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The World Bank has released an economic assessment report for Sub-Saharan Africa and cautions that Kenya is walking a tightrope in trying to push reforms, including higher taxes, to net much-needed revenue in the wake of subdued collections and high debt financing requirements.
Andrew Dabalen, World Bank African Region chief economist, spoke to Business Daily about the prospects of Kenya’s economic revival amid headwinds including high debt service costs and underlying inflationary pressures.
The World Bank’s new released Africa Pulse report mentions the loss of political capital in pushing reforms in the aftermath of the youth-led protests here in Kenya, do you see the difficulty in the government bringing new revenue/tax measures after the backlash?
The general gist is what is underneath these protests that started in Kenya and spread into Uganda and Nigeria. There is a common set of grievances in which people want policymakers to do reforms that allow these economies to work well for them, to provide opportunities for jobs, advancements, and careers, and to flourish as individuals and groups.
The lesson is not really to stop doing or retrench from reforms but to do reforms that are bold and lead to the kind of demands the protesters were asking for; transparency, good governance, and an economy geared to creating opportunities for young people.
Many central banks on the continent, including our own (CBK), took tough measures to curb inflation, even though it came with the pain of higher interest rates. Was this pain worth it?
The thing about inflation in general is that in retrospect it’s easy to imagine a situation in which it would have been less painful, but inflation left unchecked can be destructive and completely go off the rails for policymakers to manage and you kind of damage the economy and society.
Secondly, inflation is a tax on everyone which can really disrupt social cohesion. It was the right thing to do for the policy makers and you are now beginning to see a time for a pause in the policy, increase with the battle having been won.
Can central banks over the inflation hurdle cut interest rates just as fast, to bring some relief in rekindling growth in private sector credit without giving it all away again?
One has to be very empathetic for what Central Bankers are doing because on the one hand, they don’t want to choke investments for the countries but on the other, they don’t want the monster of inflation to get out of control because the consequences of that are likely worse.
That balance has to be driven by being very vigorous about the data in the local economy and keeping an eye on external factors.
The report mentions the high debt service costs faced by many countries driven mostly by Eurobond redemptions, Kenya kind of avoided the bullet with the June 2024 maturity, but should we still consider restructuring as an option, following the likes of Ghana, Ethiopia, and Zambia?
It’s a difficult question given you and I are not policymakers in the government of Kenya. Going to the G20 common framework is an option but the Kenyan government has chosen not to go there.
There are a lot of reasons for reluctance by many countries, one is the process is too complicated because of the expansion in the composition of lenders.
Second, a lot of these countries want to see if there is real meaningful debt reduction which hasn’t panned out so far. There is also concern for reputation where a country may be seen as one likely to struggle in meeting its obligations.
Refinancing costs remain high, and there is an example of Kenya’s 2024 Eurobond which fetched a higher coupon than the prior 2014 issue, do you feel it will take quite some time before countries return to the international capital markets, noting the stay of comparatively higher interest rates?
The fact that the Fed and the ECB have reduced interest rates, and if they continue on the path, there is every likelihood to imagine that in fact there will be a spillover to the rest of the world in terms of interest rates, maybe the premiums will come down for countries completely closed off from the market.
At that point, the countries might be tempted to go back and it’s important to acknowledge that countries do need market access. Interest rates will still be dependent on the economic fundamentals of the specific countries even as interest rates come down around the world.
Coming back to the domestic market, we have had a deep one, and the domestic market has served in the absence of access externally, however, the private sector has been crowded out, how can the government go about tapping the same market but ensure it’s not at the expense of everyone else?
It’s a very difficult balance. Government borrowing heavily in the domestic market leads to very high interest rates cutting off the private sector and it’s a problem faced by not just Kenya.
We need private sector-led growth where entrepreneurs have access to cheap capital. The balance is difficult, but I’ll give you some ideas that we are yet to have concrete research on.
For instance, Kenya has a debt anchor at 55 percent of GDP, we can go further and say have an anchor to domestic borrowing.
Second, the government can think about borrowing from long-dated bonds targeting pension and mutual banks and leave the banks to lend to the private sector. Finally, the government can focus on growing the economy to finance its expenditures from revenues raised from taxes.
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