Archives for category: Politics

Uhuru and Ruto wrote in the Jubilee Manifesto that they plan to establish a development Bank to “prop up the private players”. Although nobody is talking about it, and although we have no idea if that will happen anytime soon, this could be a huge deal for the future of Kenya. What is a development bank? And is it a good or a bad idea for Kenya?

A traditional definition of a development bank is one which is a national or regional financial institution designed to provide medium-and long-term capital for productive investment, often accompanied by technical assistance, in less-developed areas. Development banks fill a gap left by undeveloped capital markets and the reluctance of commercial banks to offer long-term financing. [full “primer on development banking” here]

We have to keep in mind is that UhuRuto provided no details about how a development bank fits into their grand scheme for economic development in Kenya. For example, we don’t know if the objective is to promote small businesses (like the informal sector or SMEs), whether they want to finance large infrastructural projects, agriculture or large manufacturing industries.  However, the sure thing is that whenever the plan is to increase the government role in the economy, you attract both huge praise and criticism:  that’s the difference between the “industrial policy view” and the “political view”

According to the industrial policy view, development banks do more than just lending to build large infrastructure projects. They also lend to companies that would not undertake projects if it was not for the availability of long-term, subsidized funding of a development bank. Furthermore, development banks may provide firms with capital conditional on operational improvements and performance targets. In such circumstances, we would expect to see the firms who borrow from development banks increasing capital investments and overall profitability after they get a loan.

According to the political view, on the other hand, lending by development banks leads to misallocation of credit for two reasons. First, development banks tend to bailout companies that would otherwise fail (this is the soft-budget constraint hypothesis, e.g. Kornai, 1979). Second, the rent-seeking hypothesis argues that politicians create and maintain state-owned banks not to channel funds to socially efficient uses, but rather to maximize their personal objectives or engage in patronage deals with politically-connected industrialists.

So, whether a development bank is a good idea or not for Kenya entirely depends on your opinion on the current political class: will they be committed-to-development or good-old rent-seekers? For now I want to keep on the optimist side.

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In an interesting post Moses Kemibaro argues that technology –not Raila Odinga– was the only real loser of the 2013 Kenyan election (you can find the details of the IEBC tech fiasco here). But Kenyan investor Ali-Kahn Satchu found a second, more subtle, loser: inflation.

It is clear that this has been the most expensive election ever witnessed since independence. My estimate is that the spend has been above and probably considerably above Sh86 billion ($1 billion). I said to Reuters that the move higher in inflation to 4.45% in February was surely correlated to a “tsunami of election-related spending” across the country.

A few months ago, The Daily Nation wrote that the 2013 Kenyan elections are not only the most expensive since independence. They are actually the most expensive in the world:

Elections in Kenya are the most expensive in the world thanks to a high voter registration cost, administrative inefficiencies and outright theft of funds.

Estimates for the upcoming election presented by the Independent Electoral and Boundaries Commission (IEBC) placing the cost at Sh36 billion translates to a cost per registered voter of Sh2,000 ($25), higher than any other on record.

In counting the costs of this election, we also have to consider that (a) this was not not an election day, it was an “election week”, where most shops remained closed, workers didn’t go to work and central business districts all over Kenya became ghost towns for almost seven days in a row. And (b) let’s not even talk about the huge costs of the election campaigns.

Campaign costs

On the other hand, the most important fact is that peace is still prevailing in the country, and that is of course an epic win for Kenya.

The Kenyan Shilling (KSh) reached a 1-year low against the US dollar last week (1 dollar=87KSh), probably because the Presidential Elections are approaching and everybody is worried about it. Bloomberg analysts predict that the value could go down to 89 KSh a dollar on election-day.

What I find interesting is that in December 2007 the Shilling also plummeted just a few weeks before the infamous elections that led to the violence. But the value in 2007 was 63 KSh a dollar, not 87 like last week. Here’s an excerpt from an article written in 2007 in the African Executive:

The Kenya shilling (Ksh.) has hit a nine years low against the US dollar at an average of US$1.00 = Ksh.63.50. The shilling has been gaining strength over the dollar for over two years now. This has come both as a blessing and curse to many Kenyans depending on which side of the divide they hail. For exporters, the strengthening of the shilling against the dollar has wiped out millions of earnings, making them to suffer losses.

So, what puzzles me is not just the “pre-election depreciation” but the long-term trend. Why has the Kenyan Shilling lost so much value in the last 5 years? Why did it appreciate back then? I am asking these questions to myself as well the informed readers of this blog. Take a look at the 5-years trend:

KShUSD 2007 2013

You see that 2011was an “annus horribilis” for the Kenyan Shilling, which lost a quarter of its value in less than a year. But the downward trend goes beyond that.  When it comes to the currency appreciation before 2008, the African Executive gave this explanation:

The shilling has become stronger because of huge inflow from donors, increased remittance by Kenyans in the Diaspora and the weakening of the US dollar.  Other reasons include the buying of 24.99% stake in Equity Bank by Helios Capital Ltd. at an estimated value of Ksh.11 billion, and the take over by 51% of Telkom Kenya by France Telecom, at an estimated value of Ksh.26 billion. Recently, the International Monetary Fund disbursed four billion shillings to the Kenya government. This has further increased the amount of dollars in circulation.

That cannot be the only reason, however, considering that both foreign direct investment and the net inflow of portfolio equity increased between 2008 and 2011. Official development assistance increased as well. Perhaps, another possible  explanation is the one proposed by Wolfgang Fengler, lead economist for Kenya at the World Bank, who wrote that the current account deficit (imports higher than exports) is the structural cause behind the downward trend of the Kenyan currency:

The main reason is that Kenya’s economy is increasingly imbalanced: the country is importing too much and exporting too little. This makes it vulnerable to shocks.  The gap between imports and exports needs to be financed by financial inflows other than export earnings. In 2011, imports have soared (mainly due to higher oil and food costs), while exports remained stagnant. The gap between imports and exports, also called current account deficit, now stands at above 10% of GDP – one of the highest in the world! Today, Kenya’s main exports don’t even earn enough to pay for its oil imports, not to mention other imports beyond oil (figure)!  The money to pay for any additional imports needs to come from somewhere.

I bet there are plenty different explanations that I don’t know about. Feel free to comment if I missed out something.

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This is the huge advertisement I see every day outside the University of Nairobi. It’s a constant reminder that elections are only a few weeks away and that the risk of political violence is still unacceptably high, as the International Crisis Group wrote a few days ago. Does the business community in Kenya fear the upcoming elections?

Looking at some numbers, it definitely looks like it. Insurance against political risk has increased by 50%, in the last 12 months, and it has gone up by over 30 times since 2008, from KSh 1.3 billion in 2008, to KSh 41 billion in 2013. The demand is so high that Kenyan insurance companies have decided to form a pool offering services also to small enterprises. From the Business Daily newspaper:

The intention is to have a facility that offers affordable political risk insurance services even to small and medium-scale businesses that may not afford premiums charged by bigger insurers like ATI [Africa Trade Insurance Agency].

The idea of the pool was mooted in 2009, a year after the post-election violence. In addition to business process disruption that happened during the violence, the premises were damaged and looted.

At that time, Kenya insurers did not offer political risk insurance products meaning that many of the businesses were not compensated bringing an end to many companies.

Apparently the demand for political risk insurance started growing already a few months ago, when Kenya invaded Somalia and the business community started fearing retaliatory attacks by Al-Shabaab. It has grown exponentially in the last few months as the presidential elections are approaching.  I heard rumors that some companies even plan to move their inventories out of the country for a few weeks in order to better manage their risk during the elections. This is not a matter of “fearing” the elections, however. Let’s just say that Kenyan firms are aware of the risk and started mastering the art of risk management. Hopefully this will turn out to be completely unnecessary.