Kenya

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

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The Way Forward on the Eurobond

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This article first appeared in my weekly column with the Business Daily on December 21, 2015.

Since about October this year the country has been gripped by allegations that the proceeds for the Eurobond have been mismanaged. Opposition alleges that there is still KES 140 billion that has not been accounted for despite government having released a press statement detailing what they consider to be the hard facts of how the full amount of Eurobond was used. However, opposition insists that there is still something awry with this whole Eurobond issue. As I have stated in my previous column, it was absolutely essential that government ensured that Kenyans and global financial markets scrutinizing Kenya, viewed them as having handled the Eurobond proceeds with meticulous care and transparency. However, as is clear, government bungled and although serious allegations were presented in October, it is not until December that Treasury put together a coherent statement addressing the core concerns.

(source: http://apolloassetmanagement.co.ke/wp-content/uploads/2014/07/euro-bonds.jpg)

Whether one believes the proceeds of the Bond have been misused or not, the lax communication response from government means that the suspicions and allegations were allowed to gain momentum and tarnish the image of Kenyan fiscal management globally. Indeed, it can be certain that should government try to issue any more international bonds, they will be priced much higher as has been already seen in the recent CBK issue of a USD 300 million bond that was set at 11 percent; almost double what government got for the Eurobond in 2014. This issue here is that there still is not a general consensus that the Eurobond question has been answered, so beyond being treated to allegations and denials, what is the concrete way forward on this issue?

Firstly, in the press release by Treasury, government presented a list of Ministries, State Departments and other government offices to which they assert funds have been released. Clearly the most obvious action to take is to query whether indeed all government entities tabled as having received Eurobond funds did indeed receive them. If they did not receive the full funds as indicated on the Treasury statement then blame lies with the Treasury and hard questions must continue to be asked. However, if indeed proceeds have been transferred to these entities, then scrutiny should now shift from Treasury to the relevant state offices.

 

(source: http://www.businessdailyafrica.com/image/view/-/2352280/medRes/767328/-/maxw/600/-/wqpelcz/-/treasury.jpg)

Secondly, the Eurobond has to be used for development expenditure and not a cent ought to be directed to recurrent expenditure. I have already noted in past columns the propensity government has for using national budgets for recurrent expenditure; this can be a difficult habit to break. It is therefore crucial that independent parties track the use of the Eurobond and ensure that all of it is used for development.

Finally, opposition is adamant that not all of the Eurobond has been accounted for and that there is a hole of about KES 140 billion. It now time for opposition to stop making general allegations but instead present a clear and detailed statement on what they view to be the  key gaps in the government response, present evidence on any allegations of the misuse of funds, and table the key questions government has not addressed and ought to answer. This document should then be published for all Kenyans and international parties to view and of course opposition should present this statement to government. Doing so will allow all parties interested in this matter to more fully understand what outstanding concerns exist. From there any unanswered queries ought to be addressed by government a failure of which then warrants the needs for continued pressure be placed on government to explain what transpired.

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

Interview with CNBC Africa on the sustainability of Kenya’s debt: Sept 11, 2015

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The proportion of external debt has become a major talking point in Kenya, especially after it crossed the psychological KSh1 trillion mark a few months ago. It has since risen to about Sh1.3 trillion. Last year, the Treasury raised the external debt ceiling to Sh2.5 trillion. Is there a cause of concern over the debt level? I join CNBC Africa for more.

http://www.cnbcafrica.com/video/?bctid=4478058633001

 

What Africa should be pushing for in the WTO talks

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This article first appeared in my weekly column with the Business Daily on December 13, 2015.

The World Trade Organisation (WTO) Ministerial Summit due to be held in Nairobi this week is important to Kenya for two reasons. Firstly, it’s the first WTO Summit to be held in Africa and secondly, it’s the first time the Summit is happened after what is largely considered to the failure that was the Doha round back in 2008. So what should Kenya, and indeed Africa, be pushing for during this round?

Africa should firstly, use this round to push for the reclassification of countries such as India, China and Brazil that still fall under the docket of ‘developing’ countries. Currently, such countries essentially are lumped together with Africa in negotiations despite the fact that over the past seven years these countries have significantly ramped up their presence and role in global trade. China’s share of global trade stands at about 12 percent, India stands at 2 percent and Brazil stands at 1.2 percent. Although Africa’s share of global trade is 3.5 percent that is a share at continental level; Kenya’s share of global trade is 0.03 percent. Therefore, Africa as a bloc should use this Summit as an opportunity to push for a more sophisticated classification of countries where the percentage of contribution to world trade preponderates rather that GDP per capita.

(source:http://thumbnails.visually.netdna-cdn.com/world-commodities-map-africa_536becb7083f7_w670.png)

Secondly, Africa should continue to build pressure with regards to agricultural concerns. The main issue of contention African countries, Kenya included, have with current trade realities is that governments of developed economies still grant substantial subsidies to their farmers creating trade barriers to agricultural products from Kenya and other African countries. It is important that Africa continue to push for the removal of tariff and non-tariff barriers for agricultural commodities as these are a significant forex source for many African countries. But it should be noted that while African countries are likely to push on the agricultural subsidies issue, developed economies are unlikely to agree and there will be another impasse. This is clearly because if Africa’s request is to be honoured, the governments of developed economies will essentially be telling an important portion of their electorate, namely farmers, that the demands of African governments are more important than the welfare of their electorate; this is unlikely to happen.

Another issue pertinent to Africa is the issue of bolstering returns from natural resources in relevant exporting countries. Bear in mind that according to WTO the merchandise trade values in 2014 revealed a paucity of trade flows in natural resource commodities (such as fuels and metals) from exporting regions such as Africa. In fact the continent experienced a 7.6% decline in natural resource exports as lower commodity prices cut into export revenues. Thus again here the story is an old one; Africa has to push for a greater role in producing finished goods from raw materials as finished goods are not as susceptible to commodity price fluctuations.

The final point really has more to do with the work that Kenya and East Africa in general should implement if the region’s economy is to have a larger share of global trade. Firstly, the region should, together, devise a strategy through which they can bolster their share of exports globally. Secondly, although East Africa is one of the fastest growing regions in the world, tariff and non- tariff barriers such as over-stretched ports and time consuming customs and border operations hamper the ability of the region to play a strong role in global exports. Finally, there is a need for the region to hone into compliance to global technical standards as doing so will ease the region’s access to global markets.

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

Is Kenya’s tax policy optimal?

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This article first appeared in my weekly column with the Business Daily on December 6, 2015.

Last week a slate of new taxes were effected increasing the prices of goods such as bottled water, cars, beers and cigarettes. Although these items can be viewed as luxury items rather than essential commodities, the tax hike calls Kenya’s tax policy into question. The government has made it clear that it seeks to expand its tax base and rope in more individuals and businesses into the tax net as well as introduce new taxes to strengthen revenue generation. However, does the current tax policy contribute to or detract from revenue generation as well as economic growth?

(source: http://greenhassonjanks.com/mediaclips/wp-content/uploads/2015/04/138-day-Tax-rule.jpg)

On one hand are those of the view that current tax policies are subpar for several reasons. Firstly, some analysts argue that of the 2.4 million people who are formally employed, only 1.4 million (including corporations) are taxed. This is important because, according to the Institute of Economic Affairs (IEA), of the total tax revenue collected by the government over the last decade, the largest contributors are income tax, about 40% followed by VAT at 28%. Secondly, even of those taxed, the limited reach of the taxman, and laxity and corruption therein, facilitate tax evasion. For example, many businesses especially in the informal sector are not taxed; this should be rectified. Thus those in this camp are of the view that KRA can do more to expand the tax base, curtail tax evasion and collect more revenue.

On the other side of the equation are those of the view that Kenyans are over-taxed. In a country where 45% of the population lives at or below the poverty line, how much money can be extracted from such a population in the form of tax? Further there are tax equity questions; IEA makes the point that of the total labour force (15-64 years) of slightly over 10 million, less than 20% bear the burden of paying PAYE tax. Therefore the idea here is that government focus should not be on introducing new taxes or increasing taxes, effort should be placed on increasing levels of employment so that a larger portion of the labour force is formally employed and therefore can be taxed. This could eventually create scenario where higher overall employment widens the base of those taxable such that individual tax burdens can be reduced.

(source: http://www.standardmedia.co.ke/article/2000092721/kenya-poverty-levels-to-rise-over-next-two-years-says-report)

Another issue that ought to be considered in tax policy is the Laffer curve. The curve suggests that as taxes increase from low levels to higher levels, tax revenue collected by the government also increases. However, if tax rates increase after a certain point this reduces incentive to work hard or work at all, thereby reducing tax revenue. Where does Kenya’s tax policy sit on the Laffer curve? Such research ought to be done to determine if the current tax policy is optimal or not.

Finally, and perhaps this is the most compelling point: if Kenyans are of the view that their taxes are being misused and misappropriated in the form of corruption by public officials, there will be limited incentive to be tax compliant. Kenyans have the right to expect the provision of services from government in return for paying taxes. At the moment, there are far too many corruption cases pointing to the blatant misuse of public funds as a result, there is little reason for the average Kenyan to feel compelled to pay taxes. Therefore, the onus falls on government to demonstrate that taxes are being used appropriately and efficiently. Perhaps then incentive will be created in every individual and business in Kenya to be tax compliant.

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

The expense of the SGR and related implications

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This article first appeared in my weekly column with the Business Daily on November 29, 2015.

It is now well known that the Standard Gauge Railway (SGR) is being developed under the leadership of the Kenyan government and will connect Mombasa to Malaba (with a branch line to Kisumu) onward to Kampala, Kigali (with a branch line to Kasese) and Juba (with a branch line to Pakwach). What is also well known is that Ethiopia is developing Ethiopia Rail (ER) which will link Addis Ababa to Djibouti. The importance of the SGR to Kenya is, yes, the potential dividend that will arise from bolstering infrastructure in the country; indeed the government expects the project to reduce freight costs from $0.20 per tn/km to $0.08 per tn/km. But importance also lies in the fact that the SGR is expensive. Indeed, last week Treasury made the point that the SGR has caused an upwards revision of the fiscal deficit from the initial 7.4% of GDP to 12.2%.

(source: http://i2.wp.com/nairobiwire.com/wp-content/uploads/2015/05/sgr2.jpg?resize=1121%2C682)

So is the approach towards the construction of the SGR the most cost effective possible? A comparison with the ER would be useful. As early as 2013, experts raised questions about the costing of Kenya’s SGR; Kenya is being charged $6.6 million per kilometer compared to $4.9 million per kilometre for Ethiopia’s ER. This is particularly a concern because, as experts have pointed out, there are no major rivers or lakes or big hills to justify the high cost of the SGR. In addition, parts of the ER will be a double track, not a single track as the SGR will be in its entirety. The SGR freight will have an average speed of 80KPH while the ER will go up to 120KPH; experts state that it is doubtful those speeds will be reached by the SGR because it is a single track and stoppages will be needed to allow other trains to pass. The SGR passenger train will have an average speed of 120 KPH while the ER will have an average speed of 160 KPH with future provision for 225KPH. Questions also arise because Kenya is spending more to buy its trains and rolling stock than Ethiopia. Why?

Ethiopia has also been smarter with regards to reaping human development dividends from rail construction, specifically the Light Rail Transit System (LRT). Ethiopia has been using the development of the LRT to build domestic technical capacity. Reports indicate that foreign contractors conduct training for local staff at the Institute of Technology in Addis Ababa University. Further, the Ethiopian government is sending promising undergraduates to Russia, India and China to continue their education. Indeed, the Ethiopian government is doing all it can to ensure that the all other rail network projects including ER will be carried out by Ethiopian enterprises. Are there such plans and activities going on with regards to Kenya’s SGR?

(source: http://www.hgomezgroup.com/wp-content/uploads/2015/02/techtransfer_620.jpg)

The basic sense one gets when comparing Kenya and Ethiopia is that the latter has been able to get a better deal overall and is leveraging all experience to build domestic capacity and reduce future dependence on external contractors for rail construction. Kenya on the other hand has agreed to a plan that appears to not be the most cost effective and there have been no plans announced indicating intentions by the Kenyan government to use SGR construction to build domestic capacity. I have long argued that if Kenya does not leverage all infrastructure development projects to build domestic technical capacity, Kenya will be relegated to eternal dependence on others to do the basics of building infrastructure of the country. The prudence of such a strategy is questionable. Kenya is in a position to learn from Ethiopia; pressure ought to be applied to ensure such learning happens.

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

India: A growing footprint in Africa

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This article first appeared in my weekly column with the Business Daily on November 22, 2015

It is widely known that China has been making significant inroads into Africa over the past two decades and a great deal of energy has gone into analyzing Sino-African economic interaction. However, another country has been making big moves yet barely any attention has gone into analyzing India’s growing footprint on the continent. Last month the Third India Africa Summit took place in New Delhi, clearly signaling India’s interest in the region.

(source: http://mahersamajworldwide.com/wp-content/uploads/2015/11/India-Africa.jpg)

Carlo Lopes of the UNECA makes an important point when he recently stated that Chinese foreign direct investment (FDI) stock is less than 1% of the country’s total global investment yet India invested as much as 16% of its outward FDI, valued at $70 billion, in Africa in 2013. Further, Africa is responsible for 26% of India’s total inward FDI stocks at $65 billion, more than Brazil, China, the Russian Federation and the USA. Analysts make the point that Indian FDI to Africa is concentrated in oil, gas and mining, and investment in the manufacturing sector is focussed on automobile and pharmaceutical firms. Most of the Indian FDI in African countries is through Greenfield investments and joint ventures. India’s growing investment in the region is seen to be motivated by a blend of factors such as socio-cultural ties particularly due to a healthy Indian Diaspora on the continent estimated at over 2 million, host country policies, regional integration agreements, bilateral investment treaties as well as GDP growth in Africa. An interesting point to note however is that India’s FDI into the continent is focused on a limited number of countries; in 2012 95 percent of India’s total FDI stock went to Mauritius alone partly due to its favourable tax treaty with India.

In terms of trade, the IMF estimates that the value of India’s exports to Africa have increased by over 100 percent from 2008 to 2013, and the value of India’s imports from Africa also grew dramatically from 2008-2013 by over 80 percent. This year Indo-African trade it is expected to be about USD 70 billion. African exports to India have been growing annually at 32.2% while Indian exports to Africa grew annually at 23.6%. Sadly in terms of trade composition, a vast majority of exports from Africa to India are raw materials such as crude oil, gold, raw cotton, and precious stones. Indeed, while India’s merchandise imports from Africa totalled $447.5 billion in 2015, oil imports accounted for $116.4 billion and gold was $34.4 billion Exports from India to Africa mainly consist of high-end consumer goods such as automobiles, pharmaceuticals, and telecom equipment. Trade between Kenya and India stood at USD 4.23 bn in 2014 and the country has been jostling with China as Kenya’s top trade partner.

(source: http://financialtribune.com/sites/default/files/field/image/06_Pilot%20launch.jpg)

India is also becoming an important lender to the continent, USD 8bn was provided in Lines of Credit (LOCs) to Africa between 2008 and 2011 and Africa constitutes 53 percent of India’s operative LOCs. The LOCs finance a range of sectors ranging from agriculture, food processing, rural electrification, IT and infrastructure.

As the Brookings Institute states, although Indo-African economic relationship is burgeoning, there is clearly much more room for growth if the country wants to be as significant as China and the USA on the continent. Indeed as China reorients itself and undergoes some difficulty, India can become a very important partner for Africa. From an African perspective, African countries should focus on diversifying their exports to India, tapping into the technological expertise in India and leveraging that for African development and being more proactive in attracting FDI from India.

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