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Obeying Uncle Bob’s Economics

breaking-the-bankZimbabwe dictator Robert Mugabe’s thirty years of economic outrages have not been enough to keep him satisfied. He now plans to shut down the Standard Chartered Bank and some other foreign-owned firms because they have failed to comply with his demand that it hand over 51 percent of its ownership to “indigenous Zimbabweans” (usually meaning relatives and cronies of the incumbent president).

Uncle Bob Mugabe has never been one to submit to the logic of economists, and presumably he has not noticed the link between expropriation of foreign-owned assets and the reluctance of foreigners to invest in his country, or alternatively he has ceased to care about such trivia, having presided over one of the greatest economic declines in the history of the world, reducing his country from one of the wealthiest in Africa to one of the poorest.

Standard Chartered Bank has been operating in Zimbabwe for 120 years, the first financial institution to be established in that country, according to the bank’s website. It currently has 29 branches including a special Robert Mugabe Branch, on Robert Mugabe Avenue in Harare, and employs 700 people in Zimbabwe. The bank is a wholly-owned subsidiary of the British company Standard Chartered PLC.

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Devolution complications

complicationsLast month Kenya undertook its most complicated elections ever because, as well as voting for members of parliament and a president, Kenyans were for the first time voting for county governments, as required under the new Constitution. The Constitution provides for 47 county administrations, and 47 new governors have now been sworn in to office. Unsurprisingly, there are substantial financial issues with the new arrangement.

In addition to the logistical issues associated with creating and running new county administrations, there are sure to be many unresolved issues about where the responsibility of the county governments stops and where the responsibility of the central government begins. The central and local governments are supposed to engage on the basis of consultation and co-operation, but it is overly optimistic to assume that co-operation will be the main tenor of interactions.

According to the Constitution, at least 15 percent of national revenues are to be allocated to the counties, but it is estimated that the actual amount will be more than one quarter of revenues. This creates serious financial complications for the country’s treasury, given that revenue collections are well below target and expenditure is well above target for the current year, so that the unfunded budget shortfall is likely to be between 25% and 50%.

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Continuing uncertainty

stalled-economyKenya’s Supreme Court is this week hearing petitions arising from the elections held earlier this month and, depending on the outcome, the uncertainty may be over by next week or the country may experience a re-run of the election in two months’ time. While the uncertainty remains, the economy is at a standstill and businesses have been accumulating cash to tide them over, instead of investing it.

According to a report in The East African, a survey of the financial results released by companies listed on the Nairobi Securities Exchange reveals that the majority of them have been holding more cash than they held in the previous financial year. Banks, in particular, have been increasing their cash positions and improving their liquidity ratios, rather than loaning it out in what is regarded as a high-risk environment.

Although there was violence and numerous deaths in the coastal region on election day and in the weeks leading up to the elections, the elections and their aftermath have so far been much more peaceful than the last elections, and most Kenyans are cautiously optimistic that stability will prevail. Most businesses will be hoping for a quick recovery when the election uncertainty is over, to compensate for the slow-down during the election period.

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What now for Kenya?

difficult-choicesOn Saturday, the runner-up in this month’s Kenyan presidential election filed papers with Kenya’s Supreme Court contesting the declared result of the election. While some are interpreting his actions as a failure to admit defeat, there are some odd circumstances surrounding the declared result:

  • Uhuru Kenyatta’s first-round victory was well outside of what was predicted by polls
  • If there was a serious attempt at vote rigging, the riggers would have had to arrange for the failure of the equipment designed to prevent vote rigging; that equipment did in fact fail
  • There was widespread vote rigging at the last election
  • If Kenyatta was in fact guilty of the charges currently lying against him at the International Criminal Court, vote rigging would be entirely in character

So far there has been no persuasive evidence to suggest that there was anything significantly wrong with the conduct of the elections. Even if there was electoral misconduct, there would be substantial problems with any attempts to change the present situation. A court order for a re-run of the election would increase the likelihood of tribal violence, and would certainly result in even greater losses of productivity. Most Kenyans are probably hoping that the court proceedings do not result in a repeat of the election.

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The high cost of elections

high-costJudging by the cost to Kenya and the surrounding countries, Kenyans take their elections much more seriously than do citizens of most other countries. Not only did many people wait in queues for more than 8 hours to lodge their votes, almost all businesses stopped on Monday while votes were cast, and on the subsequent days while votes were counted. The biometric kits and computer resources acquired for the elections were expensive, but the days off work were even more expensive.

Last time round, post-election unpleasantness made it extremely dangerous for people travelling through the Rift Valley from Nairobi in the direction of Uganda, and accordingly this time transport businesses closed down until it was clear that travel along the road would not be interrupted by fighting over the election outcome. As it turned out, the biometric kits failed when their batteries ran out, and computer communications proved unreliable, so the vote count took much longer than anticipated.

This meant that transport businesses could not safely resume their work for several days, and as a result Uganda, Rwanda, Burundi, South Sudan and the Democratic Republic of Congo have been experiencing shortages of commodities including fuel. Since the announcement of Uhuru Kenyatta’s surprise victory in the presidential contest on Saturday, relative peace has prevailed and most businesses, including transport companies, have cautiously returned to work.

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Kenyan elections

voting-formYesterday was the big day for voting in Kenya. Long queues had already formed when polling centres opened at many locations across the country at 6am. Given the unhappy experience of post-election violence following the vote-rigging and corrupt practices which occurred at the last election, there has been much talk about peace, and all candidates for the presidential position have pledged to accept the result, whatever it might be.

Unfortunately, however, violent clashes during polling yesterday in the coastal region of Kenya, with around 17 reported deaths. Five police officers and at least six other people were reported to have been killed in a violent confrontation at Changamwe, near Mombasa, and six more people are reported to have been shot dead at Kilifi, which is half way between Mombasa and Malindi on the Kenyan coast. Three explosions were reported at polling stations in Mandera, which is at the north eastern extremity of Kenya, on the borders with Somalia and Ethiopia.

Deliberate violence was not the only hazard for voters. There was a stampede at St Monica Academy polling station in Kitengela, and 20 people were taken to hospital. A man died while waiting to vote in Hardy, Nairobi, and a woman died while waiting to vote in Kiharu, Muranga County. According to the official timetable, results are due to be announced by next Monday, but it is expected that most of the results will be available within two days or so.

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Nervous days in Kenya

nervous-daysOpinion polls in Kenya are predicting that the presidential contest between Uhuru Kenyatta and Raila Odinga will be very close. It seems likely that neither candidate will get more than 50% of the first round vote, so that the contest will be decided in a second-round run-off. Business investment has been at a standstill for several months now in anticipation of the elections, and the run-off campaigning will delay certainty for at least another month.

Political campaigning is already intense and the risk of politically-inspired inter-ethnic violence is high; the polarisation could become worse during run-off campaigning. Kenya’s chief justice has revealed that he had received threats against his life and those of his fellow judges in connection with a court hearing relating to the eligibility of Uhuru Kenyatta, and he was unlawfully challenged by an airport officer on the apparent orders of a senior administration official.

Neighbouring countries are nervous about the possibility of unrest during or following the election period. Uganda and Rwanda are reliant on goods imported through Kenya, particularly including oil, and the supplies of both countries were severely interrupted during the riots in the months following the last Kenyan elections.

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The case of the missing goats

magic-goatAlmost a decade ago, Uganda’s president Yoweri Museveni personally instituted a poverty reduction program involving goats and costing $3.6 million. Some 3,000 goats were purchased in 2004-2005, and their offspring were to be exported for the benefit of numerous poor farmers. An adult female goat typically gives birth twice each 13 months, and there is a high ratio of twins, so over a period of five years the goats were expected to give birth to 30,000 kids.

The original goats seem to have been accounted for, but their 30,000 offspring seem to have gone missing in mysterious circumstances. This fact was noted in a newspaper in April 2011, giving rise to an investigation by the Public Accounts Committee. The accounts reveal that a private firm entered a contract to supply 150 male and 200 female exotic breed goats using its own funds, and 54,000 Mubende goats using government funding.

During the financial year 2004-2005, the government allocated $3.3 million to the Presidential Goats Project to cover infrastructure development and the purchase of the first lot of goats, but only 3,023 Mubende goats were purchased, and they were not distributed to farmers as intended because of a lack of funds. The government subsequently released another $3.7 million, and a further 5,040 Mubende goats were purchased and distributed to farmers together with the original 3,023, some five years later.

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Promises without finance

unfunded-promisesThe two leading candidates in Kenya’s forthcoming presidential elections have at last released something resembling policies, but unfortunately the policies of both candidates concentrate on spending plenty of money rather than on how the money will be raised. Kenya is already in a difficult financial position, with this year’s revenue falling well short of target and expenditure considerably exceeding target.

Apart from the problem of the deficit, the incoming government will have to fund the 47 new county governments specified in the new Constitution, each of which will be anxious to have money to spend. The next president will have a job that would stretch the capacity of the most able economist, facing the need to rein in spending sufficiently to assuage the anxiety of lenders while avoiding policies which might curb economic growth.

The past six years have seen little reduction in the poverty rate in Kenya, with the poverty level hovering around 45%. Something needs to be done to provide more people with an economic pathway out of poverty. One presidential candidate proposes a free national health insurance scheme and cash handouts for orphans and the elderly; the other proposes business tax cuts and free milk for all school children; neither says where the funding will come from.

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Kenya’s funding shortfall

unmanageable-debtThere is a limit to the amount of free spending that a country’s treasury can incur before the available funds run out, and in the case of Kenya the spending limit seems to be approaching. Just over a year ago the country began an expensive military intervention in Somalia, and then negotiated a deal whereby Kenyan forces would join up with Amisom forces and the United Nations would foot the bill.

Now it seems that Amisom has asked for the receipts to verify the $209 million expenses claim that Kenya has filed. This is rather awkward for Kenya, as it has already spent the expected $209 million in funding the first stage of its forthcoming elections. No provision has been made for funding run-off elections, should they prove necessary, and the country’s ambitious budget for the current year is already more than $1.5 billion in arrears.

The government’s taxes and revenues for the current financial year are $500 million behind budget. Recent salary rises for teachers, health workers and police have increased costs by $350 million. Other unbudgeted expenditures including security operations and implementation of the new Constitution stand at around $800 million. Whoever wins the upcoming elections will be faced with significant fiscal challenges upon taking up office.