/wordpress/wp-content/uploads/2017/01/Africa-infrastructure-1k.jpg)

Additionally, there are concerns with how the financing will be structured and deployed. Will financing be debt or grants? It can be argued that China needs to increase its free aid toward Africa in order to build its image as a global leader. Further, who will build the infrastructure? Africa has grown weary of China linking its financing to the contracting of Chinese companies. Will this infrastructure drive employ Africans and use African companies? If not, then it can argued that Africa will merely be borrowing money from China to pay itself back.

Linked to the point above, is the fact that Africa is already deeply indebted to China. In Kenya, China owns half of the country’s external debt. Kenya will pay about KES 60 billion to the China Ex-Im Bank alone over the next three years.  Kenya and Africa do not need more debt from China, and if this initiative is primarily debt-financed (in a non-concessionary manner), it will cause considerable concern in African capitals.

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

Changes needed in National Fiscal Policy

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This article first appeared in my weekly column in the Business Daily on March 26, 2017

This week the National Budget for FY 2017/18 will be read, and being an election year this budget may indicate how fiscal policy will be approached post-election.

There are three issues with fiscal policy as articulated over the past few years. The first is sub-par revenue generation and unrealistic revenue targets. The economy grew at about 5.9 percent in 2016, yet the tax revenue forecast was raised by 8.7 percent. By December 2016, it was reported that the Kenya Revenue Authority (KRA) failed (once again) to meet its half-year target by KES 20 billion. This is not a new event; revenue targets are routinely not met begging the question as to whether or why unrealistic targets are set; this habit has to change in the upcoming budget. Kenya needs more realistic targets in order to more effectively anticipate debt requirements for the year.

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(source: http://www.capitalfm.co.ke/business/files/2013/11/BUDGET-BRIEFCASE.jpg)

The second issue in fiscal policy is notable increases in expenditure.  Please note that according to the Budget Policy Statement 2017/18 released in November 2016, the government seeks to curb non priority expenditures and release resources for more productive purposes. The BPS states an expected overall reduction in total expenditures resulting in a decline of the fiscal deficit (inclusive of grants) from KES 702 billion to KES 546.5 billion, equivalent to 7.5 percent of GDP. This is positive in that this fiscal deficit should be lower than the 9.3 percent of GDP for 2016/17. However, two problems linger; firstly a deficit of 7.5 percent is still above the preferred fiscal deficit ceiling of 5 percent. Secondly, it is almost certain that supplementary budgets that ramp up expenditure will be tabled over the course of the fiscal year. Just last month the government proposed KES 75.3 billion of additional expenditure for various ministries and government departments. Government has the problematic habit of creating what seem to be artificially narrow fiscal deficits and borrowing requirements during budget reading, only for these to be revised upward significantly over the course of the fiscal year.

Finally, and linked to the point above, government has to rein in its debt appetite. Growing expenditure, partially attributed to a bloated devolution-related wage allowances and benefits bills has contributed to government borrowing aggressively for capital expenditure. The debt to GDP ratio currently stands at 52.7 percent, up from 44.5 percent in 2013 and above Treasury’s 45 percent threshold. To be clear, the debt to GDP ratio in itself would not be worrying if there were clear and demonstrated action to manage debt levels more aggressively. The World Bank puts the tipping point for developing countries at a 64 percent debt to GDP ratio above which debt begins to compromise economic growth. Thus while there is still wiggle room, continued debt appetite juxtaposed with (or due to) subpar revenue generation means Kenya is headed towards debt unsustainability in the near future.

It is hoped that the fiscal policy due to be read will provide detailed strategies on how revenue generated will be stimulated, expenditure cuts effected as well as the articulation of a clear and realistic debt management strategy.

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

The Rise of Debt in Africa

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This article first appeared in my weekly column with the Business Daily on December 18, 2016


Often when a conversation on debt in Africa emerges, the focus is on public debt. And this is warranted as African governments are accumulating a significant amount of debt. Since 2007, countries such as Zambia, Ethiopia, Rwanda, Kenya, Ghana, Senegal and Cote d’Ivoire have issued sovereign bonds worth over USD 25.8 billion. In terms of local debt, African local debt stock rose from USD 150 billion to about USD 400 billion between 2004-14. In Kenya, government has already overshot its fiscal year debt target having borrowed KES 147.1 billion against a target of KES 106.0 billion.

Debt accumulation is unlikely to slow in the near future due to several factors: firstly, Africa needs to spend USD 600 billion-1.2 trillion to implement the sustainable development goals according to the UN Conference on Trade and Development (UNCTAD); there is impetus to spend and thus borrow. Secondly, Africa continues to be an attractive market for debt. According to Bloomberg, yields on Kenya’s 5-year and 10-year Eurobonds declined by 2.8% and 1.9%, respectively from the mid-January 2016 peak, perhaps indicating that Kenya continues to be attractive investment destination able to attract even more debt. https://www.creditwritedowns.com/wp-content/uploads/2013/01/debt.jpg

(source:https://www.creditwritedowns.com/wp-content/uploads/2013/01/debt.jpg)

There are serious, multi-layered concerns with the accrual of debt by African countries. The most obvious is sub-par domestic revenue generation which compromises the ability of African governments to service both domestic and foreign debt sustainability. Foreign debt has additional risks: falling commodity prices have compromised the ability of African governments to raise forex; the strengthening US dollars makes servicing foreign debt more expensive and as the global economy recovers, there are forecasts for higher global interest rates. An additional point of concern as The Economist points out is that African governments are getting more money from private creditors. Official lenders are more willing to reschedule or reconfigure payment terms if governments get into trouble; private lenders are less willing to do so.

An additional overall concern is financial mismanagement and its implications on debt. Corruption spikes the costs of public projects to accommodate expectations of kick-backs by public officials thereby increasing borrowing demands beyond what projects actually warrant. Secondly, embezzlement of public funds means money does not reach intended projects, reducing the economically regenerative power of said projects.

However there is another, less publicised debt problem emerging on the continent: private debt.Figures on private debt in Africa (Kenya included) are hard to come by but perhaps a look at mobile loan figures may be indicative to the growth of private debt. According to the Business Daily, KCB-MPESA disbursed KES 10.3 billion to customers since inception to September 2016 and Equitel has issued KES 20.8 billion in loans since June 2016. Debt is a feature of life to Kenyans and Africans be it in the form of loans from mobile platforms, commercial banks, MFIs, SACCOs or merry-go-rounds. And it not only the rich and middle income individuals getting into debt; even low income individuals are accruing debt. Conversations with informal business people indicate that the presence of credit vendors has encouraged a pattern of a single individual receiving essentially unsecured loans from numerous credit vendors at the same time. This individual then faces massive financial pressure to repay numerous debts and is often unable to do so sustainably.

Related image (source: http://i2.wp.com/skiptracing.info/wp-content/uploads/2014/03/money_2.jpg?resize=415%2C315)

Clearly, there is a need to further unpack the scale of private credit amassed in Kenya and continent to better understand the continent’s actual debt stock. Further, while African governments ought to be more prudent in debt subscription, perhaps the same ought to be promoted among private borrowers, many of whom do not necessarily have the financial literacy skills to fully appreciate the implications of debt and how to service it sustainably.

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

Interest rates are capped, what next?

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This article first appeared in my weekly column with the Business Daily on August 28, 2016

Last week on Wednesday President Kenyatta assented to the Bill to cap interest rates at 4 percent above the Central Bank Rate (CBR). Given the CBR is currently at 10.5 percent, the new law stipulates banks cannot charge more than 14.5 percent on loans. The immediate effect of this decision is already being felt. As of when this article was written, prices of shares of banks listed on the Nairobi Securities Exchange (NSE) had plummeted by up to 10 percent. Given that a great deal of activity in the NSE is from foreign sources, the dip in prices signals that the world was watching Kenya on this issue and do not seem to like the direction of the decision made.

However, the overall concern with the rate cap decision is the associated uncertainty. Banks themselves are trying to figure out how the new law will affect them and their operations. There are basic questions that are yet to be answered: will existing debt portfolios be affected by the law? Will regulated microfinance rates be capped? How will the new law affect lending? This cap creates an aura of uncertainty going forward which is of particular concern given that Kenya is going into an election year which comes with uncertainty of its own.

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(source: http://letscrowdsmarter.com/wp-content/uploads/2016/03/Interest-Rates.jpg)

Beyond the uncertainty, an issue that will be front and centre is whether the lower interest rates will actually expand access to credit. In the mind of the Kenyan public, lower interest rates will translate to cheaper loans. What the public seems to be forgetting is that capping interest rates may make it harder to qualify for the loan in the first place. There is a real possibility that the law will lead to a contraction of credit; banks will not lend to parties whom they feel are riskier than the stipulated 14.5 percent. Indeed, because rates have been capped, there is no margin of error for banks in lending decisions. Thus there is there a real possibility that qualification requirements for credit will become even more stringent and onerous than before as banks seek to ensure that each lending decision is a sure bet.

So while there may be jubilation for the next few months, it may be short lived. Kenyans may find that getting that ‘cheap loan’ is not as easy as they had anticipated. In short, it is conceivable that the credit market will be drier than was the case before the capping. Leading from this scenario is the possibility of a broadening of the gap between credit demand and supply. There has been concern expressed on how such a credit gap may strengthen unregulated shadow lending mechanisms; this is a real and present danger.

Image result for sacco Kenya

(source: http://www.businessdailyafrica.com/image/view/-/832162/highRes/113511/-/maxw/600/-/auqffp/-/money.jpg)

However, there is a silver lining. SACCOs stand to be the biggest winners from this interest rate cap. If the new law leads to lower access to credit from banks, many Kenyans may move to SACCOs to get the credit they need for their personal and business needs. Other parties that can benefit from the unfolding scenario and potential credit squeeze are alternative financing institutions such as impact investors and equity funds. Impact investors may find that fairly credible SMEs that were previously absorbed in mainstream credit markets are finding it harder to get the financing they need and can now be more readily financed through impact investment products.  Equity funds may find that this is the tipping point needed for Kenyans to truly open up to equity financing.

In short, we’ll see what happens. What Kenya can be sure of is that the world is watching this development, and key lessons will be learnt from this, for better or worse.

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