fiscal policy

Toxic public debt a chance for African firms to raise capital

Posted on Updated on

This article first appeared in my weekly column with the Business Daily on November 25, 2018

Kenya’s public debt stands at over KES 5 trillion. Both last year and this year, international finance institutions and development banks such as the World Bank, African Development and the IMF cautioned Kenya over the pace, composition and terms of public debt accrual. But the appetite for debt continues unabated. And Kenya is not alone. The Brookings Institution makes the point that since 2008, public debt in Africa countries has been rising at an increasingly rapid pace and by 2016, the continent’s gross public debt to GDP ratio had doubled. Countries such as Chad, Sudan, South Sudan, Zimbabwe, Cameroon, Ghana, Eritrea, Ethiopia, Djibouti, Zambia, Zimbabwe, Mozambique and of course Kenya have been warned that their fiscal path and debt pile up is unsustainable.

Image result for Africa public debt

(source: http://www.geeskaafrika.com/22006/africas-public-debt-rising-alarming-levels/)

The composition of debt is of particular concern. Kenya for example has a domestic to foreign public debt split of about 50-50. With the strengthening dollar, the cost of servicing foreign debt will be increasingly onerous. This is in a context of chronic subpar revenue generation with revenue targets routinely revised downwards year on year. Thus, not only is government unable to raise planned levels of revenue, it will have to figure out how to raise even more local currency to service foreign debt as the dollar strengthens.

Another favourite of African governments has been sovereign bonds, and these too are becoming more expensive. Last week Bloomberg reported that spreads on Africa’s sovereign bonds had widened to 506 basis points (bp) above U.S. Treasuries, the most in two years. Te Velde, an analyst, makes the point that at the current rate at which African countries issue sovereign bonds (USD 14bn in the past year), a 2 percent (500bp-300bp) increase in cost of financing, means an increase in future cost of servicing newly issued bonds at more than USD 250 million a year. Let that simmer for a while.

Image result for Africa eurobonds

(source: https://web.northeastern.edu/econsociety/eurobonds-an-opportunity-or-a-curse-for-african-economies/)

Now this would perhaps be fine if there were assurance that African governments were using the debt effectively and in an economically productive manner. But even that is not clear. What is clear is that the rapid accumulation of debt by African governments, partnered with serious questions about fiscal accountability will translate to a massive drop in the popularity African governments have been enjoying in local and international debt markets. And this is good news for the African private sector.

Africa’s private sector continues to be under-capitalised and the past decade or so of considerable appetite for public debt from Africa has left most of the African private sector in the shadows. However, creditors are beginning to understand that debt owed by African governments can be toxic. And this presents the perfect opportunity for private sector in Africa to better position itself to domestic and international players for financing. Let the African private sector grab this opportunity and show the world that much of Africa still has its head on right.

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

Advertisements

TV Interview: 8% VAT on Fuel in Kenya

Posted on

On September 18, I was part of a panel that discussed the 8% VAT on fuel that has since been effected.

Podcast: A frank discussion on Sino-Kenya Relations

Posted on Updated on

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.

 

Image result for china africa relations

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

Kenya’s Development Expenditure Problem

Posted on

This article first appeared in my weekly column with the Business Daily on July 8, 2018

The budget for FY 2018/19 revealed the divide in expenditure as follows: recurrent expenditure will amount to KES 1.55 trillion, development expenditure is projected at KES 625 billion, and transfers to County Governments will amount to KES 376.4 billion. Development expenditure will only be 24 percent of total expenditure (below the 30 percent threshold), recurrent about 60 percent and transfers to county 15 percent. To be clear, public spending in itself is useful in principle because it increases the level of aggregate demand in an economy and can compensate for failings in other components of aggregate demand, such as a fall in household and private sector spending.

Image result for government budget

(source: https://www.vskills.in/certification/blog/meaning-of-government-budget-and-its-objectives/)

That said, government has a development expenditure problem where the development-recurrent ratio always favours recurrent, both at national and county government level not only in terms of allocation but also in terms of actual spending. The first supplementary budget for financial year 2017/18 was submitted to Parliament in September 2017 in which development expenditure was reduced by KES 30.6 billion. As the Parliamentary Budget office points out, this reduction translates to slower implementation of some projects leading to higher project costs and accumulation of pending bills as well as delayed returns on investment. At the same time, net recurrent expenditure increased mostly to cater for the repeat presidential election, enhancement of Free Day Secondary Education, drought mitigation measures as well as the implementation of Collective Bargaining Agreements in the education sector. Thus, the first problem is that the original development-recurrent ratio is not respected or followed.

The second problem is that a reduction in development expenditure juxtaposed with a rise in recurrent expenditure is deeply worrying. Government’s narrow fiscal space has led to a large bulk development expenditure being debt-financed. Thus, it is fair to ask whether if through supplementary budgets, where development spending is reduced and recurrent increased, Kenya is using debt to finance recurrent expenditure. If so, this is going against both basic common sense and fiscal prudence.

Image result for Kenya budget

(source: https://www.capitalfm.co.ke/business/2013/11/cabinet-approves-sh116bn-supplementary-budget/)

Finally, the supplementary budget above is not the first time development spending has lost out to recurrent; the question is why? Given deep development needs in Kenya, where the infrastructure deficit alone stands at USD 2.1bn annually, and significant development spending required, why does recurrent remain the winner? The first factor is the bloated wage bill, a reality that is well known and very difficult to change. Another factor is how spending is classified, which can be confusing because it makes the tracking of types of spending difficult. Public debt accrued in the development docket one year is shifted into the recurrent the next year. Development expenditure covers expenses incurred for the purchase or production of new or existing durable goods, while recurrent expenditure, includes wages and salaries, other goods and services, interest payments, and subsidies. Thus, the broadening yearly financial needs of recurrent spending are informed by debt binges of previous years.

As Kenya continues to accrue debt, interest payments on all the debt will be tabled under recurrent leading to a further bloating of this component of spending. This shift in allocations can make it difficult to determine whether development spending is ever used efficiently through its entire project lifetime.

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

Don’t hold your breath for Kenya’s Fiscal Consolidation

Posted on

This article first appeared in my weekly column with the Business Daily on July 1, 2018

The budget speech for FY 2018/19 is of interest because desires of government seem to be in opposition. On one hand is the previously articulated intent from government for fiscal consolidation and on the other, the need to finance the Big Four. This article will focus on fiscal consolidation and assess the budget using this lens with a focus on planned expenditure, revenue generation and borrowing. Under fiscal consolidation, expenditure should reduce, revenue generation increase and borrowing reduce.

Budget: Treasury Cabinet Secretary Henry Rotich

(source: https://www.businessdailyafrica.com/analysis/ideas/-Kenya-fiscal-consolidation/4259414-4640846-wga0eu/index.html)

Already we can see that appetite for increased expenditure continues unabated. Planned total expenditure for the FY 2018/19 is Ksh 2.56 trillion (equivalent to 26.3 percent of GDP). Under the current administration, projected spending has gone up from Ksh 1.6 trillion in 2013/14 to Ksh 2.29 trillion in 2017/18 and now to 2.56 for 2018/19. Clearly, expenditure continues to grow indicating an inability to effect fiscal consolidation measures which are exacerbated by weaknesses in the composition of expenditure. Of planned spending, recurrent expenditure will amount to KES 1.55 trillion, development expenditure is projected at KES 625 billion, and transfers to County Governments will amount to KES 376.4 billion. It seems the element of expenditure that has been cut is the most economically productive, namely development expenditure. Indeed, development expenditure will only be 24 percent of total expenditure (below the 30 percent threshold), recurrent about 60 percent and transfers to county 15 percent. So government seems to be cutting development expenditure while allowing the excesses of recurrent spending to continue. Thus, the government is not leveraging the budget to drive public spending in an economically productive manner.

In terms of revenue generation, the government argues that revenues will rise by 17.5 percent to about KES 1.95 trillion (equivalent to 20 percent of GDP) in the FY 2018/19 from the estimated KES 1.66 trillion collected in the FY 2017/18. Part of the ‘revenue enhancement’ steps include higher corporate tax as well as a tax on the informal economy. What may materialise is not more revenue, but less. Kenya already struggles with high costs of production attributed to high power, transport and labour costs, as well as endemic corruption and rent seeking. These are dynamics that affect both big and small private sector players. Increasing tax on the private sector may well push them to a level where the combined effect of high production costs and higher taxes cut into profits substantially reducing the total government can claim as tax revenue.

Finally, government announced that in the fiscal year ending in June 2018, they estimate a fiscal deficit of 7.2 percent of GDP, down from 9.1 percent of GDP in the previous year. Indeed under, their fiscal consolidation plan, government project the fiscal deficit to narrow to 5.7 percent of GDP in the FY 2018/19 and further to around 3 percent of GDP by FY 2021/22. While this is a step in the right direction, government seems to have a problem in keeping on a disciplined path of fiscal deficit reduction. Last year government’s target for the 2018/19 fiscal deficit was 6 percent, yet here we are at 7.2 percent.

Image result for fiscal policy

(source: http://www.theedvantage.org/economics/fiscal-policy)

The fiscal deficit of KES 558.9 billion will be financed by external financing amounting to KES 287.0 billion, while domestic financing will amount to KES 271.9 billion. This clearly indicates that domestic borrowing will be substantial. In the context of an interest rate cap, government knows that continued heavy borrowing in the domestic market squeezes out private sector and places upward pressure on interest rates.

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

Manage Risks Raised by Oil Exports

Posted on

This article first appeared in my weekly column with the Business Daily on June 10, 2018

Last week Kenya became the first country in East Africa to export oil. Media reports indicate that the crude oil was transported in the Early Oil Pilot Scheme and will be kept in Mombasa as the country looks for viable international markets. While Kenyans may be jubilant at the prospect of earning revenue from oil, and hope that those proceeds will lead to prosperity and an improvement in their quality of life, key risks have to managed.

First is the Presource Curse. We are all familiar with the resource curse where natural resources such as oil lead to conflict, facilitate corruption and generate an immense income divide with most citizens failing to benefit from the process of natural wealth. The presource curse, as the IMF points out, indicates that on average after major oil discoveries, growth underperforms post-discovery forecasts. The presource curse is especially pronounced in countries with weaker political institutions. These countries not only fail to meet growth forecasts, their average growth rate is lower than before a discovery.

Image result for oil africa

(source: http://www.littlegatepublishing.com/2014/01/tullowoil/)

IMF points out that an oil discovery should increase output, and hence growth; oil discoveries are worth 0.52 percentage point a year in higher growth over the first five years. Kenya has only transported the oil to port, whether a buyer has been found is unclear and raises questions as to whether the country has the expertise to consistently find good quality buyers as well as ensure consistent supply. In the presource curse, countries are tripped up by the steps needed to turn discoveries into dollars. Time will tell whether Kenya will buck this trend.

The second risk is to manage profligate spending linked to an anticipation of oil-related revenue. Ghana is an example of a country that went on a borrowing spree based on overly optimistic revenue projections linked to generous oil barrel prices. When the commodity slump emerged, Ghana found itself unable to generate the revenue projected and service new debt obligations. Kenya has to manage this dynamic carefully because, as the IMF points out, if oil prices fall enough, Kenya may see projects cancelled and miss out on anticipated investment, taxes, and jobs. And even if prices go higher, Kenya may only get a share of the increased profits through taxes. Overly rosy expectations may lead to overly optimistic borrowing and risk over-exposure for both the lender and borrower. Thus, there is a need to manage exactly what oil can deliver in terms of revenue.

Tullow Crude Oil

(source: https://www.businessdailyafrica.com/analysis/ideas/Manage-risks-raised-by-oil-exports/4259414-4604952-pw40k2/index.html)

Finally, is the global tide away from fossil fuels; Kenya faces a conundrum. As the IMF points out, if there is no progress in combating climate change, poor countries are likely to be disproportionately harmed by the floods, droughts, and other weather-related problems. But if global actions to address climate change are successful, poorer countries that are rich in fossil fuels will likely face a steep fall in the value of their coal, gas, and oil deposits leading to a massive reduction in the value of their natural wealth.

In short, let Kenya be realistic that as a latecomer to the oil game, there are important risks to manage. And if we fail to manage these risks, the oil-related jubilance will fade very quickly.

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

 

 

 

 

TV Interview: Reduction of the interest rate

Posted on

I was on CGTN discussing the decision of the Monetary Policy Committee to reduce the Central Bank Rate, in the context of an interest rate cap.