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Posted on November 12, 2019

Kenya’s economic structure: What’s the optimal role of finance?

On November 19th, FSD Kenya’s Annual Lecture will be held under the theme ‘Financing Kenya: 2020 hindsight for Vision 2030’. The idea of ‘financing Kenya’ is interesting because if one were to have a discussion on the state of the economy in Kenya, inevitably money (or the lack of it) will come up. Whether it is with regards to public finance or private sector, there is sense that money is ‘stuck somewhere’ and that if that tap were opened, the liquidity would cause all the boats in the economy to rise. However, opening the tap of liquidity in an economic system with clogged pipes may not lead to a better life for all Kenyans; it may even exacerbate structural issues that drive inequality. This article will highlight three features of Kenya’s economy, and ask what the optimal role of finance is within this structure. The three features are by no means exhaustive and the discussion does not address all the issues and dynamics related to the sectors or value chains mentioned.

The first feature is a large but volatile agricultural sector juxtaposed with premature deindustrialisation. Kenya’s agriculture sector contributed 34.2% to GDP in 2018, up from 31.1% in 2016. The contribution of manufacturing to GDP declined from 9.3% to just 7.7% in those three years, with no shift in this trend in sight. This is a fundamental constraint because even if one was to make the agriculture sector more stable and productive, with no attendant increase in agro-processing and more complex manufacturing capacity for both food and industrial agriculture, Kenya risks cementing its position as a provider of raw agricultural commodities to the world. At the same time, a key factor that informs the under-performance of the manufacturing sector is unpredictable agricultural production. When the rains fail, crops and livestock die, this leads to a collapse of the inputs into food factories, tanneries or ginneries/textile mills, for example. So what is the optimal role of finance here? Should it be directed to support agriculture production or rather, ramp up manufacturing production capacity?

The second feature is a weak government social security net. Kenya is not a land of free healthcare, education and unemployment benefits. And the reality is that even when government does subsidise some services, the quality of those services is often so poor that most Kenyans privatise those services, particularly health and education, as soon as possible. The aggregate effect of this is poor resilience against any type of shock be that job loss, illness, death or even a bad business year. And the fragility of incomes makes the lack of government welfare even more serious, because for the 83% of employed Kenyans in the informal sector, income is often unpredictable and seasonal. Thus, income shocks are an issue that has to be managed on an ongoing basis, and when other shocks hit, government is generally not a buffer. Our FinAccess data reveals that under 9% of Kenyans get financial assistance from government (including social cash transfers and bursaries), which are still subject to shocks. This is important, because the lack of a welfare net, in the context of a young and growing population means higher dependency ratios where income is stretched even further, leaving less money for buffering against shocks, let alone ‘surplus’or discretionary spending. So again, what is the optimal role of financing here? Should more be spent on the social welfare net or should the focus of financing be to make income sources for Kenyans more stable and resilient?

The third feature is the financial ecosystem itself with a defining element being the lack of long-term, patient capital, particularly from domestic sources. Kenyans often have to contend with financing on difficult terms with regards to variety, tenure and cost. Thus, just turning on the tap within the existing financial infrastructure without addressing the mismatch between the type of capital required versus what is available, may not yield much. And perhaps due to the lack of appropriate financing from formal financial channels, most Kenyans still rely in informal financing for personal and business purposes. FinAccess Survey 2019 reveals that 62% of Kenyans use informal financial solutions such as chamas (groups), moneylenders, shopkeeper credit, saving at home and finance from social networks. The challenge with informal financial solutions is that consumer protection violations can often go undetected and left unaddressed. Thus, should the focus be to build out financing infrastructure that develops pipelines of long-term patient capital from domestic sources, or should the focus be to get existing formal financial solutions to better speak to the financing needs of Kenyans?

These three features provide examples of how macro-level factors inform or even constrain the ability of financing alone to lift the quality of life of all Kenyans. And even if one were to get consensus on the priority areas to which financing should be directed, who or what would constitute the anchor financingand take on the uncertainty related to fundamentally shifting structural elements of Kenya’s economy? Because the reality is that government does not have enough money, and these are long-term structural issues where a purely commercial lens may not deliver outcomes of economic development or inclusion. Thus, what role can finance plausibly play in reconfiguring the plumbing that is Kenya’s economy, and should it? And if so, what attendant factors are required to catalyse the economic transformation required to deliver a better quality of life for all Kenyans?

We’ll be discussing some of these issues on the panel I will be moderating at the Annual Lecture on November 19 at the University of Nairobi. Speakers on the panel will be from the financial, tech and manufacturing sectors.

 

Anzetse Were is Economist at FSD Kenya.

 

Click here to register for FSD Kenya’s 2019 Annual lecture, which will be held on November 19 at the University of Nairobi’s Chandaria Auditorium. You can also join the conversation on Twitter at @FSDKe and hashtag FSDLecture.

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