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How fiscal policy can attract the right type of investment for Africa

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This article first appeared in my column with the Business Daily on March 30, 2017

Someone once told me that there are three types of foreign investors in Africa. The first are those who invest in the country in order exploit raw natural resources and direct them to their projects outside the country. The second are those who invest in countries in order to flood the country’s markets with their products. The third are investors who invest in the country for the long-term in a manner that creates employment, builds incomes, contributes to GDP growth and of course, generates profits. Africa seems to have little problem in attracting the first two investor type, but often struggles to secure the third type. The question for Kenya is, which type of investor is the country attracting? And what can be done to attract the third type of investor?

These questions are important in the context of fiscal policy, of which a key event will take place today when the National Budget 2017/18 will be read. Fiscal policy ought to and can play an important role in attracting the right type of investor to Kenya.

Over the past ten years, the government has been on an investment drive to build the country’s infrastructure. In principle, efficient public investment in infrastructure can raise the economy’s productive capacity by connecting goods and people to markets. The national budgets over the past few years have thus has allocated significant amounts to energy and transport infrastructure such as LAPSSET, the Standard Gauge Railway (SGR), Rural Electrification and the Last Mile Project. With the SGR due to be completed this year, it will become clear what dividends the country will reap from such heavy fiscal commitment to infrastructure. That said, infrastructure investment is a prerequisite to attract the third investor type as the ease and cost of transporting goods are an important business cost and variable.

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The second fiscal strategy that can bring long term investors as well as bolster food security and manufacturing is tax incentives to create productive agricultural value chains. Fiscal policy can more effectively engender a shift from subsistence to commercially productive farming by identifying commercially viable agriculture value chains and linking small holder farmers to manufacturers. Through incentives such as tax remissions along key food and beverage manufacturing value chains, fiscal policy can incentivise higher productivity in farming and contribute to making manufacturing more dynamic than is currently the case. The key however, is consistency in fiscal policy with no abrupt changes in tax remissions or other incentives so as to engender long term investment in food value chains.

Thirdly, the right investor type can be attracted to the country through investment in Kenya’s human capital. As the IMF points out, more equitable access to education and health care contributes to human capital accumulation, a key factor for growth and an improvement in the quality of life. Fiscal policy has two roles here; the first is creating incentive structures for private sector investment into the country’s private and public education and health networks and the second being the country’s own fiscal commitment to health and education sectors. National budget allocations to education stand at about 23 percent, while commitments to health are at about 6 percent of the national budget. Health allocations are paltry and while the education allocations look impressive, a great deal of the funds are directed to free primary education. In order to develop a healthy, highly skilled and productive labour pool, government ought to consider reorienting the almost obsessive fiscal commitment to infrastructure towards more robust allocations to health and post-secondary education. This should be complemented by the creation of incentive strategies that attract investment into national priority nodes for the sectors.Image result for health kenya

(source: https://investinkenya.co.ke/components/uploads/0942a7f713ab6801a17e2cfb325fc99c.jpg)

The fourth means through which fiscal policy can attract the right investors is by managing tax rates at national and county levels.  At the moment, private sector is facing numerous tax burdens due to the lack of harmonisation of tax rates between national and county governments. Fees and charges at county level are unpredictable, non-standardised and onerous; business face multiple payments for advertising and transporting goods across county borders. While these are not technically taxes, they are a form of tax exerted on private sector with no clear link to the service that should be expected for such payments. At national level, the main concern for private sector beyond VAT refunds, is that a small segment of business and individuals are onerously taxed due to the narrow tax base in the country. Thus national government ought to develop a long-term strategy for broadening the tax base.

A key component of broadening the tax base is addressing informality in the economy where millions of informal businesses do not pay taxes. The aim here is not to tax informal businesses, as most are micro-enterprises barely making profits, but rather creating an ecosystem that encourages the development of informal business. Again, fiscal action can be taken by government to direct financing focused at developing micro, small and medium enterprise through more the strategic deployment of the Youth, Uwezo and Women’s Funds. The financing architecture of these three funds has to be fundamentally rethought to focus on building technical skills and business management capacity, and improving productivity and profitability in the informal sector.

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Additionally, the government ought to develop a strategy for Kenya’s cottage industry which is the Jua Kali (informal industry) sector linked to solid fiscal commitments. Through fiscal action, the government should create an investment environment that attracts traditional investors as well as non-mainstream financing such as angel investors, impact investors and venture capitalists to invest in Jua Kali. In this manner, action will not only invest in the informal sector, it will create incentives for investment into a sector in which over 80 percent of employed Kenyans earn a living, in a manner that complements fiscal policy.

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

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The economics of the doctors’ strike

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This article first appeared in my weekly column with the Business Daily on January 22, 2017

Doctors in Kenya went on strike in December 2016 due to on-going concerns with regards to numerous issues including remuneration, working conditions, promotion and transfer policies, doctor occupational safety issues and inadequate health staff and facilities.

Both the press and national government have given Kenyans the impression that the main demand being made by doctors is focused on a 300 percent pay increase. However, a public announcement released by the Kenya Medical Practitioners, Pharmacists and Dentists Union (KMPDU) stated concerns that, ‘in all its offers the government has addressed itself solely on a non-existent 300 percent pay increase demand and has refused to give its position on the non-monetary issues’. Thus while there are requests by doctors to improve compensation, there are other demands that would benefit the greater health of Kenyans including a call to hire more doctors and better equip hospitals.

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(source: http://s1.ibtimes.com/sites/www.ibtimes.com/files/styles/lg/public/2012/03/08/245904-kenya-doctor-strike.jpg)

However, it must be said that although the CBA the doctors seek to have honoured is not solely on remuneration issues, their demands would have financial implications. For example, there is a demand to hire 1,200 doctors per year for four years, making a total of 4,800 new doctors. It cannot be denied that honouring this request in addition to meeting the demands of increased compensation and better equipping medical facilities would be an expensive endeavour; and that is likely why national government has yet to broker an agreement with the doctors.

The reality is that Kenya’s fiscal space is narrowing and the ability of national government to take on added costs is becoming increasingly limited. Last year the government overshot its fiscal year debt target having borrowed KES 147.1 billion against a target of KES 106.0 billion. The public debt to GDP ratio stands at about 52.8 percent, well above Treasury’s 45 percent ceiling; and the fiscal deficit is at 8 percent, well above the 5 percent target. Indeed, the country has acquired public debt to the extent that a fifth of the budget is committed to repaying loans. The national government seems to have acquired the habit of chronic over-spending. And while debt levels are still thought to be sustainable, bodies such as the IMF and World Bank have issued warnings about the trend of government borrowing with concerns that it may lead to the country being over-leveraged, probably in a shorter time span than anticipated. So there is reason for national government to be concerned about the financial implications of the demands being made by doctors.

However, there are is a clear flaw in the case being made by government attempting to use finance and economics to deny doctors their requests. Just as the government seems stuck on chronic over-spending, it also seems stuck in chronic financial mismanagement. Kenyans will simply not believe that the government does not have enough money to meet doctors’ demands given the sheer volume of allegations of colossal corruption housed in national government bodies such as the Ministry of Devolution and Ministry of Health; allegations of graft in these bodies alone are estimated to stand at about KES 8.5 billion. Last year Member of Parliament (MPs) negotiated a deal that effectively made Parliament’s wage bill rise by more than KES 2 billion in a year.  Please note that by 2013 reports indicated that Kenyan legislators are the second-highest paid lawmakers in the world, beating their counterparts in USA, Britain and Japan. Ergo, the issue is not a lack of money, the issue is what priorities are absorbing public finances.

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(source: http://pathfindersrcd.org/wp-content/uploads/2016/05/spend-or-save-300×300.jpg)

Thus, while there are financial and economic implications to the demands being made by doctors, I fundamentally agree with their demands. This is not only because the country can only develop on the foundation of a healthy and productive population, fiscal policy is wanting. It is wanting not only in terms of fiscal mismanagement but also through the prioritisation of wages for some while failing to better equip hospitals and ensure the adequate compensation of doctors and other health staff.

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

Development yet to get right fuel in yearly allocations

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This article first appeared in my column with the Business Daily on June 21, 2015

The 2015/16 Budget of more than Sh2 trillion indicates the government will raise expenditure by 17 per cent. But is the budget pro-development? A useful way of determining whether development is the focus of a Budget is looking at allocations to health, education, water and youth.Health and education are important as they invest in the country’s human capital that often drives economic growth and development. Water is important as a basic human right.

Given that more than a third of the population is youth (aged 18-35), it is important the segment get budget support to build up skills, employability and employment opportunities for Kenya to reap the youth dividend of innovation, energy and affordable labour.

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In addition to this, one should take note of the ratio between allocations and expenditure related to recurrent versus development costs; a pro-development budget has higher outlay for development.

A quick analysis of the key sectors reveals education previously got 26 per cent of the total; in this Budget that figure is 22 per cent. The last budget allocated four per cent to health; it is unchanged. Water (and regional development) got four per cent in both budgets. In the last budget, youth (alongside gender and culture) received less than one per cent, the same as this year.

Juxtapose these percentages with security (15 per cent) and infrastructure and energy (27 per cent), both of which the government openly stated are top priorities.

Although one can argue peace and infrastructure are the foundations of development, but shouldn’t the focus be promoting and defending national economic development? Because without defeating poverty, Kenya will remain weak and vulnerable, no matter how many roads and fighter jets it has.

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(source: http://www.kenyanaviation.com/wp-content/uploads/2012/10/KAF_Harbin_Y-12_by_Antoisurf_sm.jpg)

The 2015/16 Budget seems to say development-related sectors are becoming less of a priority for government. However, there are some steps the Budget takes that are pro-development; for example, an additional pro-youth element of the budget is rebates to corporate bodies hiring new graduates and supporting them to build the relevant skills and experience.

To qualify, employers must provide internships/apprenticeships to a minimum of 10 youths for a period of six to 12 months. Although this is commendable it may be a misplaced strategy because it doesn’t get to the root of the problem: the failure to offer relevant curricula.

Perhaps, the government should consider deploying strategies to revamp training offered in the first place.

One also has to analyse allocations to recurrent versus development expenditure and audit that spending.

International Budget Partnership (IBP) indicates that in 2013/14, the government allocated 58 per cent of the Budget to recurrent but spent 78 per cent on the same. In 2014/15, recurrent was allocated 58 per cent but IBP projects government will eat into 63 per cent of the Budget.

This year, the recurrent versus development stands at 52 per cent to 48 per cent. In short, in all the past three budgets, recurrent allocations trump development and even worse, actual recurrent is higher than what was allocated. This is a concern.

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Also note that an analysis of Q4 2014 of the budget by the Institute of Economic Affairs (IEA) revealed a failure to spend 48 per cent of the development budget.

So, the government is overspending on recurrent expenditure such as salaries but underspending on development. The government would do well to push for more austerity in recurrent expenditure.

Ms Were is a development economist. anzetsew@gmail.com; @anzetse