Friday, 17 February 2017

Candid Conversations on the Kenyan Polity

Parliament buildings in Nairobi.
Image: Courtesy
Progress? Stagnation? Or a combination of both? Just what description suits the state of affairs of the Kenyan Republic 53 years after independence? I am not in the business of being the jury and the judge at the same time but I endeavor to present an analysis on the insincerity, machinations, dogmatism, disillusionment, disparity, unfairness and hopefully the positives that outrightly define and deeply describe the Kenyan polity.

There is a common narrative in the public domain and more specifically in the developmental circles regarding the similar state of socio-economic affairs between Kenya, the Asian Tigers and the Tiger Cub economies in the 1960s, 70s and a better part of the 1980s. Available information indicates that these economies’ challenges were similar to Kenya’s in terms of the level of infrastructural development, absolute and relative poverty rates among other socio-economic indicators. No doubt that these Asian economies took-off while Kenya, a peer country at that point in time, is still trying to find a balance on the developmental  scale.

In cognisant of the developmental differentials between Kenya and these Asian countries in terms of the socio-economic complexities and dynamism, it is still relevant and fundamentally important to thoroughly interrogate and investigate where the rain began beating us. In any case, some degree of harshness is required when evaluating a country which at one time was classified as a peer economy to the Asian economies. Is it that Kenya’s progress, as envisaged at the turn of the independence period, been hampered by certain intrinsic factors, internally and externally?

The Wabenzi Culture
Members of the civil society protesting against corrupt leaders.
Photo: Courtesy
The big man’s syndrome, the so-called wabenzi, augmented with the get-rich-quick schemes since 1963 have often dragged Kenya’s potential to be an economic powerhouse in Africa. The various administrations and/or regimes that Kenya has had since attaining her independence have one common denominator; corruption/embezzlement of public financial resources.

The administrations of Jomo Kenyatta and Daniel Moi are a summation of 39 years of cronyism. I strongly hold the view that Kenya would be a different country, in positive terms, were it not for the malfeasance exercised during Jomo’s and Moi’s regimes as the presidents of our Republic.

One of the notable ideals that underpinned the struggle for Kenya’s clamour for independence was indeed the maxim of economic independence in which all the Kenyans irrespective of their ethnic, racial, gender or ideological orientations were to be guaranteed equal economic rights. The Jomo Kenyatta administration had the mandate of institutionalizing the independence manifesto in which economic rights were to be keenly observed.

The treachery that was employed by the Republic’s first administration under the leadership of Jomo Kenyatta engendered a wicked culture in the country’s public administration system. It was then that personal interest was placed above public interest/service hence the entrenchment of the culture of amassing wealth without any metric of accountability being taken into account.

There is no doubt that Jomo Kenyatta and his cronies furthered the challenges of the land question in Kenya which had initially been perpetuated by the colonialists. The land question remains unresolved in this country since then as the Republic has lacked a bold political leadership to right the wrongs committed over 50 years ago.

These economic crimes, of the illegal accumulation of wealth, were engineered by honchos in the Kenyatta administration who were either politicians or individuals who had strong political connections with the highest office in the land.  This is the point in time in which Kenya’s politics was poisoned whereby it became the absolute pathway to richness. Moi’s administration exacerbated the situation for 24 good years.

The culture is still in place and perhaps the situation has even intensified. Across the country, more than 90% of all the candidates for the various political offices have only one main agenda; to utilize the opportunity of occupying a political office to accumulate wealth.

Selective Application of Justice
Kenya's Judiciary.
Photo: Courtesy
Despite the reformations that have taken place in the country’s justice system, more needs to be done as far as the observation of the doctrine of the rule of law is concerned. The principle of fairness and equality before the law changes tune depending on how deep one’s pockets are or how well he/she is politically connected.

It is evident in this Republic that the economic and political elite are treated differently than other citizens even when some members of the former group are found to have planned and executed criminal offences especially the economic crimes.

The lords of graft who steal millions and billions of shillings are hardly locked up behind bars compared to the high number of petty offenders who continue to fill up the prisons. A good number of the officers within the justice system ranging from judicial officers to law enforcement officers have oftentimes been bribed to delay the administration of justice. These deliberately occasioned delays in prosecution and jailing of the corrupt wealthy and mighty (The big fish) in Kenya has always been an incentive for the increase in the rate of corruption.

The selective application of justice has all along punctured the country’s economy; it is an incentive for the politically connected individuals to steal public resources which would otherwise have been invested in viable infrastructural projects. As a matter of fact, how can serious private investors have confidence in the government if economic crimes aren’t punished heavily? This is a concern for the private investors with regard to property rights.

Haunted by the Ghosts of the 1960s
Pupils in a congested public primary school.
Courtesy: Standard Media
At the turn of independence, the then government was focused on eradicating three notable challenges; poverty, disease and ignorance by institutionalizing viable economic policies, establishing an effective healthcare system, and setting up an efficient education system. As a matter of fact, a national blueprint, African Socialism and its Application to Planning in Kenya, was drafted to fast-track the process of achieving the targets set by the then government.

Unfortunately, the development plan was never fully implemented and the same fate faced the subsequent policy frameworks formulated to improve the living standards of the citizenry as I illustrated in a previous article. Significant strides have been made in the course of the last 50 plus years of independence but there is lot that needs to be done to tackle poverty, improving healthcare and the education standards.

As much as there has been progress in the education sector, the government must be committed in improving the conditions especially in most of the public primary schools. These schools have a poor teacher-pupil ratio, dilapidated facilities and a chronic shortage of learning equipments. I am longing for the day that most members of the political elite, the upper-middle class and the wealthy will take pride in enrolling their children in public primary schools.

The conditions in the public health facilities must be greatly improved for the benefit of all the citizens. The political leadership; the Executive and Parliament, has never been fully committed in establishing a universal healthcare system in the country. The political class doesn’t even have confidence in the public healthcare system because it is ill-equipped. This has contributed to medical tourism where each year there is an increase in the number of patients traveling to countries such as India to seek for medication. The billions of shillings looted in the Ministry of Health in each fiscal year is enough to set up modern health facilities that are fully equipped with modern machinery for treating the non-communicable diseases such as cancer, diabetes, and others which are on the rise.

Tribalism: The Dark Paradise
An IDP camp following the 2007/08 PEV.
Photo: Courtesy
Negative ethnicity is real in Kenya with a good number of socio-economic and political arrangements/deliberations taking shape along the ethnic divisions. Since independence, the successive governments have been characterized with deeply entrenched tribalism as a result of the “we” versus “them” mentality. This has really worked against the realization of Kenya as a one united nation.

Kenya’s politics is largely based on ethnicity. In a nutshell, the doctrine of ethnicization of the political system is pronounced in our Republic. Just as I have noted earlier in this article, most of the challenges experienced in Kenya can be traced to the first post-colonial government and these mistakes haven’t been rectified by the successive governments.

Tribalism isn’t confined to politics but it is alive and kicking in other structures of the Kenyan polity especially regarding employment opportunities, awarding of tenders and contracts or even access to public services which all the citizens are entitled to.

Negative ethnicity has troubled our Republic and this has significantly hindered economic progress. Following the 1992 general elections, there were ethnic clashes that took place and even the 1997 elections had certain parts of the country recording ethnic flare-ups. Despite the fact that the 2002 general elections were peaceful, regions such as Kuresoi in Nakuru County experienced ethnic clashes. The mother of all ethnic explosions rocked the country in 2007 following the disputed results of the presidential elections. The 2007/08 post-election violence (PEV) was much more than the election results; the existing unfair distribution of national resources was the primary factor precipitated by the “we” versus “them” mentality.

Taking into account that the PEV was our Republic’s critical juncture in restructuring the systemic challenge of negative ethnicity, profound measures such as the formation of the Truth Justice and Reconciliation Commission (TJRC) and the enactment of a new Constitution were put in place. To ensure that there is fairness in the distribution and redistribution of national resources, the aspect of devolution was indoctrinated in the Constitution. However, the tragedy has been the failure by the political leadership to implement the recommendations of the TJRC report and this puts the country at risk of another major ethnic outburst.

Various parts of the country continue to witness occasional fighting among some of the communities. These cases are common among the Pokot, Turkana and Marakwet communities; along the border of the Kipsigis-Kisii, Luo-Nandi, Kisii-Maasai, Kipsigis-Maasai, and Orma-Pokomo among others. The fights have disrupted the economic activities in these regions.

The Economy: A Distorted & Non-Inclusive Complexity
Jua kali artisans.
Courtesy: Business Daily
The economy is growing but hardly developing; the rate of structural transformation in Kenya’s economy has been extremely slow. This is why cases of extreme and/or absolute poverty continue to be on the increase. Of course the national government and its honchos will always viciously defend the economy’s progress but their defense is anchored on the estimates of the Gross Domestic Product (GDP) which is a foggy way of analyzing the economic progress of any economy.

Developed and the newly industrializing economies experienced structural transformation due to the fact that their governments were committed in making heavy investments in the manufacturing sector. Kenya’s manufacturing sector currently makes up 11% of the country’s GDP compared to 16% in the 1970s and part of the 80s. This decline is largely due to the lack of bold political leadership to effectively implement the development blueprints/economic policy frameworks and also the Bretton Woods institutions (IMF, World Bank) are partly to be blamed following the fantastic failure of the Structural Adjustment Programmes (SAPs) back in the 1980s.

At the moment our economy is faced with the twin deficit problem; trade deficit and fiscal deficit. The trade deficit has been occasioned by a large volume of imports compared to the relatively lower volume of exports as a result of lacking a vibrant manufacturing sector. The fiscal deficit has increased tremendously under the Jubilee administration presenting a possibility of a debt overhang.

The major reason why Kenya resorts to borrow largely to finance its expenditure is because of the low levels of savings within the economy. Savings play a crucial role in financing investment projects and in due course cushioning the economy against the shocks that may emanate in the case of the externally sourced funds. Currently, the level of savings in Kenya is around 14% which is low for any economy seeking to have a strong economy.

Kenya’s economy is largely reliant on the informal sector and this has significantly contributed to the rising levels of unemployment. More jobs are created in the informal sector compared to those created in the formal sector. Unemployment is a ticking time-bomb and in any case a concern for the country’s political stability. The frustrated, unemployed “army” is a threat to national security. History has shown that economic frustrations are bound to generate political turmoil in a polity.

Food security, as detailed in an article co-authored by my colleague and I, is still a major challenge to the government fifty-plus years down the line. The successive governments have always adopted reactionary measures in approaching the issue of food insecurity and it seems learning from history has been a tall order for the country’s political leadership.

So, where do we stand as a country? Are we on the path to prosperity? Is the political leadership committed to transforming the country’s economic landscape? Find the right the answers.

This article was first published on

Friday, 3 February 2017

Kenya’s Policy Dilemma in Perspective

An artist's impression of Nairobi under Vision 2030
Image: Courtesy
If nearly all the socio-economic policies that have been formulated in Kenya since 1963 were to be fully implemented, there is no doubt that this country’s economy would feature among the newly industrialized economies not just in Africa but in the whole world.

The implementation of these policies would have translated to low levels of poverty in the country, enough food for all Kenyans, a vibrant manufacturing sector, a high number of formal job opportunities, a better healthcare system, a highly developed transport system, proper access to clean water among other positives that are associated with an economy that is undergoing structural transformation.

In evaluating and reviewing a good number of these policies, there is a consistent feature that clearly defines the policy process/cycle in the country; the aspect of policy dilemma. The policy process involves several stages with the most pronounced phases being policy formulation and policy implementation. The formulation of socio-economic and/or public policies involves the input of the various stakeholders and the implementation phase largely depends on the rate of efficiency of the government- ministries, agencies, state departments and institutions.

Policy dilemma, in this case, refers to how magnificent policies are formulated but implemented in a flawed and inconsistent manner. This has led to the recurrence of the socio-economic challenges/problems that bedevil the country creating a developmental scenario of making three steps ahead and five steps backwards. With reference to this, it is not a surprise that some of the challenges that faced the nation in the 70s, 80s and 90s have never been amicably solved.

Take for instance Kenya’s first comprehensive development blueprint, Sessional Paper No.10 of 1965: African Socialism and its Application to Planning in Kenya. This policy document highlighted the course of action that was to be followed to steer the country’s nascent economy with the public sector and the private sector playing an important role in its implementation. Three challenges were to be solved by this policy; poverty, disease and ignorance implying on a large-scale that all Kenyans were to have access to affordable healthcare and education as well as better living standards. Several gains were made but its implementation was thwarted along the way by both internal and external forces.

Women fetching water from a river in Kenya.
Photo: Courtesy
The current water shortage problem experienced in the country would be non-existent if most of the water policies that have been formulated over time were effectively implemented. The most notable policy initiative to solve the problem of access to clean and available water can be traced to 1974. During this year, there was the formulation and subsequent launch of the National Water Master Plan Initiative whose slogan was: Water for All by the Year 2000. The implementation of this policy never came to fruition.

In 1986, another policy paper was drafted; Sessional Paper No.1 of 1986 on Economic Management for Renewed Growth. This policy paper incorporated the Structural Adjustment Programmes (SAPs) and it was formulated following the conditions issued by the Bretton Woods institutions (World Bank & IMF) on the supposed economic restructuring the government was to adopt in return for financial assistance from these institutions.

This policy document addressed the following: market liberalization, reduced role of the state in the economy, deregulation and privatization of some of the state-owned enterprises. Since this policy was recommended by the Bretton Woods institutions, the government implemented nearly every bit of it and the outcomes were not pleasing at all; it did more harm than good. This was because its recommendations were based on the model of the USA economy and not on the local conditions that were prevalent in Kenya’s economy.

A Sessional Paper on the Micro and Small-scale Enterprises (MSEs) was formulated in 1992. The objective of this policy document was to transform the MSEs by institutionalizing a high degree of formality in them as a larger percentage were operating informally in the agricultural sector. The agricultural sector at that time contributed approximately 30% of the country’s Gross Domestic Product (GDP) and most of the Kenyans depended directly and indirectly on the sector for their source of livelihood.

What could be the scenario in case the Sessional Paper on the MSEs was fully implemented? A strong foundation for the manufacturing sector would be created as a result of the establishment of the agro-based industries, food production would have certainly increased hence making the country to be food secure, a high number of formal employment opportunities would have been created among many others.

A policy framework for achieving industrialization by the year 2020 was developed in 1996 specifically known as Sessional Paper No.2 of 1996; Industrial Transformation to the Year 2020. The overarching objective of this policy paper was to develop a vibrant manufacturing sector in the country that would have enabled Kenya to be a newly industrializing economy.

The entrance to Kenya's Export Processing Zone at Athi River.
Photo: Courtesy
The implementation of this policy framework was flawed largely due to the inherent institutional weaknesses and structural inconsistencies which some are in-built in the policy itself and others being explicit to the policy. Its total implementation, with the rectification of its weaknesses, would have steered the economy’s trajectory to be defined in terms of the structural transformation.

With the institutionalization of the NARC administration in 2003, great attention was paid in reviving the country’s economy. To actualize this, a policy paper was formulated; the Economic Recovery Strategy for Wealth and Employment Creation (ERS) for the period 2003 to 2007. This policy document envisaged an economic growth rate of 7% upon the completion of the five year period in which it was to be implemented. In 2007, the country’s economy grew by 7% a clear indication that this policy framework was effectively implemented.

As the period of time for the implementation of the ERS was elapsing, the Sessional Paper No.10 of 2012 on Kenya’s Vision 2030 was designed. The main objective of the Vision 2030 is to transform the country into a middle-income economy by largely investing in the manufacturing sector and key infrastructural projects. The implementation of the Vision 2030 was to occur in phases denoted as the Medium-Term Plans (MTPs). The first MTP covered the period from 2008 to 2012, the second MTP from 2013 to 2017 and so on.

In as much as some significant progress is taking place especially in the construction of infrastructural projects, certain fundamentals have been ignored, for instance, the government hasn’t been largely committed to heavily invest in the manufacturing sector. Achieving the objectives of Vision 2030 remains a mirage considering how its implementation process is being executed.

Inconsistent & Flawed Implementation
Both internal and external forces have contributed to the failure of the holistic implementation of the policy frameworks formulated since independence. The major cause of the failure to fully implement these policy documents is the lack of a committed political leadership. The country’s political leadership has always focused on enriching itself at the expense of steering the country’s economy. Politics plays a crucial role in the implementation of the policy frameworks. All the administrations that have existed in Kenya starting from Jomo Kenyatta’s era have been rocked with massive corruption. However, Kibaki’s administration was more serious when it came to the implementation of national development blueprints compared to the others.

The urge to implement the policy proposals advocated by the World Bank and International Monetary Fund without subjecting them to scrutiny has in one way led to the flawed implementation of such policies. Normally, the policies championed by the Bretton Woods institutions are ignorant of the prevailing circumstances in the developing economies and they are formulated in accordance with the model of the economy of the United States of America. These are two different and primarily distinct economic models. The challenge is the readiness to embrace the policy proposals of the Bretton Woods institutions and disregard the locally formulated ones.

An in-built weakness could also be responsible for the flawed implementation of the policy frameworks. It is highly possible that the formulation phase is executed with so many assumptions and errors. Definitely, the problem of insufficient data comes into play causing the data collection phase to majorly rely on guesswork creating a situation that is different from the reality on the ground. This ultimately leads to a disconnect between the formulation and implementation phases of the policy frameworks.

The implementation phase of the policy process is crucial and the failure to effectively execute it will not create the desired socio-economic transformation. Politics plays a significant role in this phase hence the need to have a visionary political leadership in place. Kenya’s lack of a visionary leadership coupled with the challenges of inadequate data and the pressure from the Bretton Woods institutions have collectively hindered the country from fully implementing the various policy frameworks, some of which I have highlighted in this article. With proper implementation of the policies there is no doubt that most of the recurring problems in the country will be fully solved.

This article was first published on

Friday, 27 January 2017

What is in Store for Kenya’s Economy in 2017?

Kenya's capital Nairobi.
Photo: Courtesy
At the beginning of this year, many analysts and journalists as expected delved into making predictions about the possibilities and eventuality of Kenya’s economy. The overriding theme in the forecasts has oscillated on how the country’s economy will react to the increasing political temperatures in this electioneering period. Historically, Kenya’s economy has always been negatively affected by the exogenous shocks occasioned by political events/activities in the years in which the general elections have been held.

In 2016, Kenya’s economy is believed to have grown by 5.9% as compared to 2015 in which the country’s Gross Domestic Product (GDP) expanded by 5.6%. The 5.9% GDP growth is impressive with respect to the growth rates registered by peer economies, the Sub-Saharan region and the global average. In 2016, Sub-Saharan Africa (SSA) registered a growth rate of 1.4% which is the lowest ever for the region in two decades. This slump in SSA’s growth rate is attributed to the decrease in the global commodity prices such as oil and other minerals which are key export commodities for most of the country’s in this region. Kenya’s economy, being not so dependent on such commodities, was able to register a GDP growth rate of 5.9%.

Earlier projections by The National Treasury and the Word Bank have pointed out that the country’s economy is expected to grow by at least 6% in 2017. A growth rate of 6% for 2017 is pegged on various factors; endogenous and exogenous.

Fast forward, various economic phenomena are expected to shape the country’s economic trajectory in 2017. One of the activities that will definitely alter Kenya’s economic architecture is the Standard Gauge Railway (SGR) whose first phase, linking Mombasa and Nairobi, is expected to commence operations in June 2017. According to the Ministry of Transport and Infrastructure and The National Treasury, the SGR once fully operational will expand the country’s economy by 2.5%.

An image showing a section of the SGR.
Photo: Courtesy
For the SGR to contribute significantly to the country’s economic growth and development then some tough decisions must be made by the government including imposing bans on the transportation of commodities via the road using the trucks. However, the possibility of such an action being taken by the government is low considering that most of the trucks are owned by politicians and individuals who are well connected politically. In any case, the SGR is not only confined for the transportation of cargo but passengers as well. But to generate significant amounts of revenue then the operations of the SGR must be near full capacity and this will have massive implication on the privately-owned long-distance trucks. If at all the government is not going to impose tough restrictions on the long-distance trucks, then the SGR will largely be used to transport passengers and its expected returns on investments may just turn out to be lower.

In June 2017, Kenya is expected to start exporting crude oil against the possibilities that such a move in view of the energy infrastructure that is in place may totally fail to generate significant revenue, create meaningful jobs and create viable linkages with the other sectors of the economy. The exploration of oil backed up by sound systems and structures is an economic activity that is bound to spur growth and development unless there are prevailing exogenous shocks such as low crude oil prices around the world.

Ngamia 1 oil well in Turkana County.
Photo: Courtesy
It is expected, for the start, that only 2,000 (318,000 litres) barrels of oil will be drilled daily from the oilfields awaiting transportation to Mombasa. This amount of oil is certainly insignificant as far as the doctrine of economies of scale is concerned. This is the first misstep that the government is making. From the oilfields, the oil will be transported by road to Eldoret from where it will be transported via the railway line to Mombasa.

The 2,000 barrels of oil will have to be transported by at least 20 trucks daily from Turkana to Eldoret which is not economical at all. The trucks and trains that will be used to transport this crude oil need to be fitted with heating systems to maintain the suitable temperature recommended for crude oil and it will take at least more than one day for the crude oil to be hauled on the trains from the trucks. We should also not forget to factor in the risks associated with transporting crude oil on the road.

With reference to the early oil pilot scheme, the crude oil will be transported by train from Eldoret to the Kenya Petroleum Refineries Limited in Changamwe for specialized heating. Experts estimate that it may take not less than two months before the capacity of one shipping tank is attained and this implies further costs. After the capacity for a shipping tank is attained, the crude oil will be transported for a further 13.5km to the Kilindini Harbor for shipment. The early oil pilot scheme is uneconomical and inefficient and patience should have been duly exercised by first waiting for the construction of the proposed 865 km pipeline which has the capacity of transporting 80,000 to 120,000 barrels of oil per day.

This pilot phase is a move meant to benefit the multi-national corporations that are drilling oil in Kenya. Kenya’s economy is not expected to highly benefit from this early oil pilot scheme and the country will lose billions of money and only a handful of employment opportunities will be created.

The performance of the stock exchange market (Share index value) is another economic phenomenon that keen attention must be paid to. From my vantage point of view, the performance of the Nairobi Securities Exchange could be headed to the dogs if its recent performance is anything to go by. In the first 17 days of this year the Kenyan stock exchange market lost Kshs.153.5 billion. This is a clear pointer that Kenya’s economy has relatively large amounts of hot speculative money. There is no doubt that this wave of the hot speculative money leaving the economy has been triggered by the uncertainty surrounding the general election. Unless the situation normalizes, the rushing out of this hot speculative money from the economy may increase and in turn worsen the situation at the bourse as the general election fast approaches.

As for the electoral cycle, 2017 is a critical juncture in which very serious evaluations of the second Medium-Term Plan (MTP) should be done. The MTPs are cyclical phases detailing the structural and systematic implementation of Kenya’s development blueprint, Vision 2030, in accordance with successive governments that are instituted after each general election.

Considering the state of economic affairs in the country with the goals of Vision 2030 and with respect to the second MTP then clearly the economy is off the mark. The challenges which the second MTP was supposed to address include: the low level of domestic savings which is currently 14% of the total national GDP estimates, high dependence of the country on rain-fed agriculture, high levels of unemployment and poverty, the narrow range of exports, socio-economic inequality among others.

Objectively, the government has done little as far as the targets of the second MTP are concerned. The nexus of this is rooted in the flawed implementation of the existing policies. The implementation process of the Vision 2030 (second MTP) and other supporting policies has been overtaken by cases of grand theft (Corruption) and the prioritization of politics over policy implementation.

Perhaps the most anticipated event that will ultimately shape the country’s economic trajectory going forward is the 2017/2018 Budget Policy Statement which is expected to be read in April this year just four months to the general election. The 2017/2018 Budget Policy Statement, which has already been drafted by The National Treasury, amounts to Kshs.2.288 trillion. The fiscal deficit for the 2017/2018 budget is projected at Kshs.582.4 billion (Excluding grants) with the government expected to plug this deficit by netting in Kshs.221.1 billion from external sources and by sourcing for Kshs.320.7 billion domestically.

CS Henry Rotich at a past budget presentation event.
Photo: Courtesy
From the above, it is evident that the public/national debt will continue rising. According to reports by The National Treasury the public debt is approximately Kshs.3.7 trillion and with an impending budgetary deficit the figure is bound to increase to around Kshs.4 trillion by the end of the 2017/2018 financial year. This will dent the state of the economy especially if the general election occasions a slump in the economic growth rate. Borrowing by the government is not bad but the amount borrowed must be seriously invested in viable infrastructural projects and in the manufacturing sector which have a very high potential of sustaining long-term economic growth as well as structural transformation.

2017 will certainly be a defining moment for the banking industry following the capping of the interests rates. The essence of Economics disputes the enactment of the usury laws unless such capping is meant to promote funding for specific sectors/segments of the economy or if it is instituted only for the short-term. A number of banks have been forced to lay off some of their employees following the operationalization of the law. It will be interesting to see the profit margins recorded by the banks as they will be announcing their financial performance in a few weeks time. The reality on the ground is that most of the banks have instituted tighter conditions for advancing loans to prospective customers. A larger proportion of high risk borrowers have been highly affected and banks prefer to lend to the government.

On a general scale, however, the political activities leading to the general election in August this year is the primary factor that will influence negatively or positively the performance of the country’s economy. Major investments in the private sector will be based on speculation and there is no doubt that the country’s economic growth rate may reduce in 2017.

Wednesday, 23 November 2016

The Kenya-Tanzania Relationship in Perspective

Presidents Magufuli and Kenyatta at State House Nairobi during the former's recent visit to Kenya.
Photo: Courtesy

The visit by Tanzanian President Dr. Pombe Magufuli in Kenya three weeks ago has been interpreted as the initial step in restoring “good” relations between Nairobi and Dodoma.  In recent times, the relations between the two states have been frosty majorly due to ideological differences and lately due to economic differences.

Historically, the divide that separates Kenya and Tanzania is one of ideological fundamentalism. A few years after gaining their independence, the two states identified themselves with two distinct politico-economic and social philosophies; Kenya pursued capitalism while Tanzania religiously adopted socialism (Ujamaa).

Collectivization which characterized the Tanzanian economy had two salient features; state ownership of the basic industries/enterprises and the indifference to competition (Protectionism). The Ujamaa policy that was implemented in Tanzania by Mwalimu Julius Nyerere was a sure road to serfdom of the largest East African state. Another path that led Tanzania to the economic doldrums was the policy championed by Mwalimu Nyerere to finance the liberation struggles in Africa.

Adoption of the Ujamaa policy implied that the country would have a closed economy due to the simplistic notion of protecting the infant industries from external competition. To a larger extent, the state was seen to be fashioning the agenda of isolationism. Recall that one of the ideals of socialism is to strongly advocate for nationalism.

After the collapse of the EAC in 1977, Tanzania closed her border with Kenya for seven years until 1984 out of the fear that Kenya could economically emasculate her.

During the final days of President Jakaya Kikwete’s term, Tanzania was seen to be dragging her feet and in due course delaying to ratify some of the policy and legal frameworks that would lead to a fully fledged Customs Union within the EAC. This lukewarm approach adopted by Tanzania led to the emergence of the “coalition of the willing” which comprised of Kenya, Rwanda, Uganda and Burundi.

The “coalition of the willing” states signed several deals that would see the development of major infrastructural projects in the East African region without Tanzania’s input. The projects would involve the construction of the standard gauge railway (SGR) line linking Kenya with Uganda, Rwanda and Burundi; construction of a pipeline from Lamu in Kenya to the oilfields in Uganda.

Magufuli’s Entrance
Magufuli’s administration has had its own fair share of isolationist and nationalistic policies that are touted to cushion the Tanzanian economy from external competition. There have been cases whereby the work permits of some Kenyans have been cancelled by Tanzanian officials. Not long ago a directive was issued by President Magufuli to limit the number of flights made by Kenya Airways in Tanzania a move which the Kenyan state retaliated by banning Tanzanian tour vans from accessing the Jomo Kenyatta International Airport.

Furthermore, Magufuli’s administration has been avoiding to sign the Economic Partnership Agreement (EPA) unlike the other EAC member states which have already appended their signatures. The EPA would guarantee duty-free and quota-free commodities that would be exported to the European Union from the EAC which is largely beneficial.

President Magufuli’s administration has also embarked on a mission to position Tanzania as the region’s economic hub a move which has generated a lot of uneasiness in Nairobi. This mission began with Rwanda and Uganda rescinding their earlier agreement with Kenya that would involve the inter-linking of the pipeline from Lamu to Uganda and the construction of the SGR from Kenya through Uganda to Rwanda. Both the pipeline and the SGR would have ensured that Rwanda, Uganda, South Sudan and the Eastern part of the Democratic Republic of Congo majorly import their commodities through Kenya via the ports of Mombasa and Lamu.

As a result of the economic sucker punch, Rwanda and Uganda will construct their SGR phases through Tanzania to the port of Dar es Salaam and also the pipeline to the Ugandan oilfields will go through Tanzania to the port of Tanga. This particular move appeared to have isolated Kenya to some degree.

On a general scale, President Magufuli seems to be more focused on developing the country’s economy compared to his predecessor. His vision is to see Tanzania rival Kenya as the biggest economy in the East Africa region.

A Mutually Beneficial Relationship
Despite the suspicions that the Tanzanians have towards Kenyans which are hangovers of the dogmatic ideals of socialism, restoring economic relations between the two states will be mutually beneficial. Ideally, logically and realistically any action by either state to ignore the other would be a lose-lose situation for both.

Presidents Kenyatta and Magufuli commissioning the Nairobi Southern By-Pass
Photo: Courtesy

Kenya is Tanzania’s largest trading partner in Africa with the former importing commodities worth Kshs.33.7 billion in 2015 and most importantly Kenyan companies have invested in Tanzania. Data from the Tanzania Investment Center shows that there are 529 Kenyan companies that operate in Tanzania and they have collectively invested approximately US $1.7 billion. In addition, these Kenyan companies have employed at least 56,000 Tanzanians.

Going forward, both economies stand to gain from each other through various ways. Tanzania having more diverse mineral deposits compared to Kenya seeks to benefit from the latter’s relatively advanced human resources and relatively developed soft infrastructure. Kenya, on the other hand, will benefit by accessing the Tanzanian market for the various commodities that are produced in the country.

Zulekha Ibrahim a Tanzanian financial analyst based in Dar es Salaam states that the frosty relations between Tanzania and Kenya are unnecessary and that having good relations will benefit both of them. She further states that a closer economic cooperation between the two will help to expand their economies.

During his visit to Kenya, Presidents Magufuli and Kenyatta agreed to develop a highway linking Bagamoyo to Malindi and construct another one from Mwanza through Isebania to western Kenya. These major highways will facilitate the movement of people and commodities between the two countries.

Challenges to Better Relations
There are certain challenges that are both prominent and underlying that could still jeopardize the economic relations between Tanzania and Kenya as well as between Tanzania and the other EAC member states. One of the challenges concerns the work permits. Though the Tanzanian government has reduced the cost of obtaining the work permits their existence still works against the principles of the EAC especially regarding the free border movement. The work permits are mechanisms that can be used to check the number of people especially the ‘aggressive’ Kenyans from conducting business in Tanzania.

Kenya-Tanzania border at Namanga
Photo: Courtesy

Secondly, the refusal by Tanzania to sign the Economic Partnership Agreement (EPA) will in particular dent Kenya’s exports to the European Union. The EPA is supposed to be signed by all the EAC member states and Tanzania’s action will imply that Kenya will be categorized under the Generalized Scheme Preferences (GSP) by virtue of being a developing country and the other EAC members falling under the least developed countries category. As a result, Kenya’s exports will be subjected to levies ranging from 12 to 25%.

An underlying challenge whose ratification will elicit a lot of passions and emotions will be the institutionalization of the EAC Political Federation (The East African Federation) as enshrined under Article 5(2) of the Treaty of the Establishment of the East African Community. The process of establishing the East African Federation ought to have begun in 2016 but because certain issues relating to sovereignty need to be formalized no formal progress has been made. If Tanzania has not been committed in actualizing the EAC Customs Union then it will be even harder for her to sign the treaties ratifying the formation of the Political Federation. However, going by the recent events in the EU in relation to Brexit and the perceived dangers of free trade and free borders then the fate of the East African Political Federation hangs in the balance.

The thawing of the relations between Kenya and Tanzania will be beneficial to both countries and to a larger extent the EAC bearing in mind that the two economies collectively make up about 68% of the GDP of the East African region. Magufuli’s visit may perhaps be a signal of positive actions to come by as far as the relation between Tanzania and Kenya is concerned.

This article was first published on

Thursday, 17 November 2016

Africa’s Economic Take-Off Dependent on the Manufacturing Sector

A photo showing workers in a firm located in Kenya's Export Processing Zone.
Courtesy: Business Daily

To sum up, the African pattern of structural change is very different from the classic pattern that has produced high growth in Asia, and before that, the European industrializers. Labour is moving out of agriculture and rural areas. But formal manufacturing industries are not the main beneficiary. Urban migrants are being absorbed largely into services that are not particularly productive and into informal activities. The pace of industrialization is much too slow to spurn self-sustaining growth.”- Prof. Dani Rodrik.

Apart from a few tax havens, there is no country that has attained a high standard of living on the basis of services alone.”- Rick Rowden.

One of the challenges in understanding Africa’s growth and development quandary is the inherent inability to focus on the basics. Ignoring these basics when seeking to contextualize matters concerned with Africa’s development is what makes most of the arguments on the subject to be amorphous.

From the outset, a reflection on the excerpts at the beginning of this article is imperative as the text will solely focus on the message contained in them. There is no doubt that the manufacturing sector is fundamental in spearheading and securing the gains of structural transformation. But how has the manufacturing sector in Africa performed for the last five decades?

In the 1970s and early 80s, the manufacturing sector contributed around 16% to the continent’s Gross Domestic Product (GDP) but at the moment, the sector contributes an average of 11% to the GDP. A fact to note, however, is that despite the decline in the sector’s contribution to the GDP the overall size of the sector has generally increased in monetary terms.

Africa’s manufacturing sector contributed over 3% of the total global manufacturing output in the 1970s which is twice the current rate that is 1.5% as documented by the United Nations Industrial Development Organization (UNIDO). The contribution of other regions as a percentage of the world’s total manufacturing output is as follows: Asia-Pacific 21.7%, East Asia 17.2%, North America 22.4%, Europe 24.7%, Latin America 5.8% and others 6.7%.

Failure to Industrialize
On a general scale, Africa has failed to undergo rapid industrialization. This can be attributed to various factors, endogenous and exogenous. Endogenously, the policy frameworks that have been formulated by the various African states are inconsistent and incoherent on a large-scale. Exogenously, political instability, the policy actions by multi-lateral institutions such as the World Bank and International Monetary Fund, and the economic activities in the other continents/regions of the world have partly contributed to the slow pace of industrialization in Africa.

In the 1970s and 80s, Africa’s manufacturing sector was not so much different from that in some of the East Asian economies notably the Asian Tigers. The mid 80s, the late 80s through to the 90s was a critical juncture, though in negative terms, where the fortunes of Africa’s manufacturing sector began dwindling.

During this period, most of the African states witnessed an increase in the level of political instability. Furthermore, African countries were largely affected by the economic crises and shocks in the world. The Structural Adjustment Programmes (SAPs) were also introduced at this time courtesy of the World Bank and the International Monetary Fund (IMF) as a conditionality for the African economies to receive foreign aid which has been a big failure.

Foreign aid has largely contributed to the continent’s inability to take-off economically. A larger proportion of the foreign aid has traditionally been funneled to fund social sectors such as education, healthcare and others which are important segments of the economy. However, if the Bretton Woods institutions and the other entities that advance foreign aid were channeling more resources towards the development of the manufacturing sector then the face of Africa would be different.

A fact to note is that foreign aid has been a political mechanism used for manipulating African governments. It has been one of the effective machinations choreographed to propagate the neo-colonial tendencies. With the realization that the independence of African countries would starve their economies of raw materials and resources for their industries, it was vitally important that a scheme be hatched to siphon resources from Africa and enhance the dependency syndrome.

This is a case of politico-economic tomfoolery; if the aid had been largely used to develop infrastructure and industries from the 1960s, geopolitically the West would have been weakened because more economic independence for the African states would have meant more negotiations and bargains on the international frontier. The political chaos that was the order of the day in the 80s and 90s were mainly the agenda of some of the Western states with the ultimate aim of tapping the resources en masse.

Workers inside a textile firm in Ethiopia.
Courtesy: The Economist

Domestically and inwardly, though, the African economies should also take the blame especially on the formulation and implementation of policies that focus on the manufacturing sector and industrialization. Apart from the ‘aidnomics’ agenda, there have been systemic weaknesses in view of the import-substitution and export-promotion policies.

Export-promotion policies in particular haven’t fully enhanced value-addition on the various commodities that are exported from the continent. Import-substitution policies ought to focus on smart protectionism and the Africans should not be fooled that the developed economies and the newly industrializing economies do not have protectionist policies. It’s the weakness of the import-substitution and export-promotion policies that the service sector is the leading sector in Africa. Even though the service sector is growing rapidly, it is developing slowly as most of its activities are largely informal.

Missing the Boat & Bridging the Gap
At the end of the 20th century, most of the African countries had registered significant progress politically and economically. The challenge at that time and at the moment is the act of playing catch-up with the industrialized and industrializing economies especially in Asia.

The development of the manufacturing sector and industrialization in general outrightly depend on readily available and relatively cheap labour. The rapidly industrializing Asian economies have managed to leverage on the abundant labour from the relatively larger population. As a result, the economies of agglomeration have effectively been established hence most of the firms that were previously located in the West shifted their location to these Asian economies.

It is expected that perhaps Africa would be the next destination for most of these firms as the Asian economies enter a new phase of economic development. But this may not happen any time soon if the prevailing conditions are to go by. Despite having a large population, the continent is yet to start benefiting from the demographic dividend. This is chiefly due to the level of soft and hard infrastructure that makes production costs to be very high. The energy costs, the transport costs, bureaucratic costs and the political costs remain major hindrances towards rapid industrialization of Africa.

All is not lost, however. Several African countries have embarked on industrialization programmes and policies that will enable them to engender sustainable economic development in the long-term. Countries such as Ivory Coast, Kenya, Zambia, Morocco, Ethiopia and a few others have set up or are in the process of setting up Special Economic Zones (SEZs) and industrial parks.

Most importantly, the Chinese investment in various infrastructural projects in Africa is pivotal in laying a strong foundation upon which rapid industrialization can take-off. To bridge the economic gap, a larger proportion of the Foreign Direct Investment (FDI) should be allocated to the manufacturing sector. Ethiopia is leading the way as 70% of the country’s FDI goes towards funding activities in the manufacturing sector.

A phot showing a petrochemical firm in South Africa.
Image: Courtesy

Of economic importance is that African states can still finance the manufacturing sector by formulating efficient industrialization policies. These policies, however, should not be enacted in isolation. Other policies, legislations and treaties focusing on the illicit financial flows, corruption, public sector efficiency, the vibrancy of the private sector and an effective skills-based education system are crucial in creating synergy with the industrialization policies.

The Developmental State & Kicking Away the Ladder
To set up a strong foundation for the manufacturing sector, the government’s hand is vitally important. Despite the inefficiencies associated with the government’s involvement in the economy, it cannot be ignored whatsoever that it should be the major driver of industrialization especially in Africa and other developing states of the world. The private enterprises and investors cannot invest massively in the manufacturing sector at the initial stages bearing in mind the ‘heavy investment’ required in the sector.

Policies such as liberalization of the economy advocated by the various multi-lateral institutions and Western states haven’t unleashed the potential of the manufacturing sector in Africa. This is where the doctrine of kicking away the ladder comes in. Ha-Joon Chang, a development economist, states that kicking away the ladder is a phenomenon of rich countries forcing policies on poor countries that they themselves did not implement during their time of take-off.

The role of the developmental state biased towards the development of the manufacturing sector in Africa is indispensable. When the Asian Tigers took-off economically, the respective governments took upon themselves to heavily invest in the manufacturing sector. Ethiopia has adopted a similar mechanism and approach. A more convenient mechanism which the African countries should utilize is the Public-Private Partnership (PPP) through which the private sector can be involved in establishing a strong manufacturing sector.

To create a sustainable economic trajectory that will benefit the Africans, the African states must invest seriously and heavily in the manufacturing sector. The service sector doesn’t create the desired linkages that are necessary for economic development.

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