fiscal policy

TV Interview: Effect of the elections on the Kenyan economy

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On November 2, 2017 I was part of a panel on Citizen TV that analysed the effects of the elections on the Kenyan economy.

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County Governments are not accountable to Kenyans

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This article first appeared in my weekly column in the Business Daily on October 1, 2017

Last week the International Budget Partnership Kenya (IBPK) released the results of an assessment on county budget reporting for all 47 counties for the financial years 2016/17 and 2017/18.  They found that counties are not making key fiscal and budget-related documents available to the public online in a timely fashion. As a result, citizens cannot participate effectively in the budget process as intended under the constitution and Public Finance Management Act (PFMA).

 There some troubling findings the first of which is that counties are still not making key documents available to the public online. With regards to the Annual Development Plans which are a main anchor to budgets, as of the second week of September 2017, just 22 counties had published their 2017/18 Annual Development Plans online; that is less than half of the 47 counties. In terms of the 2016/17 Quarterly Implementation Reports which detail budget implementation performance during the year, only Baringo county had published its Budget Implementation Report for the third quarter of 2016/17. With regards to 2017/18 Budget Estimates which detail program and item level decisions, only 15 counties had made the document available. Finally, with regards to the 2017/18 County Fiscal Strategy Papers which is the most important budget formulation document that sets total budget size, sector ceilings and key priorities, only 21 counties had published this online.

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(source: http://www.fortyfort.org/images/Budget.jpg)

Overall, the IBPK assessment found that only about 20 percent of key budget documents that were supposed to be online were available. To make matters worse, four counties (Garissa, Mandera, Migori and Turkana) have never published any document analysed during the assessment. The star performer however is Baringo County which has consistently been the most accountable across all documents studied in the assessment.

The findings above make one reality clear; there is a consistent pattern of low fiscal transparency across most counties. There are several factors at work that creating this troubling picture.

The first is that counties do not feel moved to adhere to PFMA stipulations and account for how they plan for and execute county budgets. There is a distinct air of mischief informing this laxity. It is not a secret that the first era of devolution revealed how much autonomy county governments have in the planning and use of funds they receive and generate. In the past, it seems that the poor reporting may have been due to lack of capacity at county level. While this may be true in some cases, Baringo county makes it clear that counties can develop the capacity if they have the will to do so. Ergo, this lack of transparency seems to be aimed at facilitating a culture of financial mismanagement and corruption at county level, in an environment where, frankly, no one is holding them accountable.

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(source: https://upload.wikimedia.org/wikipedia/commons/thumb/4/4b/Baringo_County_in_Kenya.svg/250px-Baringo_County_in_Kenya.svg.png)

This leads to the second point, county governments know they can get away with failing to account for funds because there are no consequences to poor performance. County governments know that National government will still deploy funds the next year irrespective of whether they comply with the PFMA or not. With no consequences for poor fiscal performance and reporting, financial mismanagement and corruption at county level can and probably are running rife.  The basic question is: who is responsible for keeping county governments accountable?

The way forward is for citizens in each county to demand financial accountability from county governments. This is because it is county citizens to whom county governments are accountable and it is county citizens who can vote out county governments.

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

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.

How Kenya can restructure fiscal policy in the next 5 years

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This article first appeared in my weekly column with the Business Daily on August 27, 2017

Fiscal policy in Kenya over the past 5 years has been characterised by several features the first of which is aggressive growth in expenditure. Cytonn Investment makes the point that over the past 6 years, total expenditure in annual budgets have grown at an average of 14.7 percent yet revenue growth has only increased by 12.7 percent. This has led to more borrowing and expanding fiscal deficits with an increase in debt levels from 40.7 percent debt to GDP in 2011 to the current 54.4 percent. While some argue that Kenya’s debt is not at distress levels, if current patterns of spending continue the distress point will be quickly reached. Thus, it is important to ask how policy should be structured over the next 5 years to put the country on a more sustainable fiscal path.

At national level, fiscal focus should target cutting non-essential expenditure; government needs to be very firm on this and make the hard decisions required to prevent profligate spending, particularly in recurrent expenditure. Cytonn makes the point that recurrent expenditure accounts for 58.8 percent of the 2017/2018 budget. One way to address this issue is through robust support to the Salaries and Remuneration Commission (SRC) to cut salaries and better align compensation packages to reflect the economic reality of a developing African economy. The current association between public office and wealth accrual needs to be severed and stern fiscal policy backed by political commitment can make this happen. Further, a keener eye should be cast over the efficiency of government spending; procurement at national and county must focus on value generated for funds spent. Without doing so, Kenya will find itself on a path where careless and inefficient spending leads to debt accretion that doesn’t stimulate the economic growth required to meet debt obligations.

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(source: http://www.itworks-inc.com/wp-content/uploads/2015/11/delegating-expenditure-approvals.jpg)

Secondly, revenue generation needs to be ramped up; expenditure is growing at 14.7 percent and revenue collection by only 12.7 percent.  Revenue collection has to grow faster than expenditure if the country is to have greater funds available for public investment. One way to do this is by better supporting the KRA to prevent illicit financial flows from the country; a serious problem for African countries. The United Nations Economic Commission for Africa estimates that Africa loses more than USD 50 billion through illicit financial outflows per year. Devex points out that companies evade and avoid tax by shifting profits to low tax locations, claiming large allowable deductions, carrying losses forward indefinitely, and using transfer pricing. Government ought to undertake an audit of tax policy, restructure outdated tax laws and correct faulty tax arrangements with multinational companies; KRA needs to be supported to improve enforcement of these laws.

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(source: i.ndtvimg.com/i/2016-03/income-tax_625x300_51457071220.jpg)

At county level, fiscal policy needs to be characterised by, again, cutting down on unnecessary spending. County governments have to take the initiative on this and so far there have been encouraging signs of newly elected governors choosing to fully or partially redirect massive inauguration budgets to more productive areas; this should be encouraged. Further, county government budget processes ought to be more transparent; at the moment there are significant gaps in understanding how county budgets are formulated and implemented. More counties should follow in the footsteps of Elgeyo Marakwet county and develop a transparent, formula-based budget development process that prevents elite capture in budget formulation and deployment.

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

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.

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(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

Is agriculture being neglected under devolution?

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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.Image result for agriculture Kenya

(source: https://ccafs.cgiar.org)

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.

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(source: https://anzetsewere.files.wordpress.com/2017/07/af82e-kenya-ag-1.jpg)

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; anzetsew@gmail.com

Lingering effects of interest rate cap

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This article first appeared in my weekly column with the Business Daily on July 9, 2017

The interest rate cap has led to several consequences, some of which have been elucidated in this column. The most concerning are the effects is has had on monetary policy and access to credit for the private sector. However new medium to long-term effects are beginning to emerge.

The first is that, private sector, particularly SMEs are getting used to functioning without the credit lines on which they used to depend. Data from the CBK indicates that credit to the private sector expanded at 3.3 percent in the year to March 2017, the slowest rate in more than a decade. So while some private sector may be turning to the shadow lending system for credit, many more may be growing accustomed to getting by with no credit lines at all. In effect, the cap may be dampening the private sector’s appetite for credit. Thus the concern is not only that the economic engine of the country is being starved of liquidity, the engine may be getting to used to ticking away at sub-optimal levels due to poor access to credit with dire consequences to GDP growth. GDP grew at just 4.7 percent in the first quarter of the year, and although part of this is due to a contraction in agriculture, the cap has also informed the sub-par growth. Will dampened appetite for credit become a long-term trend or will private sector aggressively take up credit lines if the cap is reversed?

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(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

Secondly, since the cap has made government the preferred client for many banks, the cap has created the very situation government has been stating it has been trying to avoid and that is crowding out the private sector. Thus the irony is that in government assenting to the cap, it has created the very situation it sought to circumvent. Indeed in the 2017/18 financial year government plans to finance 60.7 percent of the fiscal deficit using domestic sources. In the past government would somewhat limit heavy borrowing from domestic markets but in the age of the interest rate cap, government is well aware of its priority status and thus seems to be leveraging this to finance the budget with domestic sources perhaps more aggressively than had previously been the case. Will this become a long-term habit that proves difficult to break?

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(source: http://www.businessdailyafrica.com/image/view/-/3947270/medRes/1621958/-/62ktdm/-/NT.jpg)

Thirdly, however, there is a silver lining in the cloud; banks are going to come out of this period more efficient than ever. The cap has caused banks to ask themselves hard questions such as: how much labour is actually required to effectively meet client needs? How many branches need to remain open to serve clients and hit targets?  The cap may be accelerating the automation drive that had already began to occur in the banking sector and banks should embrace this era of capped rates to become more efficient. Banks will likely emerge from the interest rate cap as leaner and more efficient entities than would have been the case if the cap hadn’t been effected. This is a long term effect on the banking sector and may well have lasting benefits on profit margins.

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