GDP growth

Kenya: What should be demanded of the next administration

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This article first appeared in the Business Daily on February 12, 2017

The election year in Kenya is contextualised in two conflicting realities: on one hand the country is among those growing the fastest in Africa and the world and is successfully attracting mega investment. On the other hand, companies have shut down or left the country, poverty and unemployment levels remain high and cost of living continues to rise. How do we reconcile these two conflicting realities?

The first is to acknowledge that the economy is growing; by 6.2 percent in Q2 and 5.7 percent in Q3 of last year. Juxtapose this with an African GDP growth rate of about 1.4 percent and a global growth rate of about 3.4 percent in 2016. Analysts point to several sources for this growth; agriculture, forestry and fishing; transportation and storage; real estate; wholesale and retail trade as well as mining and quarrying. Kenya was not only buffered from the decline of commodities, Kenya saved nearly KES 50 billion in the first half of 2016 alone due to low global petroleum prices. Further, the Kenya Shilling remained steady with regards to major currencies, standing at around KES 100 to the US Dollar. This is important for Kenya which is an import economy; currency depreciation places upward pressure on inflation. With regards to inflation, the country remained within the Central Bank of Kenya’s (CBK) inflation target range of 5 plus or minus 2.5 percentage points; annual average inflation dropped from 6.5 percent in November to 6.3 percent in December, the lowest reading since November 2015. In addition, the country made progress on the Ease of Doing Business Index. Kenya ranked 92nd up from 113 in 2015; this is the first time in seven years Kenya has ranked among the top 100.

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Further, Kenya’s profile as an attractive investment destination grew in 2016. FDI Markets ranked Nairobi as Africa’s top foreign direct investment destination with inflows surging by 37 percent in 2015. Indeed, reports indicate that Kenya recorded the fastest rise in FDI in Africa and the Middle East. The FDI intelligence website indicates that a total of 84 separate projects came into Kenya in real estate, renewable and geothermal energy as well as roads and railways worth KES 102 billion, all of which provided new jobs for thousands of Kenyans. Additionally Peugot announced a contract to assemble vehicles in the country joining Volkswagen which opened a plant last year, Wrigley invested KES 5.8 billion in a plant in Thika and a contract worth KES 18.74 billion was signed with the French government to build a dam.

However, the reality elucidated above seems theoretical in the minds of millions of Kenyans, most of whom are not feeling the positive impact of all these rosy statistics. Media reports indicate that that thousands jobs were lost last year due to company restructuring or company shut down altogether. 600 jobs were lost when Sameer Africa announced that it would shut down its factory. Flourspar Mining Company also shut down, leading to a loss of between 700-2000 direct and indirect jobs. Oil and gas logistics firm Atlas Development also wound up operations and the Nation Media group shut down three of its radio stations and one television channel. But perhaps it is in the banking sector where job losses were most pronounced. This paper reported that more than six banks announced retrenchment plans in 2016: Equity Bank released 400 employees; Ecobank announced it would release an undisclosed number of employees following a decision to close 9 out of its 29 outlets in Kenya; Sidian Bank, formerly known as K-Rep, made plans to release 108 employees, and the local unit of Standard Chartered announced plans to lay off about 600 workers and move operations to India.

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Why is this happening? How can economic growth be juxtaposed with massive lay-offs and economic hardship? There are several factors at play here. With regards to the employment cuts in the banking sector, these are linked to two factors, the adoption of technology and the interest rate cap. Technology adoption has translated to the reality that millions of Kenyans no longer have to visit banks to access financial services as they can make financial transactions digitally, transactions that range from money withdrawals and transfers, to loan applications and disbursement, and the payment of bills. This automation has led to the attrition of jobs.

Secondly, the interest rate cap has placed pressure on the profit margins of banks leading to job forfeiture. The interest rate cap effected by the government stipulates that banks cannot charge interest rates above four percentage points of the Central Bank Rate (CBR). Interest rate spreads have several functions for banks, of which perhaps the most important is insulating banks from bad borrowers. There is an asymmetry of credit information in Kenya due to the fact that the creditworthiness of most Kenyans cannot be established. As a result, when banks make loans to Kenyans, they often do not know if the borrower will be a good or bad one. Thus to insulate themselves from the risk of lending to bad borrowers, interest rates are raised in order to ensure that the bank recovers as much money from the borrower in as short a time as possible. In removing this provision, the interest rate cap is essentially forcing banks to lend money to both good and bad borrowers at the same rate. This in turn threatens profit margins as there is a real risk that the bank now has no buffer against bad borrowers. As a result, some banks have responded to the interest rate cap by shedding jobs to cut down operating costs and safeguard profits.

However, the interest rate cap is having a more insidious effect on the economy. A report by the IMF released last month states that the interest rate controls introduced in Kenya could reduce growth by around 2 percentage points each year in 2017 and 2018. The IMF also expects a slowdown in the growth of private sector credit linked to the cap. Additionally, the growth of the economy has been revised downwards due to the cap. What does this mean for the average Kenyan? The interest rate cap means that SMEs and individuals who used to get loans, albeit at higher rates, are likely to get no credit at all. Banks will simply not lend to individuals and businesses whom they think cannot service the debt credibly at that capped ceiling. Sadly it is the most vulnerable who will be disqualified first as these are seen as high risk and high cost borrowers. As they are shut out of credit SMEs cannot implement growth plans and are unable to create jobs and wealth. The contraction in liquidity engendered by the cap may also mean there will be less money moving in the economy; Kenyans will feel that there is less money around and feel more broke as they cannot get loans to grow their business or meet personal costs.

However, one of the biggest factors behind why Kenyans don’t feel the rosy statistics is because most Kenyans operate in the informal economy whose performance is generally not captured in official figures. GDP growth and Ease of Doing Business data do not capture the reality of dynamics in the informal economy where over 80 percent of employed Kenyans earn a living. Therefore, one cannot extrapolate positive overall statistics as reflective of performance of the informal economy. Perhaps the incongruence Kenyans feel stem from the fact that the economy from which millions earn a living is largely ignored. The hardship and challenges of Kenyans living and working in the informal economy continues to be neglected and thus policies and action that could help most Kenyans are never developed or implemented. Until the gross negligence of the informal economy is addressed, one can expect the average Kenya to feel a disconnect between economic growth and their lived reality in the informal economy.

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An additional factor leading to the disconnect between economic growth and the lived reality of most Kenyans, is that the country seems to be in a ‘jobless growth’ rut where GDP growth doesn’t lead to formal job creation. This is partly because Kenya’s economic growth is services driven, and services produces far less jobs than manufacturing. Until the manufacturing sector is given the attention it requires such that economy is driven by export-led manufacturing, the ‘jobless growth’ challenge will continue. Bear in mind that manufacturing in this country is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption. Kenya is currently deindustrialising as the manufacturing sector grows at a slower rate the economy. The manufacturing sector grew 3.6 percent in the Q1 and at 1.9 percent in Q3 of 2016. Compare this with a GDP growth rate of 6.2 percent in Q2 and 5.7 percent in Q3 of 2016; this means the share of manufacturing in GDP is shrinking. This should be of concern because, as analysts point out, industrial development is crucial for wealth and job creation. Exacerbating the already slow growth of the sector this year are the drought and cheap imports. As the Kenya Association of Manufacturers points out, the drought is having an impact on raw materials in sectors that rely on agricultural products. The drought will also lead to a higher cost of goods and services for Kenyan as electricity tariffs are adjusted upwards. The manufacturing sector is also threatened by the fact that the country has allowed the entry of cheap goods, particularly from Asia, to flood the market; goods that benefit from protection and subsidies in their home economies which is not reflected here.  These constrain the growth of the sector in Kenya.

Finally, financial mismanagement at both national and county levels is compromising growth. The top allegations of the financial mismanagement of public funds according to media reports include the laptop tendering debacle, NYS scandal, Ministry of Health and the GDC tendering scandal. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. Thus the economic stimulus that ought to be garnered from public never happens because projects are either under-financed or not financed at all as public officials siphon money away from them. Further, business routinely complain that bribes have become a basic expectation of county officials around the country. A report released by the Auditor General last month revealed that Kenyans are asked to pay up to KES 11,611 by county officials; Mombasa County officials top the list of bribe-seekers followed by Embu, Isiolo and Vihiga. As long as this continues, jobs and wealth that government investment and financing could have created will not materialise.

So what should Kenyans demand from those vying for power in this year’s general election? The first and foremost is ending financial mismanagement where even opposition is culpable as counties under opposition engage in corruption as well. Kenyans must demand a clear plan that will take serious steps to make financial structures more robust and punish those engaged in the financial mismanagement of public funds. Secondly, Kenyans should push for the government to provide a detailed analysis on the impact the interest rate cap is having on Kenyans and the economy. If the analysis elucidated herein is anything to go by, Kenyans should also seek the reversal of the interest rate cap as soon as possible. Thirdly, Kenyans ought to demand the development of a policy aimed at supporting and developing the informal economy at both national and county level. The gross neglect of this sector must end given that it is in the informal economy where most Kenyans earn a living and are employed. Finally, Kenyans should push for a detailed plan on industrialisation for the country. While the Ministry of Industrialisation has developed the Kenya Industrial Transformation Programme, a detailed work plan and timeline of deliverables ought to be developed and shared so that Kenyans can reap the dividends that green industrialisation can create.

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

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How the commodities decline is good for Africa

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This article first appeared in my weekly column with the Business Daily on May 22, 2016

The fact that the prices of commodities such as crude oil, iron ore, copper, aluminium and coffee have been in decline is not a secret. What seems to have been lost in the story however is how Africa is actually benefiting from this decline. The main story we’re hearing as Africans is that Africa is suffering from the commodities decline. The IMF makes the point that particularly hard hit are the region’s eight oil exporters (which together account for about half of the region’s GDP and include the largest producers, Nigeria and Angola) as falling export incomes emerge due to lower commodity prices. This results in sharp downward fiscal adjustments which limits government activity. The IMF goes on to say that among oil exporters, the sharp and seemingly durable decline in oil prices makes adjustment unavoidable, and while some had space to draw on buffers or borrow exist to smooth the adjustment, that space is becoming increasingly limited. This column agrees with much of this- but the positive elements of the commodity decline have not gotten nearly as much attention.

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To be clear, there are positive consequences to the commodity decline for Africa. So although Africa has to be aware of the difficulties this dynamic raises, the positive elements also ought to be highlighted.

The first positive result of declining commodity prices is that Africa finally seems to be truly serious about building manufacturing capacity on the continent. Once again Africa has found itself at the short end of the stick; because commodities were booming for so long, there was no pressure on Africa to domesticate value addition and build up manufacturing activity on the continent. Africa, once again, in the 21st century, found itself in the very old position of having just largely exported raw commodities during the commodities boom and is now suffering. It is almost as though Africans told themselves, ‘ let’s ride this wave while it lasts’, and the continent did not make any serious re-orientation in terms of domesticating value addition. Now that boom has ended and clearly African economic growth still seems tethered to commodity prices perhaps to a greater extent than expected. Thus, we now see increased impetus on the continent and scrutiny directed towards the continent on building up manufacturing and value addition capacity. . This is good news for Africa because the value of building up manufacturing, especially export-oriented manufacturing has long been an important story in countries pulling populations out of poverty. This is a chance for the fundamental reorientation of Africa’s economy which is long overdue.

Bear in mind that given the fact that China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030 the question becomes: where will they go? Africa finally seems to be saying ‘Africa!’. Those interested in the African economy driving development, now due to the commodities decline, are seeing manufacturing taking its rightful place in terms of the priorities of the continent.

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Secondly, the commodities decline is very good news for East Africa. The region is minimally exposed to the commodities debacle. Yes there are new oil deposits that have been discovered in some of East Africa, but these have not been fully exploited yet so East Africa economies continue to grow in spite of the commodities decline. Let’s look at some figures based on average growth rate of about 3.4 percent for the global economy in 2016. Africa, for the first time in years is below the global average and is expected to grow at only 2.9- 3.2 percent this year, the slowest since 2001 according to some estimates. Compare this to East Africa where Kenya grew by 5.6 percent in 2015 and preliminary estimates suggest Tanzania registered 6.9 -7 percent GDP growth in 2015, Uganda around 5 percent, Rwanda was estimated to have grown at 6.9 percent in 2015 and Ethiopia at 6.3 percent a year between 2016-20. Please bear in mind getting data for some of these countries is difficult. But the point is that these are all well above the estimated African GDP growth rate of 2.9- 3.2 percent and the global growth rate. So the global community is alive to the fact that East Africa is really a bright spot and is a space where economies seem to be relatively unaffected by the commodities decline.

The message is simple: Africa should more fully exploit what it stands to gain from the commodities decline. There is plenty of good news therein.

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

My thoughts on the Kenya 2016 Economic Survey and interview panel on the same

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This article first appeared in my weekly column with the Business Daily on May 8, 2016

The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2016 which provided interesting insights on the state of the Kenyan economy. GDP growth stood at 5.6 per cent in 2015 compared to a 5.3 per cent growth in 2014. An important development indicator to note in Kenya however is that GDP per capita (a measure of average income per person in a country) has not moved very much marginally increasing to KES 91,588 in 2015 from KES 89,240.5 in 2014. This is because although the economy is growing, so is the population. Such robust population growth in which almost a million births were recorded last year, translates to a dilution of the ability of economic growth to significantly reduce poverty levels.

Inflation stood at an average of 6.6 percent, within the CBK preferred range of 5 percent +/- 2.5 percent. It appears that monetary policy action by the CBK which consisted of several actions such as increasing the Central Bank Rate (CBR) from 8.5 per cent to 10.0 per cent in June 2015, and further to 11.5 per cent in July 2015, managed inflation.  Interestingly however, despite the CBK interest rate hikes and a general feeling that credit is expensive in Kenya, domestic credit grew by 19.2 per cent and credit to the private sector expanded by 17.5 per cent in the 2015. Back to monetary policy, this was particularly important last year which saw the KES dip in value to the USD. This depreciation was due to internal and external factors and probably negatively informed growth as Kenya is an import economy and such depreciation created upward inflationary pressure. However the lower cost of Kenya’s biggest import, petroleum, ameliorated the inflation dynamic as oil prices fell to USD 52.53 per barrel, down from an average of USD 99.45 per barrel in 2014, which allowed government to spend KES 215 billion in 2015, down from KES 293 billion in 2014.

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Agriculture continued to be the strongest contributor to GDP at 30 percent followed by manufacturing at 10.3 percent. An important note about agriculture is that the report states the weather system El Nino as a positive contributor to agriculture leading good rains and an improvement in agriculture outputs. However a point of concern is that tea production fell by 10.3 percent and coffee by 16 percent, both of which are important exports and forex earners. Although both still earned a bit more than they did in 2014, it is important that any further deterioration in the performance of these commodities is stemmed. This is because of the continued poor performance in the tourism sector, another important forex earner, where tourism earnings fell 2.9 percent from KES 87.1 billion in 2014 to KES 84.6 billion in 2015. In short, the figures seem to indicate that forex revenue generation was difficult last year. Poor performance by forex earners has numerous fiscal implications such as negatively informing government’s ability to service foreign denominated debt affordably.

In terms of manufacturing, growth remained fairly constant growing a fraction from 10 percent in 2014 to 10.3 percent in 2015. This marginal increase is attributed to reduced cost of inputs such as petroleum products and electricity. However, on-going constraints such as the high cost of credit and cheap imports continue to negatively affect the sector.

Job creation grew by 5.6 percent and an on-going trend was confirmed in that the vast majority of jobs were created in the informal sector. Informal sector employment rose by 6.0 per cent to 12.6 million persons, with a share of 82.8 per cent of total persons engaged in employment. Clearly the informal sector continues to grow and be an important job creator for Kenyans. This should provide impetus for efforts to be directed at this sector to make it more productive in a manner that alleviates poverty.

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Overall, efforts need to continue to increase productivity and outputs in agriculture and manufacturing (particularly the latter), the poor performance of forex earners ought to be analysed and addressed, and the informal sector has to feature front and centre in terms of efforts to improve the performance of private sector.

Below is an interview panel in which I participated on Citizen TV last week commenting on the Economic Survey 2016:

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

 

How important are services to economic growth?

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This article first appeared in my weekly column with the Business Daily on March 21, 2016

A report by the Overseas Development Institute (ODI) analyses four services sectors in Kenya to determine the role of services in economic growth. The four sectors analysed are the financial sector, IT services, transport services and tourism services.  The report argues that services are becoming increasingly important, even for non-industrialised countries such as Kenya, as they have a direct contribution to GDP, exports and employment.

Indeed according to the report, services account for 50.7% of the share of GDP; a fact with which the World Bank agrees. Kenya has already become a major exporter of services in areas such as transport services, financial services and, less significantly, ICT. In terms of exports, the export of services from Kenya nearly tripled from $1.9 billion in 2005 to $4.9 billion in 2012; far more than the exports of goods. The ODI report goes on to state that ICT and financial services in particular makes companies in other sectors more productive, help develop value chains and safeguard jobs, while tourism creates numerous jobs within suppliers. Further, services have an important role to play in the ‘servicification’ of manufacturing. Indeed the World Bank survey made the point that in Kenya, services  constitute at least 62% of the cost of manufactured goods illustrating the extent to which manufacturing relies on services.

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The position ODI takes goes contrary to dogma in economic theory which argues that the most effective path to development is linear with a progression from agriculture to manufacturing and finally into services. Yet here is Kenya, a non-industrialised economy, with services as the engine of economic growth.

Given this scenario, the questions to ask include: what are the implications of a services-led economy in the context of a non-industrialised county? Is a service-driven economy sustainable in the long term? Does a preponderance of services have a negative effect on the development of agriculture and manufacturing?

Well, the report acknowledges that there are weaknesses in the service-driven model, especially in non- industrialised countries. The dominance on services means that it pulls labour in from the other sectors such as manufacturing. This could result in the exacerbation of deindustrialisation as manufactured jobs are replaced by low-productivity services jobs.  This is a key concern for Kenya which has a significant informal economy, most of which is not very productive and in which services are a notable constituent. Is Kenya facing a scenario where labour is being pulled into services from other sectors, not into high productivity services which are typically in the context of formal employment, but rather into low productivity informal employment in services?

Further there are questions as to whether the dominance of services in Kenya will lead to skills shortages in agriculture and manufacturing. The report rightly makes the point that there is a risk emerging where the development of skills for the service sector will preponderate, perhaps to the detriment of skills development in other sectors. More and more young Kenyans will opt to train to become bankers and HR specialists because it will be easier to find jobs in those areas of speciality than it would be if they had trained as engineers and scientists. What does this bode for the future of the country?

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The final risk of service-driven growth is that, as ODI point out, too much export-oriented services have opportunity costs. It could lead to Dutch disease effects where the shilling appreciates thereby damaging the manufacturing industry as locally produced goods become expensive and uncompetitive due to a strong shilling.

In terms of the way forward, Kenya should continue to reap the benefits of service-driven growth but go through a deliberate process of rebalancing where highly productive agriculture and manufacturing play a stronger role. Further, there is a need to ensure that as long as services preponderate, it is associated with noteable job creation and secondary effects that benefit the economy as whole.

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

The importance of the informal economy in Africa

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

It is well known that in Africa there exist two types of economies: the formal and the informal. Often the general assumption is that the formal economy is the more important of the two, and often it is the formal sector which gains attention in terms of policy formulation, development strategies and funding inputs. However there exists a sizeable informal economy on which millions of Africans depend and which employs millions of Africans. In fact informal employment comprises 66 percent of non-agricultural employment in Sub-Saharan Africa (82 per cent in Mali and 76 per cent in Tanzania). The Africa Development Bank (AfDB) which uses slightly different delineations estimates that nine out of ten rural and urban workers are informally employed.

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The global research-policy-action network Women in Informal Employment: Globalizing and Organizing (WIEGO) delineates two types of informal employment. The first is informal employment inside the informal sector made up of all employment in informal enterprises including employers, employees, own account workers, contributing family workers and members of co-operatives.

The second, as per WIEGO’s delineations, is informal employment outside the informal sector which includes employees in formal enterprise not covered by social protection, employees in households (e.g. domestic workers) without social protection; and contributing family workers in formal enterprises. In Africa informal employment is a greater source of non-agricultural employment for women than for men: 74 per cent for women and 61 per cent for men in SSA. The percentages of women engaged in own account employment are higher than of men and trade is the most important branch of economic activity, accounting for 43 percent of SSA’s non-agricultural informal employment. The AfDB estimates that the informal sector contributes about 55 per cent of Sub-Saharan Africa’s GDP.

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Analysts make the point that contrary to most assumptions, informal workers do not operate outside the state, informal workers interact with the state regularly. However the truth of the matter is that most informal workers are poor and most of the working poor are informally employed. Indeed AfDB makes the point that most informal workers are without secure income, employments benefits and social protection. Further, those informally employed tend to have lower education and rates of literacy and tend to work longer than those formally employed. Further, according to the ILO, wages are on average 44 percent lower in the informal sector. This explains why informality often overlaps with poverty. This factor is important to consider as the UNECA asserts that 93 percent of new jobs created in Africa during the 1990s were in the informal sector.

As it stands, most African governments have yet to design strategies to formalise the informal economy and design strategies to make the sector more productive in a poverty alleviating manner. Issues such as taxation and regulation currently act as disincentives for formalisation. Informal businesses are reluctant to be pulled into the tax net and complicated compliance requirements thereof. Further the long, complicated and often bureaucratic requirements for registration as well as licensing and inspection requirements are also barriers faced by the informal sector. Further, the informal sector struggles with raising capital to finance activities, are often unable to fully access or leverage technology and innovation and typically suffer poor infrastructure.

Finally, a conundrum exists for the informal sector because on one hand the sector is an important source of employment, income generation and is an important contributor to GDP growth. It is not clear if formalisation may negatively affect the positive elements of the informal sector. On the other hand poverty incidences are higher in households in the informal sector, employment is more socially insecure and the informality undermines development prospects through loss of revenue and unfair competition to formal firms. What is clear is that it is time for African governments to tackle the sizeable element of informality in their economies and develop creative strategies to magnify the positive while reducing the negatives.

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