Growing economy versus loss of jobs: What Kenyans must demand from aspirants

The election year in Kenya is contextualised in two conflicting realities: on one hand the country is among those growing the fastest in Africa and the world with successful record in attracting investment.

Yet many companies have shut down their operations in Kenya or left the country, leaving in their wake high levels of poverty and unemployment and cost of living.

Reconciling these realities is the task that citizens, who will be called upon to elect the next economic managers have to face.

At 6.2 per cent in second quarter of the current financial year, it cannot be denied that the Kenyan economy is growing at a robust rate. This, in fact, is an improvement from 5.7 per cent in Q3 of last financial year.

Juxtapose this with an African GDP growth rate of about 1.4 per cent and a global growth rate of about 3.4 per cent in 2016 and the true picture emerges.

Agriculture, forestry and fishing; transportation and storage; real estate; wholesale and retail trade as well as mining and quarrying have been identified as sources of this growth.

Kenya was not only buffered from the decline of commodities that has unsettled so many African nations, the country saved nearly Sh50 billion in the first half of 2016 alone due to low global petroleum prices. Besides, the Kenyan shilling remained steady with regards to major world currencies, standing at around Sh100 to the US dollar for most of last year.

This is important for Kenya, which is an import economy. Currency depreciation places upward pressure on inflation, which remained within the Central Bank of Kenya’s (CBK) target range of 5 plus or minus 2.5 percentage points.

Annual average inflation dropped from 6.5 per cent in November to 6.3 per cent in December, the lowest since November 2015. In addition, the country made progress on the Ease of Doing Business Index finishing at position 92nd in 2016 up from 113 in 2015. This was the first time in seven years that Kenya made it to the list of top 100.

Kenya’s profile as an attractive investment destination also grew in 2016. FDI Markets ranked Nairobi as Africa’s top foreign direct investment destination with inflows surging by 37 per cent in 2015. Reports indicate that Kenya recorded the fastest rise in FDI in Africa and the Middle East.

The FDI intelligence website indicates that a total of 84 separate projects came into Kenya in real estate, renewable and geothermal energy as well as roads and railways worth Sh102 billion – creating new jobs for thousands of Kenyans.

More recently, auto maker Peugeot has announced a contract to assemble vehicles in Kenya joining Volkswagen, which opened a plant last year, Wrigleys invested Sh5.8 billion in a plant in Thika and the government signed a contract worth Sh18.74 billion with the French government to build a dam.

To millions of jobless and starving Kenyans however, the reality described above seems rather too theoretical. The fact is that not many Kenyans are feeling the positive impact of these rosy statistics.

With regular media reports on company retrenchments and company shutdowns, thousands of Kenyans are in fact grappling with the exact opposite of the rosy picture above.

Last year alone, thousands jobs were lost due to company restructuring or shut downs. Some 600 jobs were for instance lost when Sameer Africa announced plans to close its Nakuru factory.

Flourspar Mining Company also shut down, leading to a loss of between 700-2000 direct and indirect jobs. Oil and gas logistics firm Atlas Development wound up operations and media houses threw out hundreds of employees to cut costs.

Perhaps it is in the banking sector where job losses were most pronounced. More than six banks announced retrenchment plans in 2016: Equity Bank released 400 employees; Ecobank announced it would release an undisclosed number of employees following a decision to close nine out of its 29 outlets in Kenya; Sidian Bank, formerly known as K-Rep, let go 108 employees, Family Bank sent home undisclosed number of workers and the local unit of Standard Chartered announced plans to lay off about 600 workers and move operations to India.

The question is why this happening. How can economic growth be juxtaposed with massive lay-offs and economic hardship? Several factors are at play here. The employment cuts in the banking sector are, for instance, linked to two factors -- the adoption of technology and interest rate caps. Technology adoption has translated meant that millions of Kenyans no longer have to visit banks to access financial services as they can make those transactions digitally. Jobs have become redundant as more and more transactions including money withdrawals and transfers, loan applications and disbursement, and the payment of bills go digital.  

Secondly, the interest rate cap has placed pressure on the profit margins of banks leading to job forfeiture. The interest rate cap stipulates that banks cannot charge interest rates above four percentage points of the Central Bank Rate (CBR).

Interest rate spreads have several functions for banks, of which perhaps the most important is insulating them from bad borrowers. There is an asymmetry of credit information in Kenya due to the fact that the creditworthiness of most Kenyans cannot be established.

The result is that when banks disburse loans they often do not know if the borrower will be a good or bad one. Thus to insulate themselves from the risk of lending to bad borrowers, interest rates are raised in order to ensure that the bank recovers as much money from the borrower in as short a time as possible.

In removing this provision, the interest rate cap is essentially forcing banks to lend money to both good and bad borrowers at the same rate. This in turn threatens profit margins as there is a real risk that the bank now has no buffer against bad borrowers. Some banks have effectively responded to the interest rate cap by shedding jobs to cut down operating costs and safeguard profits.

However, the interest rate cap is having a more insidious effect on the economy. A report by the IMF released last month says that the interest rate controls could reduce growth by around 2 percentage points each year in 2017 and 2018.

The IMF also expects a slowdown in the growth of private sector credit linked to the cap. Economic growth rates have been revised downwards due to the cap.

For the average Kenyan, however, the interest rate cap has meant that SMEs and individuals who used to access loans, albeit at higher rates, are likely to get no credit at all.

Banks are simply not lending to individuals and businesses they think cannot service the debt credibly at that capped ceiling. Sadly it is the most vulnerable who are being disqualified first as these are seen as high risk and high cost borrowers.

As they are shut out of credit SMEs cannot implement growth plans and are unable to create jobs and wealth. The contraction in liquidity engendered by the cap may also mean there will be less money moving in the economy; Kenyans ultimately feel that there is less money around, many feel more broke as they cannot get loans to grow their business or meet personal needs.

One of the biggest factors why Kenyans don’t feel the rosy statistics is because most operate in the informal economy, whose performance is generally not captured in official figures.

GDP growth and Ease of Doing Business data do not capture the reality of the informal economy where over 80 percent of employed Kenyans earn a living.

One, therefore, cannot extrapolate positive overall statistics as reflecting the performance of the informal economy. Perhaps the incongruence Kenyans feel stems from the fact that the economy from which millions earn a living is largely ignored.

The hardship and challenges of Kenyans living and working in the informal economy continues to be neglected and thus policies and actions that could help most Kenyans are never developed or implemented. Until the gross negligence of the informal economy is addressed, one can expect the average Kenyan to feel the disconnect between economic growth and the realities of the informal economy.

Besides, the country seems to be in a ‘jobless growth’ rut where GDP growth doesn’t lead to formal job creation. This is partly because Kenya’s economic growth is services driven, and services produce far less jobs than manufacturing.
Until the manufacturing sector is given the attention it requires such that economy is driven by exports of manufactured goods, the ‘jobless growth’ challenge will continue.

Remember that manufacturing is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption.

Kenya is currently deindustrialising with the manufacturing sector growing at a slower rate than the economy. The manufacturing sector grew 3.6 percent in the Q1 and at 1.9 per cent in Q3 of 2016 compared with a GDP growth rate of 6.2 percent in Q2 and 5.7 percent in Q3 of 2016 – meaning the share of manufacturing in GDP is shrinking.

This should be of concern to policy makers because, as analysts point out, industrial development is crucial for wealth and job creation. Exacerbating the already slow growth of the sector this year are the drought and cheap imports.

As the Kenya Association of Manufacturers has pointed out, the drought is having an impact on raw materials in sectors that rely on agricultural products. The drought will also lead to a higher cost of goods and services for Kenyans as electricity tariffs are adjusted upwards.

The manufacturing sector is also threatened by the fact that the country has allowed the entry of cheap goods, particularly from Asia, to flood the market. Most of these goods benefit from protection and subsidies in their home economies which is not reflected here. These constrain the growth of the sector in Kenya.

Finally, financial mismanagement at both national and county levels is compromising growth. The top allegations of the financial mismanagement of public funds according to media reports include the laptop tendering debacle, NYS scandal, Ministry of Health and the GDC tendering scandals. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. Thus the economic stimulus that ought to be garnered from public never happens because projects are either under-financed or not financed at all as public officials siphon money away from them.

Further, businesses routinely complain that bribes have become a basic expectation of county officials around the country. A report released by the Auditor General last month revealed that Kenyans are asked to pay up to Sh11,611 by county officials. Mombasa County topped the list of bribe-seekers followed by Embu, Isiolo and Vihiga. As long as this continues, jobs and wealth that government investment and financing should create will not materialise.

So what should Kenyans demand from those vying for power in this year’s general election? The first and foremost is ending financial mismanagement. And here the opposition is not innocent either.

Kenyans must demand a clear plan that will take serious steps to put in place financial structures that are more robust and punish those engaged in the mismanagement of public funds.

Secondly, Kenyans should push for the government to provide a detailed analysis on the impact of the interest rate cap on Kenyans and the economy.

If the analysis herein is anything to go by, Kenyans should also seek the reversal of the interest rate cap as soon as possible.

Thirdly, Kenyans ought to demand the development of a policy aimed at supporting and developing the informal economy at both national and county levels. The gross neglect of this sector must end given that it is in the informal economy where most Kenyans earn a living and are employed.

Finally, Kenyans should push for a detailed plan on industrialisation. While the Ministry of Industrialisation has developed the Kenya Industrial Transformation Programme, a detailed work plan and timeline of deliverables ought to be developed and shared so that Kenyans can reap the dividends that green industrialisation can create.

Anzetse is a development economist; Email: [email protected]