Sunday, 28 September 2014

South Sudan: Cry the beloved country

THREE YEARS AGO, South Sudan, then the world's youngest country, was born. It was a nation full of hope and whose prospects were bright. It had functioning oil fields which pumped 375,000 barrels per day, she also enjoyed the good will of the world.

Everything was going for her. Investors trooped into the country seeking for opportunities. Soon, South Sudan was receiving proposals for such mega project as the US$3 billion Juba-Lamu oil pipeline.

 All those prospects evaporated In December last year when a civil war broke out. The civil war pitted the government of President Salva Kiir against Rebels led by Riek Machar, his former vice president.

Oil wells have been damaged while the meagre revenue from the little oil available is being squandered on war. A nation that sits on Sub-Saharan Africa's third biggest reserves of crude is now a beggar nation staring at a potential famine.

Oil Output has declined to 165,000 bpd from 375,000 bpd before the war broke. With it, oil revenue have also shrunk and since oil is for now the only source of revenue for the economy, prospects are also turning grim.

Before the split in 2011, crude oil exports earned the then united Sudan US$20 billion a year. The split gave South Sudan 375,000 of that and thus 75 per cent of the revenue, that is, US$15 billion. For South Sudan, this was a windfall. Previously she used to share Oil revenue 50-50 with the North.

South Sudan, just like her neighbour Sudan, depends on oil revenue to funds 98 per cent of her budget.The fall in Oil revenue caused economic chaos in Sudan. Inflation there now stands at 46 per cent owing to lack of forex. The south is fast treading the same path: Oil Output down to 165,000bpd and still falling, oil revenues have plummeted to almost a third, that is, to US$5 billion a year at the highest. This works to US$417 million a month down from US$1.25 billion before the war.

The result, shortages all round: No forex, which leads to the weakening of the local currency. The official exchange rate for Pound is 2.95 to the US dollar. However, the black market rate is 5:1. This has restricted imports leading to domestic shortages and high prices of consumer goods.

At the last count in March 2014, inflation had crossed the 25 per cent mark. Now it is likely close to her neighbour’s level of  40 per cent. Poverty is becoming endemic as foreigners, who trooped in to south Sudan seeking for opportunities are reviewing their position.Soon they may troop out.

Business has contracted due to lack of funds to expand and also insecurity. Unemployment is high and rising. These pressures weigh heavily on the government which sometimes acts in a disoriented manner.

Last week South Sudan ordered all foreign workers to leave by October 15th. The order was however, modified and mutilated. Now I is not clear whether it shall be enforced. The government also has to cope with pressure to end the conflict, which is characterized by ceasefire agreements that no one obeys.

Monday, 22 September 2014

The Stanbic report is misleading, wrong

A REPORT published by the Standard Bank of South Africa last month is dishonest.  The report , Understanding the African Middle Class should be renamed Distorting the African middle class. It proposes that, nearly two decades of economic growth in Africa has had little effect on poverty reduction. 

This is the antithesis of the “Africa rising narrative,” whose thesis is that robust economic growth in the continent over the last two decades has reduced poverty and widened the middle income class. The Africa rising is an accepted narrative world- wide.

 The Understanding ….Africa report  states that, of the approximately 110 million households studied across 11 countries, 94 million (or 86 per cent) of them were located in the low-income category, suggesting poverty levels are as much as two times the figures shown in official records.

It defines Low-income people as those spending less than $5,500 in a year or $15 per day while the lower middle class spend up to $8,500 annually, or $23 per day. The middle class spends as much as $42,000 per year or $115 per day and the upper middle class spends more than $42,000 a year.  This contrasts the generally accepted definition of middle income class.

The study uses the Living standard Methodology. LSM is a census of one’s ownership of non-essential durable assets. This is the list of 24 variables we got from their so called LSM calculator Eighty20: Tap water in the house/plot, flush toilets, hot running water, built in kitchen sink, No domestic workers, home security service, 2 cellphones per household, 3 or more cell phones per household,  one or no radio, TV set,  Pay TV, Home theatre, Washing Machine, Microwave Oven, Deep-Freezer, air conditioning excluding fans, Swimming pool, Cars in Homestead, computer, laptop, telephone Landline, vacuum cleaner.
These are hardly basic necessities. necessities are defined to include, food, shelter, health, entertainment, clothes and education.

LSM was developed in South Africa by a foundation called South African Audience Research Foundation, SAARF.  It is a survey of assets held by households at the time of the census targeting high worth people for consumer good manufacturers.

 Needless to say LSM is a good example of a wrong policy tool as it ignores various variables employed in economic policy research. It relies on snapshots of wealth and income distribution at a given point ignoring changes that happen over time.  It also ignores completely the causes of changes in wealth and income distribution. It paints a picture of a caste system where one would remain stuck in in the same strata for life. According to LSM, the tool used in this study, being in the middle class is an event, not a process.

 This is in sharp contrast to a 2012 report by African Development Bank which established that there was significant mobility of the middle class to the upper class (rich) in the last two decades.  The AfDB report titled “The making of Middle class in Africa” found very little evidence of slipping back to poverty in Africa.  This is to say that robust growth has created employment and other income generating opportunities enabling the previously poor people to transit into lower middle income groups. This study presumes that being in the middle class is a process, with intercepts, mobility and further mobility.

The findings of this study which used the asset wealth status supports the findings of previous reports by the same institution using the consumption expenditure approach. The 2011 market briefing by AFDB, estimated the size of the Africa middle class to be 320 million people in 2011. The study, The Middle of the Pyramid: Dynamics of the middle class in Africa defines the middle class to be those between the 20th and the 80th percentile broken into three subclasses.  These are: floating class whose per capita consumption expenditure is between $2-$4; the lower middle $4-$10 and the upper Middle $10-$20. The rich are defined as those whose consumption expenditure per capita is $20 and over.

 It admits that the “floating class” comprising an estimated 194 million people was the largest sub-class. This class is vulnerable to exogenous factors, says the report.  Exogenous factors would include, economic slowdown, disruptions due to violence for instance and bad governance.  These have been few and far between. Consequently, owing to upward mobility, the few in this class have shrunk into poverty, if anything many have transited into higher levels.

Apart from the AFDB reports, other findings also put question the Stanbic Report. For instance Bloomberg in a recent review of Africa quoting various sources paints a rosy picture.  It shows a continent characterized by; robust economic growth, dominated by young people with a rising incomes which translates into huge and growing market for consumer goods including electronics, beverages, motor vehicles etc.

Such reports are in tandem with the World Bank’s report which credits Africa’s robust growth to strong domestic demand.  Last year, Sub-Saharan Africa’s GDP, excluding South Africa grew by 6 per cent. However, when the sluggish South Africa economy is included, GDP grew by 4.7 per cent says the World Bank’s Global Economic Prospects.

In the telecommunications, Africa is billed as the largest market for mobile phone handsets in the world. The continent also boasts high cell phone penetration rates. In east Africa for example mobile penetration has surpassed 60 per cent. In Kenya it is 78 per cent, in Tanzania it hovering around 65 per cent while Uganda has surpassed the 50 percent mark. These are indicators of a prosperous society.

 Other observed evidence also disputes the findings of Misunderstanding Africa. Traffic jams on our roads suggest a growing population of motor vehicles. Motor vehicles are purchased by a prosperous society.

 Two more issue with the Understand the African middle class report. It places no premium on education as an asset. The world over Middle class is defined as people with a tertiary education among other assets.

 And finally, its sample size was extremely large, 110 households in 11 countries. LSM is basically a survey of assets; did the researchers survey all households?  

Thursday, 11 September 2014

Kenya leads Africa in geothermal power generation

KENYA  is now the leader in geothermal power generation in Africa. Her capacity now stands at 400 MW and will  rise to 680 MW by the end of this year when KenGen, the state owned power generator commissions all 280 MW from its Ol karia wells.

 Such an increase will stamp further Kenya's position as the runaway leader in geothermal electricity generation in Africa. Since the new capacity will be used to retire the expensive thermal capacity, the cost of electricity is expected to decline by up to 47 per cent before the end of this year.

 This has raised expectations of a general price decrease come 2015. Already, the price of electricity is down 9 per cent on last month's prices following the commissioning of 140Mw geothermal power in July. The decline is expected to pick momentum after the commissioning of another 280MW of geothermal power later this month.

This will increase the supply of geothermal power to 680MW from 260MW just two months ago. Of these KenGen, the state owned power generating company owns 570MW and the rest 110 W are owned by OR power. The commissioning of the two plants will make geothermal the second largest source of power after Hydro which produces and estimated 786MW.

The government has indicated that it is targeting a 40 per cent price decline. While the 40 per cent decline may not be reached in the next two months due to technical issues, it will be felt in December, when the new geothermal capacity is expected to be fully deployed. The price of a KWH unit is expected to shrink from US$0.15 to US$0.09.
According to the World Bank, High electricity prices push the productions costs up thus also pushing up the consumer prices. Consequently, it stymies domestic demand and economic growth. Generally, Thermal power is expensive because it is driven by the price of crude oil in the world market.

Crude oil prices have remained above US$100 a barrel for hence the cost of diesel generated power is high. Thermal power is used to bridge shortfalls in hydro power which is subject to vagaries of weather.

Hydro power as a source of electricity is dwindling because the source has its limits. Rivers are not expanding to meet the growing demand. Consequently, new sources have to be brought on stream.

High prices stymie economic growth because it pushes consumer prices up and slows down domestic demand. The worst-affected industries are construction and mining and the quarrying sub-sectors which are heavy users of electric power.

Every Megawatt of Geothermal power produced, retires a megawatt of diesel powered electricity leading to price declines since fuel charge is a major component of in electricity prices. Currently for every dollar worth of expenditure on power, the cost of fossil fuel used to generate thermal power takes 35 per cent, energy consumption stands at 52.7 per cent, forex charge 5 per cent taxes take 2.7 per cent other charges take 2.8 per cent.

From this analysis, fuel index is a large contributor to power costs in the country. In fact, at 35 per cent, it is very low. Depending on the cost of crude in the world market, Fuel index sometimes rises up to 70 per cent of the total bill. Geothermal power will eliminate Fuels cost index from consumer's bills leading to low stable prices.

Low prices buoy economic activity as low prices encourage domestic demand. The low price of electricity, say economists, will be a shot in the arm for economic growth as it will push inflation down that sustaining domestic demand at high levels. Although the Economists do not expect to see a large fall in the price of manufactures this year, they expect the prices to start inching lower from the first quarter of next years.

Consequently many expect economic growth to exceed five per cent in 2015.

Tuesday, 2 September 2014

Kenya awards 1000MW Coal fired power contract

KENYA HAS AWARDED the first of several tenders for the development of coal-fired power stations in the country. The Lamu coal-fired project was awarded to a consortium led by the Oman based Gulf Energy LLC and Centum investment, a local investment firm.

The project will produce 960MW of coal-generated power on 25 years power purchase agreement. Apart from being the first coal-fired power generator in Kenya, the project is also the first major independent power producer in the country.

 It is thus a curtain raiser as far as PPP in power generation is concerned. It will increase the supply of electricity by almost 50per cent.  As of now, the country produces 1668MW a majority of it is generated by Kengen, the largest generating company in Kenya.

 KenGen will add another 280MW to the national grid later this month thus raising the total capacity to 1948 MW. The Lamu project will add 960MW which is 49.3 percent of the capacity at the end of September 2014.

The project, which will cost US$500 Million, is part of the government’s drive to increase the power supply to 5000MW in the next 40 months. Also in the pipeline is another 900-1000MW coal-fired plant in Kitui County.

The Lamu power plant will initially use imported coal, and later convert to use local coal mined at Mui Basin, Kitui County.

 The government plans to cut the energy cost by 47 percent for industrial consumers and by 37 per for domestic consumers.

 Power generation is a huge business in Kenya for the next 16 years or so. Government projections indicate that power demand will reach 15 000 MW by 2030.

To meet the demand, the country must raise the current capacity of 1 664 MW to 18 000 MW at a cost of US$20 billion, the equivalent of the government’s budget for the 2014/15 Financial year. An estimated US$4 to 5 billion is needed to produce some 5000MW over the next three years.