BY ANTONY MUTUNGA
The year 2016 was full of surprises, from the decision by the United Kingdom to leave the European Union to Donald Trump winning the United States elections. The global community did not expect these decisions and thus they caused uncertainties that shook up the world economy. Stock markets, imports and exports were most affected as various countries experienced major loses.
However, most African countries were not greatly hit by the uncertainties caused by these decisions. For instance, East African countries, which were earlier predicted to increase their economic growths were able to do so regardless of the uncertainties. Kenya was among these countries, with World Bank and the International Monetary Fund projecting it to grow to 5.9% and 6.8% respectively. In the end, the World Bank was more accurate as the country’s economy grew at an average of 5.9% for the first three quarters of 2016 despite slowing down from 6.2% to 5.7% during the third quarter (Q3).
On the surface, the average of 5.9% shows that Kenya is doing well and soaring higher and higher in terms of economic development. In addition, the World Bank predicts that the economy will grow at 6% this year. However, despite the good news on paper, Kenyans do not quite agree because they face a rough time, feeling that the economy keeps shrinking rather than growing. This is in addition to it being an election year.
The rise in the economic growth is mostly attributed to the increase in the gross domestic product (GDP) and climbing up the ease of doing business index. However, these do not quite paint the whole picture because what they measure does not correlate with the economies of the citizen’s day to day life.
In Kenya and most of all the other developing countries there is usually a high dependency on the informal (grey) sector to help the economy. Even though the grey sector accounts more to the economy than the formal sector (for example, it is the leading sector in creation of employment as it has created almost 80% of the jobs in the country), it is not measured in the GDP. For a sector that is so essential to the economy, it is a big flaw that it is never included in the GDP, which is supposed to measure the health of a country’s economy. This goes to show that the data obtained from measuring the GDP is not as reliable as believed.
When it comes to the ease of doing business, the experience is the same as with the GDP, businesses in the grey sector are not included in the data gathered even though they are the majority in the country. According to the World Bank’s Doing Business 2017 report, Kenya had managed to rise up 21 places to position 92 in the ease of doing business index.
Many have praised this but in reality it did not capture all the information. It left out the grey sector, which includes self-employment, street hawkers and unpaid labor. Due to the fact that the ease of doing business concentrates on the regulations for businesses, the sector is usually overlooked because it is not regulated or taxed by the government.
Additionally, another major contributor to the GDP is government spending. For instance, the GDP increased due to the fact that the government spent a lot especially on infrastructure with the construction of Standard Gauge Railway (SGR) and other highways in the country. This was considered to have assisted the GDP to increase, when in fact it actually hurt the economy instead.
This is because for the government to spend, it has to first borrow or tax the people. When the government borrows from local investors it ends up using resources that would otherwise be invested in the private sector. In addition, when it spends the money borrowed it also takes up more resources in terms of labor and capital, which are used by the private sector hence making it harder to grow. Due to the fact that the government mostly depends on taxes from the private sector, now it finds itself in a dilemma because it has transferred wealth from the highly productive private sector. This eventually causes the creation of jobs to decrease in the economy.
On the other hand, if the government decides to increase taxes to finance expenditure, it ends up crowding out private expenditure and investment. As we all know when it comes to taxes, people are defensive. This is attributed to the fact that high taxes cause a decrease in investments and productivity, as most of the money goes to the government (substitution effect). This affects the private sector whereby workers are less motivated to work and on the other side investment in businesses starts to reduce. This causes businesses to start cutting cost mainly through job layoffs and in worst-case scenarios, closing down.
As a result of government spending, Kenya has been a victim to this scenario as companies have closed because of a harsh operating environment caused by increased taxes and fees. Per a report done by the Kenya National Bureau of Statistics, 2.2 million micro, small and medium enterprises have shut down since 2011 indicating how much the economy is not on the right track. Most affected are manufacturers for example, firms like Eveready East Africa, Sameer, Cadbury and Reckitt Benckiser have also closed due to high operating expenses.
High energy cost was one of the reason that most organizations stated as a reason for shutting down. This is because Kenya’s energy costs are very high, with the Kenya Association of Manufacturer (KAM) even believing that this is costing Kenya its competitive edge in the region.
At the moment, the country’s industrial power costs stand at Sh17 per kilowatt hour (kWh) compared to Tanzania’s Sh12 per unit and Ethiopia’s Sh9 per unit which are the leading countries in terms of economic growth in East Africa. Globally, industrialists in China get power at the cost of Sh3 per unit while India is at Sh9 per unit. This has affected not only the large corporations but local small manufacturers as well.
Some of the companies that survived closure have been left in debt, like Nakumatt Holdings that had to sell off part of its stake in order to pay the debts. The high operating expenses also left a lot of people without jobs, increasing the level of unemployment in the country. Some organizations felt that the only way to deal with high operating costs was to lay off employees. For example, all leading media firms including the Nation Media Group, Standard Media Group, Royal Media Services and Media Max, as well as manufacturing firms like Kenya Fluorspar have had to steadily down size their workforce over the last two years.
The banking sector was also involved in massive layoffs as banks tried to minimize costs after the President signed into law the 2015 Banking (Amendment) Bill last year. This left more than 1,000 people jobless equaling the number of redundancies that took place in last 5 years in the sector. A lot of banks were involved, for instance, the top tier one bank, Equity Bank cut off more than 400 employees last year, Sidian bank also laid off 100 and Standard Chartered let go 300 employees.
Other than layoffs, institutions also moved to close down several of their branches. For example, last year Ecobank decided to close down its branches, aiming at closing at least nine by March this year. Bank of Africa has decided to close down 12 of its branches leaving only 30 branches in the country.
The national debt also increased from 42.1% of GDP in 2012-13 to 55.1% of GDP in 2015-16, because of the massive increase in government development spending.
Apart from government spending, a rising trend in inflation also causes economic growth to slow down. This is because costs usually increase causing people to stop saving as well as investing. The inflation rate, which stood at 6.68% in November 2016, has been on the rise due to a price elevation in food commodities. This has been caused by the slow growth in the agriculture sector brought about by drought whose effects are predicted to get worse in coming months. This will eventually cause the economic growth to slow down this year according to Cytonn Business and Market outlook.
The Nairobi Securities Exchange (NSE) has also been affected due to volatility in the market, which has made it the worst performing securities exchange in the world. The securities exchange has cost investors a loss of about Sh645 billion. Things are even expected to be worse off due to the elections, because investors will most likely hold off on investments and this may cause the experienced bear run to keep going.
Political war chests
This is also an election year and as is the common trend in the period, the economy is expected to slow down. This can be attributed to the fact that the markets hate uncertainties hence they are usually unstable in the period. Due to the outcome of the 2007/2008 elections, and the unpredictability on whether the loser will have the confidence to seek redress in the Supreme Court, most organizations will most likely shy away by holding off on any major decisions concerning investments, fearing the end results to be same.
The election period is usually a time when a lot of cash circulates the economy as those who are vying splash out their war chests to reach the public to try and win their vote. This has an adverse effect on the economy as it leads to prices escalating which in turn causes inflation to rise.
The economy possibly could not have grown amid all these factors. The government needs to take more into account when it comes to economic growth. The GDP is a good measure but it tends to leave too much out. There is a need to stop focusing only on increasing the GDP but also on improving the lives of the people through job creation, better education and health services.
As 2017 is an election year, the country needs to be careful of the effects it has on economy which is already in a dangerous cycle where cost of living is going up leading to people demanding high wages that then causes production costs to increase and which finally pushes up the cost of goods and services. If nothing changes, Kenya will experience another economic slowdown masquerading as a growth and this time it may lead the country to a point of no return.