revenue

Manage Risks Raised by Oil Exports

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

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

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

Image result for oil africa

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

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

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

Tullow Crude Oil

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

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

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

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

 

 

 

 

How Kenya can restructure fiscal policy in the next 5 years

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This article first appeared in my weekly column with the Business Daily on August 27, 2017

Fiscal policy in Kenya over the past 5 years has been characterised by several features the first of which is aggressive growth in expenditure. Cytonn Investment makes the point that over the past 6 years, total expenditure in annual budgets have grown at an average of 14.7 percent yet revenue growth has only increased by 12.7 percent. This has led to more borrowing and expanding fiscal deficits with an increase in debt levels from 40.7 percent debt to GDP in 2011 to the current 54.4 percent. While some argue that Kenya’s debt is not at distress levels, if current patterns of spending continue the distress point will be quickly reached. Thus, it is important to ask how policy should be structured over the next 5 years to put the country on a more sustainable fiscal path.

At national level, fiscal focus should target cutting non-essential expenditure; government needs to be very firm on this and make the hard decisions required to prevent profligate spending, particularly in recurrent expenditure. Cytonn makes the point that recurrent expenditure accounts for 58.8 percent of the 2017/2018 budget. One way to address this issue is through robust support to the Salaries and Remuneration Commission (SRC) to cut salaries and better align compensation packages to reflect the economic reality of a developing African economy. The current association between public office and wealth accrual needs to be severed and stern fiscal policy backed by political commitment can make this happen. Further, a keener eye should be cast over the efficiency of government spending; procurement at national and county must focus on value generated for funds spent. Without doing so, Kenya will find itself on a path where careless and inefficient spending leads to debt accretion that doesn’t stimulate the economic growth required to meet debt obligations.

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(source: http://www.itworks-inc.com/wp-content/uploads/2015/11/delegating-expenditure-approvals.jpg)

Secondly, revenue generation needs to be ramped up; expenditure is growing at 14.7 percent and revenue collection by only 12.7 percent.  Revenue collection has to grow faster than expenditure if the country is to have greater funds available for public investment. One way to do this is by better supporting the KRA to prevent illicit financial flows from the country; a serious problem for African countries. The United Nations Economic Commission for Africa estimates that Africa loses more than USD 50 billion through illicit financial outflows per year. Devex points out that companies evade and avoid tax by shifting profits to low tax locations, claiming large allowable deductions, carrying losses forward indefinitely, and using transfer pricing. Government ought to undertake an audit of tax policy, restructure outdated tax laws and correct faulty tax arrangements with multinational companies; KRA needs to be supported to improve enforcement of these laws.

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(source: i.ndtvimg.com/i/2016-03/income-tax_625x300_51457071220.jpg)

At county level, fiscal policy needs to be characterised by, again, cutting down on unnecessary spending. County governments have to take the initiative on this and so far there have been encouraging signs of newly elected governors choosing to fully or partially redirect massive inauguration budgets to more productive areas; this should be encouraged. Further, county government budget processes ought to be more transparent; at the moment there are significant gaps in understanding how county budgets are formulated and implemented. More counties should follow in the footsteps of Elgeyo Marakwet county and develop a transparent, formula-based budget development process that prevents elite capture in budget formulation and deployment.

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

Kenya’s Fiscal policy: Challenges and Recommendations

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This article first appeared in my weekly column with the Business Daily on November 8, 2015


Over the past few weeks Kenya’s fiscal management has been under domestic and international scrutiny particularly with regards to the Eurobond. However, what has been lacking in the conversation is a look at Kenya’s overall fiscal policy and how it has informed the articulation of the economy. There are three core anchors that can be useful when analyzing Kenyan fiscal policy: planned expenditure, fiscal deficits and revenue generation. These will allow an elucidation of the prudence of Kenyan fiscal strategy.

In terms of planned expenditure, annual fiscal budgets have been consistently increasing year on year. In 2012/13 the budget stood at KES 1,459.9 billion, in 2013/14 it was KES 1,640.9 billion, 2014/15 the budget presented was KES 1,773.3 trillion and for 2015/16 it was a massive KES 2.2 trillion. Noting these consistent increases in annual budgets are important as it puts pressure on government to increase revenue generation.

(source: https://www2.illinoisworknet.com/SYEP2014/PublishingImages/reports_color.png)

Secondly, yearly increases in planned spending have been correlated by growing fiscal deficits: 6.5 percent in 2012/13, 7.9 percent in 2013/14, 7.4 percent in 2014/15 and 8.7 percent in 2015/16. The first point to note is that Treasury has been consistently flouting its 5 percent fiscal deficit target. Secondly, as of October 2015 according to Standard and Poor’s the fiscal deficit has already exceeded what government intended and stands at a much higher estimate of 9.4 percent. Finally, these hikes in fiscal deficits are occurring in a context of decelerating GDP growth: 2012 GDP growth was 6.9 percent, 5.7 percent in 2013, 5.3 percent in 2014 and this year we’re hoping to hit 5.4 percent. This anaemic performance fuels anxiety around growing fiscal deficits. Increases in fiscal deficits buttressing increased expenditure in the context of decelerating growth puts pronounced pressure on government to ensure sufficient revenue is generated to meet these costs. How will government sustainably finance growing fiscal deficits in the context of a slowing economy?

Further, this year Treasury aimed to finance the deficit through external financing worth KES 340.5 billion and domestic financing worth KES 229.7 billion (~ 60/40 divide). Though understandable, debt heavily weighted towards foreign currency is bound to be strenuous to service because as an import economy a scarcity of FX preponderates in Kenya. However, although government stated most funds would be sourced externally, government has since signalled it will borrow heavily in domestic markets as well, partly to service the fiscal deficit one presumes. Therefore, not only are Kenyans being pushed out of domestic borrowing markets by government, there is added pressure to raise foreign currency to service the fiscal deficit portion sourced externally. Thus, the Kenyan economy will be hit both by hikes in interest rate due to aggressive domestic borrowing by government, as well as experiencing pressure in servicing foreign debt in the context of poor FX earnings (especially tourism) and a depreciating shilling.

(source: http://www.forextradeoracle.com/images/ForexTradeOracle.jpg)

Finally, although government budgets have been increasing each year revenue generation has not been growing at par. In 2012/13 KRA collected KES 800 billion, in 2013/14 KES 963.7 billion, in 2014/15 KRA collected 1.001 trillion. This year the KRA target stands at KES 1,358.0 billion, juxtapose that with the 2015/16 budget of KES 2.2 trillion. Already there are signs this year’s targets will not be met; it emerged that the Kenya Revenue Authority missed its revenue target by KES 10 billion shillings for the first quarter ending September. Ergo it can be surmised that government may experience difficulty in not only financing future ballooning budgets, but meeting the debt service obligations of both domestic and foreign denominated debt including that linked to the fiscal deficit.

In short, there is an extent to which current fiscal strategy has informed the squeeze the economy is facing currently. There is clear room for improvement and this can be done by lowering planned expenditure and controlling spending, lowering fiscal deficits and ensuring that revenue generation is more at par with (lower) planned expenditure.

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