inflation

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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(source: https://www.matchdeck.com/uploads/image/asset/10018/large_Nairobi_NIGHT.jpg)

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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(source: http://youthvillage.co.ke/wp-content/uploads/Fired.jpg)

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

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.

(source: http://www.familiesforsurvival.org/wp/wp-content/uploads/2011/10/kenya-pic-money.jpg)

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.

(source: http://www.businessdailyafrica.com/image/view/-/2765356/medRes/770595/-/maxw/600/-/s8sitd/-/jua+kali.jpg)

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

 

My interview with CNBC Africa on the outlook of Kenya’s economy in 2016

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The year 2015 was marked by volatility in Kenya’s macro-economic space, especially the forex market and inflation. The year also saw various economists such as World Bank and the IMF downgrade growth forecast for the Kenyan economy. CNBC Africa caught up with Anzetse Were, a Development Economist to unpack what 2016 could have in store for the country’s economy.

http://www.cnbcafrica.com/video/?bctid=4701293093001#

What to expect in Kenya’s economy in 2016

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This article first appeared in my weekly column with the Business Daily on January 10, 2016

The year 2015 was instructive for the Kenyan economy and government. So what is in store for the economy in 2016? There are key factors that will bolster economic growth as well as factors that may threaten growth.

Inflation

Inflation started inching upward last year and reached 8 percent in December 2015, above the 7.5 percent limit preferred by the Central Bank of Kenya (CBK). The bulk of this inflation has been import inflation associated with the KES weakening against the USD pushing up import bills. This spillover effect may continue to drive the cost of imports upward fuelling more rises in inflation. Therefore, the CBK should continue to keep an eye on inflation and take action to pull inflation below the 7.5 percent limit when needed.

(source: http://i.telegraph.co.uk/multimedia/archive/01811/inflation_1811026b.jpg)

Interest Rates

Part of the conversation that dominated conversation about the economy at the end of last year was rising interest rates. A combination of factors such as rate hikes to control KES depreciation, aggressive borrowing from government in domestic markets and high T-bill rates contributed to some banks signaling intent to raise rates. Sadly the news does not get better this year; as mentioned, inflation is at 8 percent and as this is above the preferred CBK limit, it is possible that the CBK will raise interest rates to try and manage upward pressure on inflation. Further, as the US economy continues to recover, it may lead to a further strengthening of the dollar against the KES. Thus again, as we saw last year, CBK may raise interest rates to manage KES depreciation against the dollar. In terms of any foreign borrowing in which government would want to engage this year, IMF’s Lagarde makes the point that the increase of interest rates in the USA has already contributed to higher financing costs for some borrowers, including those in emerging and developing markets. Therefore, government should be ready to borrow on more expensive terms in international markets this year. Also bear in mind that government’s management of the Eurobond has negatively impacted investor confidence in government fiscal management; this is likely to translate into more expensive borrowing terms as well.

Intensification of Political Activity

It is almost certain that electioneering will start this year with politicians beginning to build momentum for elections next year. Sadly in Kenya, intensification of political activity tends to be correlated with lower growth. Luckily this is a threat that can be managed if politicians on all sides of the political divide are responsible in comments made and avoid negative political sensationlisation of issues in their bid to garner votes.

Infrastructure

The good news for the economy is that key infrastructure projects are progressing well. In terms of transport infrastructure, the construction of the standard gauge railway in Kenya is ahead of schedule. Further there are updates and expansions in the country’s airports and ports and the tarmacking 10,000 kilometres of new road is ongoing. Secondly, important strides are being made in energy infrastructure; solar power projects will add 1 gigawatt of power to the grid, there is a 310-megawatt wind farm in Lake Turkana as well as the drilling of 20 new geothermal wells. The implications of how such investment, some of which complete this year, could fuel economic growth is apparent.

(source: https://d3n8a8pro7vhmx.cloudfront.net/windustry/pages/433/attachments/original/1437488150/ph2009112004317.jpg?1437488150)

Ease of doing business

Kenya climbed up 21 places on the World Bank’s Ease of Doing Business Index to stand at 108 in 2016. This is a positive sign to investors both local and abroad in terms of Kenya’s attractiveness as a business and investment destination. It is important that stakeholders keep the positive momentum going in order to bolster Kenya being perceived as san attractive country in which to invest.

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

My Panel Feature on Citizen TV Business Segment on Kenya’s Economy in 2016

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I was a co-panelist with Dr James Mwangi CEO of Equity Bank Group, Dr Laila Macharia Vice Chair of the Kenya Private Sector Alliance and Joshua Oigara CEO of the Kenya Commercial Bank Group in a discussion on the expectations around the performance of the Kenyan Economy in 2016.

Interest rates present a tricky challenge for the CBK

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This article first appeared in my weekly column with the Business Daily on October 25, 2015


After the government announced that it had acquired a two-year, Sh77.43 billion ($750 million) syndicated loan, some banks raised their interest rates. This raised questions about what happened to the billions raised via the Eurobond and the implications of rate hikes on the economy. However, the truth of the matter is that there are several compounding variables with which CBK has to contend; variables that put pressure to keep rates high as well as pressure to lower rates.

In terms of the pressure to keep rates high one need only remember that the CBK raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent and then raised it again to 11.5 percent in July 2015. These hikes were done in an attempt to stem the depreciation of the shilling and control upward inflationary pressure. This act was arguably warranted given that Kenya is an import economy and has to service foreign denominated debt which currently stands at about 50% of total debt. Therefore, if the KES depreciation is not managed, import bills will become more costly and foreign denominated more expensive to service. These are real short to medium term pressures that the government has to manage.

(source: http://i.telegraph.co.uk/multimedia/archive/01811/inflation_1811026c.jpg)

Of course the problem with raising interest rates is that it often has a dampening effect on economic growth due to reduced investments and consumption. Therefore in keeping rates high further strain will be put on economic production and GDP growth. This will happen in the context of economic performance that has been so anemic that both the World Bank and the government revised GDP growth figures downwards. High interest rates will likely exacerbate the subpar performance of the economy and government will fail to generate the revenue required to pay import bills and service debt. Therefore in this scenario, CBK has to tussle with keeping rates high to stem KES depreciation and control inflation while contending with the negative consequences of doing so.

At the same time, there is pressure to lower rates. As mentioned, high interest rates tend to dampen economic growth and Kenya cannot afford this. So there is good reason for rates to be lowered, clearly the economy needs it. Lower rates will enable economic productivity, support economic growth and allow government to generate much needed revenue. However, if interest rates are lowered it risks prompting the devaluation of the shilling and enabling upward inflationary pressure. A weak shilling will mean import bills are more expensive and may make servicing foreign debt unaffordable. High inflation will raise the cost of living which will mean that basic goods such as food become more expensive for Kenyans. This is when the politics of economics comes in; no government wants to be in power when basic goods become unaffordable as social unrest usually ensues. Therefore, although there is pressure to lower interest rates, the potential negative consequences of doing so are not phenomena with which any government would want to contend.

(source: http://blog.amnestyusa.org/wp-content/uploads/2013/03/163414855.jpg)

In short, there are dangers in keeping rates high and dangers in lowering rates; so what should the CBK do? In my view, given the fact that there is extra incentive to raise rates due to heavy domestic borrowing by government, the CBK should lower rates. This is because government borrowing has prompted rate hikes beyond what CBK had orchestrated. Therefore, a lowering of the CBR will buffer the economy and Kenyans from the recent hike in rates.

However, the situation the economy is in right now has made one thing clear; Kenya’s economy cannot continue to be structured as it is. There must be concerted and deliberate action by government to plan a fundamental reorientation of the economy in which more forex is earned. This can be done through increasing exports and diversifying our export profile, as well as supporting forex earners such as tourism.

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

How rampant graft increases inflation rate

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This article first appeared in my column with the Business Daily on May 11, 2015

There appears to be an on-going assumption in the country that once oil prices drop, inflation drops as well. However, despite lower oil prices, inflation hit an eight-month high in April.

Data from the Kenya National Bureau of Statistics shows that inflation rose to 7.08 per cent from 6.31 per cent in March, pushing close to the upper limit of the 2.5 to 7.5 per cent preferred inflation bracket. In fact, despite low oil prices, the cost of living measure increased for three months in a row since February.

Clearly, other factors apart from oil prices inform inflation rates. However, there is one pervasive factor rampant in the country that informs inflation that often is not associated with it: corruption. Corruption here refers to the misuse of public power for private gain where individuals engage in a non-transparent and illegal activity; in short, the institutionalised personal abuse of public resources.

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Several studies have shown a significant positive relationship between corruption and inflation particularly in countries with higher graft levels such as Kenya. One study reveals that corruption pushes up inflation. How? Well, if corruption persists it tends to increase government spending. This encourages more rent-seeking, which can trigger a budget deficit and an increase in money supply — and thus push up inflation.

Increasing government spending is one of the direct effects of corruption on inflation rate. So it is important to consider that, as analysts point out, an increase in spending and budget deficit causes money supply to increase and probably hyperinflation. Kenya qualifies both in terms of ballooning government spending and budget deficits — both of which increase through corruption and cause an oversupply of money leading to inflation.

To make matters worse, some studies indicate that inflation can encourage further corruption. The surveys have found that rises in prices increase corruption as the applicable purchase price in public procurement becomes ambiguous. The reasons why are not clear although one can postulate that inflation lowers currency value and thus more corruption is required to accrue the equivalent value of money for the participants. Further, inflation makes it easier for corruption to occur because public officials can invoice more than normal.

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The reason why inflation is so important in developing countries such as Kenya is rooted in the reality that high inflation is akin to a tax on the poor. Indeed the World Bank makes the point that when low-income households are exposed to high inflation, they often have no choice but to cut down on food or other expenses, many of which are vital, such as school fees or health care.

Given the relationship between corruption and inflation, it is a travesty that factors that are within the control of humans — namely, the choice to shun corruption — continue to push up inflation to the detriment of Kenyans, particularly those in the low income band. It is unjust that the poor shoulder the burden of the personal greed of public officials.

In short, it is pretty obvious that there is strong evidence that elucidates the harmful effects of corruption on the economy. The relationship between corruption and inflation adds yet another compelling reason to rein in this monster for the benefit of all Kenyans.

Ms Were is a development economist. anzetsew@gmail.com, twitter: @anzetse