Tuesday, 25 September 2018

African market entices the Beast and the Dragon

A Prototype of Konza  ICT City:
Some of Africa's ambitious projects
Africa is becoming the theatre for economic giants in the East and the West to battle for domination. And because of the demonization campaign going on, we term it the battle of the Beast vs the Dragon. The beast represents the West while the dragon represents China.

Africa is rising and its economic prospects brightening presenting mouthwatering opportunities for investors anywhere in the world.  These are Africa’s pluses: a young and growing population. Researchers say that by 2040, Africa will have the youngest and well-educated population anywhere in the world.

 A report by Bloomberg back in 2014 said that Africa’s growing population is an asset, not a liability. Being healthy and well- educated, it forms a large pool for labour in the world and also a large market for goods. The report also said that in 2014, Africa’s growing middle class spend $1.3 trillion on consumption. It projects that consumption expenditure will grow to $4.2 trillion by 2030. Of these, says the African Development Bank, Agriculture, and agribusiness will gobble up $1 trillion, leaving a huge balance for other goods and services.

 Given these mouthwatering pluses, economic players in the East and the West are rearing to enter Africa. China is the first off the block, having displaced the West as Africa’s top economic partner.  A research by McKinsey &Company, says that China has taken the top perch among Africa’s economic partners in the last decade.

This was the time when the beast, was grappling with the effects of the financial Crisis of 2008 which saw a number of large financial institutions collapse.

A Geothermal Plant: Looking for investors
 The Dragon, on the other hand, warmed its way into the continent’s largest economic partner perch, becoming the leader in infrastructure financing, where its controls 50% of all EPC projects. China, the second largest economy in the world is now Africa’s biggest economic partner. Its trade in goods stood at $188 billion in 2015, followed by India at $59 billion, France at $57 billion, US at $56 billion and Germany at $47 billion, says the McKinsey report.

Although China  trails in the stock of FDI  in  the continent with only $32 billion, fourth after USA whose stock  stood at $79 billion in  2015,  followed by Britain at $71 billion, and France at $70 billion, the potential of China tipping  the scales is also  high  because its rate of FDI growth at 25
percent is way higher than its closest rival, South Africa at 13 percent. The US and UK trail at 11per cent and 10 percent respectively.

 In terms of Infrastructure Finance, China is way ahead of the pack with $21 billion committed in 2015 while the rest are below five billion dollars.

Now you can see why the USA is mad at China which is fast elbowing them out of Africa. China is also eating into the domestic markets in the West.

It is for the reason that commentators in the West are telling it to ignore Africa at its own peril. And the Mantra in the West, which considered Africa a bad economic prospect, is now turning to entering “Africa is the only choice.”

 Back in 2006, George Bush Senior was the President of the USA. He was worried about China’s growing influence in the world, and particularly Africa, the then “the hopeless Continent.” The continent was beginning to shed this tag and posting rapid economic growth rates. It was becoming an Emerging Market. China was making inroads into the continent and the West was getting worried.
A Highway in Kenya: Africa needs more of these
Apparently, the West did not know how to tame Chinese influence. So they got into propaganda: “The Chinese are bribing their way into Africa. They are bribing to get contracts.” Chinese workmanship is substandard. The Chinese will destroy your industries.” Ad nauseam.

 The bullying tactic didn’t sell in Africa. So Tony Blair, then British Prime Minister, diagnosed what hails the West’s relationship with Africa. “If Africa goes to China and say they need a road, the Chinese are there the next day with their shovels,” he said and added: “The West will load the African officials with sheaths of paper that last months to read and understand.” George Bush did not buy that. But that was the truth.

China is now the largest development partner in Africa. But the propaganda still rages on. It has now turned to “China’s debt into Africa is unsustainable. China will take over your wealth,” so the narrative goes. But the dragon is not deterred, in the FOCAC last month, China committed $60 billion to Africa’s infrastructure development which Africa receives with gratitude.

Granted. Debts can be crippling to individuals and governments alike. Therefore we must keep a keen eye on our indebted because debts can be a nuisance. And according to the Bible, your creditor is your master.

 However, we must take a cost-benefit approach and ask: what is the necessity for borrowing? What would happen if we don’t borrow at all? What would happen if we borrowed a little? Would we be better or worse off if we abandoned or delayed implementation of development projects? Delay to when and where will the money come from, at what cost?

A Factory: Manufacturers gain from efficient Infrastructure
We assume that this is what informs governments’ decision to borrow and invest in infrastructure development.

According to Africa Development Bank’s Africa Economic Outlook 2018, the continent needs to invest $160 billion a year in infrastructure development for the next seven years. This will enable the “dark continent” to build a sufficient stock of infrastructure to spar industrialization and open up intra -Africa trade.
 The continent, says the outlook, can only raise $55 billion of these leaving a financing gap of between $65 -105 billion a year. This gap means only one of the two things: borrow or craft bankable business plans to attract the Private sector into infrastructure development.
Either way, we are borrowing because, at the end of the day, someone has to recover the money sunk into the development of; Water, Roads, Railways, Airports, Seaports, Oil pipelines, energy generation plants, and such other infrastructure. China is playing its part, financing infrastructure development. But what about the production of goods.
This takes us back to “Entering Africa is the only choice” narrative. A Bloomberg columnist advises

the  West: “Instead of standing on the sidelines and wringing their hands over China’s investments, Westerners and people in other rich countries should be looking to copy or surpass China’s efforts to tap the final frontier of emerging markets.”

That infrastructure development will improve productivity in Africa is not in doubt. The question is; whose productivity? Factories, farmers, traders .name them.  Time to Enter into Africa is now else you’d be too late and live on crumbs

Wednesday, 12 September 2018

How to go slow on taxes,debts

A 14-year analysis of remittances 
 Remittances by Kenyans living and working abroad have risen 569 percent in the 13-year period from 2004 to 2017. They increased from US$ 338 million in 2004 to $1.9 billion in 2017, posting a massive 44 percent increase a year.  Remittances appear set to pass the US$2.5 billion mark this year if the trend recorded by Central Bank of Kenya is anything to go by.
 The data shows that by the end of June this year,  remittances exceeded $1.3 billion. An analysis of the 14-year trend shows that mid-year figures are a pretty good indicator of the trend to the end of the year.
Academic research and commentaries by the financial experts indicate that remittances have reduced poverty, enhanced human capital since it helps recipient households to finance education, health care, housing, small businesses, and farming. Recipients tend to put more money into these sectors than those who do not receive.
 Research also indicates that remittances are finding their way into investments in the Real estate   and the capital market
 Given that much of the remittance is driven more by Philanthropic goals, there are indications that Diaspora remittances are a huge financial source yet to be fully exploited. And this where, creative thinking, thinking outside the box, is required.
 Granted, the government recognizes remittances as a potential source of developments funds. How to channel them to areas of greater impact to national development seems to be the problem.

The money remitted is not little. The $1.3 billion (Kshs130 billion) remitted in the half- year to June, for instance, forms a significant chunk of the US$7 billion in our forex reserves.  It is the equivalent of 73 percent of the Kshs179 billion allocated to the transport Ministry this financial year to build roads. If remittances hit the anticipated $2.6 Billion by the end of the year, that would be 68 percent of the cost of the proposed six-lane Mombasa highway.

All this money stays in our economy given that it is used for the consumption of local goods be they cement and other building materials. Further, that a large proportion of the money supports domestic consumption is an indicator that only a small proportion of the potential remittances finds its way home.
 This is largely because many households through who much of this money is channeled, are not savvy in high finance and may not invest in such debt instruments as bonds and shares in new ventures.  There is also the issues of many in the diaspora trusting their relatives with their funds only to come to grieve.
This is a signal that there is room for more money coming home if we found a way of channeling it to profitable areas, both to the economy and the individuals. The question then is; how do we make remittances profitable for Kenyans living abroad?
Answering that question correctly would also answer the questions how do we attract remittances into the national development agenda?

 Here we dare propose the creation of a Special Purpose Vehicle to attract remittances and channel them into nationally profitable areas such as food security and global housing. We are talking about transforming remittances from philanthropic ventures whose only reward is the degree of personal satisfaction to Commercial ventures with a financial return.

Some studies have found no correlation between remittances and economic growth in the recipient country. This is because the remittances are directed towards meeting basic family needs which exclude national development goals. 
In these days of high-speed internet and other advances in Communications technology in the financial sector, that is almost criminal.

An SPV would fit the bill. The vehicle would sell shares or long-term bonds in a project, say irrigation of one million acres. Since large-scale -irrigation is a high-skill activity, the SPV would contract skilled people to manage the irrigation scheme and sell their produce. It will then pay the bond or shareholders from their profits.

The same can be done in the housing sector and green energy generation especially geothermal, wind and solar. These are development sectors that enable the growth of other sectors such as industrialization whose major bottleneck is the availability of electric power.

Such a vehicle(s) is an incentive for Kenyans living in the Diaspora to invest at home and support the national development agenda. 
That will plug the hole in our budget and reduce the need to borrow as the government would transfer financing of such services to the “Diaspora sector,” for a financial return. We are filing tax returns from our desktop and getting certificates of clearance in a similar way. The same technology can be harnessed to sell shares and bonds and get certificates of purchase in the same way.
It would also support the growth of other sectors as the government will need to focus on infrastructure projects that the Diaspora cannot directly engage in without paying taxes.  

The financial sector cannot mobilize such funds and even if they do, the cost of borrowing the same funds will rise.