Kenya, East Africa’s largest economy lessons on reforms abound

The ability of East Africa’s largest economy and business hub to enact reforms and free up large parts of its economy to be largely determined by market forces as opposed to government dictates has led to the economy outperforming West Africa’s economic giant Nigeria, over the past 3 years.
Nigeria has been in a semi-permanent state of crippling fuel scarcity since 2016 (with resulting negative impact on the economy), largely due to the government’s reluctance to adjust prices of imported petrol to track the rising price of crude oil.
Kenya, which imports almost all the petrol it consumes like Nigeria, has no such luxury and recently its Energy Regulatory Commission (ERC) hiked fuel pump prices for the eighth straight month.
In its monthly price guide released this week (February 14, 2018), Kenya’s ERC increased the price of petrol to Sh107.92 per litre, equivalent to $1.06 per litre (N387/litre). In Nigeria the price of a litre of petrol remains stuck at N145 or 0.40 cents a litre.
Kenya’s ERC attributed the upward price review to higher crude oil prices in the international markets.
“The changes in this month’s prices have been as a consequence of the average landed cost of imported super petrol increase of 4.10 per cent,” Pavel Oimeke, the acting ERC director-general, said in a statement.
ERC said crude oil prices peaked at $70 a barrel in January, and the regulator uses the previous month’s crude prices to compute the current month’s prices.
Subsidising the price of petrol in Nigeria has led to hoarding fuel and shortages. There is also a lot of smuggling and demand for Nigerian fuel from neighbouring countries purchased using more market determined exchange rates.
Razia Khan, the chief Africa Economist at Standard Chartered Bank, says this means the current pricing structure of fuel in Nigeria is not ideal and cannot prevent fuel shortages, because an implicit (FX) subsidy is needed for the fuel price to make sense.
“For as long as this disparity exists, and there is no meaningful harmonisation of FX rates (with fuel importers benefiting from a lower USD-NGN rate) there will be limitless demand for fuel,” Khan said in December in the midst of yet another fuel scarcity crises.
“Maybe the solution is that the regulated price of fuel should not rely so much on the implicit FX subsidy to make it work. Then it will be tougher for anyone to abuse the system.”
The retail prices in Kenya will remain in place until March 14, when the ERC will issue new price guides. Other factors considered in determining the retail prices of fuel include the position of the Kenyan currency against the US Dollar.
Kenya’s $74 billion economy, a regional hub for multinationals including IBM Corp., Microsoft and Toyota Motor Corp., has also benefited from a largely liberalised Foreign Exchange (FX) market, which has helped to moderate inflation that stood at 4.83 percent in January.
Nigeria’s January inflation printed at 15.13 percent the National Bureau of Statistics (NBS), said on Wednesday.
The currency (Kenyan Shilling) has climbed 2.1 percent this year, reaching its strongest level since June 2016 and posting five straight weeks of gains even as a basket of emerging-market currencies declined amid a global stocks selloff. Nigeria’s currency meanwhile is still artificially propped up by the Central Bank at an official rate of N306 per dollar.
Investors are buying Kenyan local currency bonds even as rising oil prices threaten to widen its current account deficit, with petroleum products being the country’s largest imports.
Foreign investors’ bullishness is largely down to their belief that political tension will wane, growth will accelerate and interest-rate caps, which have dented the banking sector, will be removed, analysts say.
The Kenyan government is starting a road-show this week as it looks to sell as much as $3 billion of Eurobonds and with yields on the government’s Eurobonds due June 2024 trading at around 6.38 percent Kenyan spreads are around all-time lows and half levels from mid-2016.
The East African nation’s 2.6 trillion-shilling ($25.1bn) budget for 2017, compares with Nigeria’s Federal and State Government combined budgets of close to $40 billion in 2017.
Kenya’s tax collection (18.7 percent of GDP in the FY 2017/18 budget period) has been underpinned by on-going reforms in tax policy and revenue administration, through automation and inter-agency collaboration and connectivity.
Nigeria’s tax to GDP ratio is a low 6 percent, one of the least not just in Africa but globally.
Kenya has a Value added tax (VAT) rate of 16 percent on most goods compared to the 5 percent VAT rate in Nigeria.
The Kenyan economy has expanded an average of 5.5 percent per annum since 2015 and the World Bank forecasts growth to rebound to 5.8 percent this year.
Growth for Nigeria should come in at half the rate of Kenya with the World Bank forecasting GDP expansion of 2.5 percent in 2018 for Africa’s largest economy.
Nigeria has seen growth rates tumble from an average of 8.2 percent per annum between 1999 and 2014, to 2.7 percent in 2015, -1.6 percent in 2016 and a 0.54 percent average rate of expansion in the first three quarters (Q1 – Q3) of 2017.
Structural risks to the Nigerian economy are still present, but the underlying conditions are worse than they were in 2014 meaning the consequences of another collapse could be worse than last time around, according to Nonso Obikili an economist.
“How do we mitigate these risks? In the near term the central bank needs to demonstrate that it has learned the lesson from the last crisis and is ready to respond properly. This of course implies focusing on its mandate of price stability and allowing flexibility when required, specifically in the event of an exit by portfolio investors. The central bank also needs to show that it can withstand political risks, specifically pressure from politicians for short term boosts,” Obikili said.
“On the fiscal front, the Federal Government needs to follow its fiscal rule, saving any unexpected oil revenue windfall. Despite the fact that the crude oil price is $20 above the budget benchmark, the excess crude account (ECA) and the sovereign wealth fund (SWF) have not seen significant increases in their balances.
“The Federal Government also needs to deal with current imbalances in the system, specifically with regards to energy prices. It’s always better to allow flexibility when you have the option to and not when you are forced to by hard times. In the long term the diversification of export and tax revenue needs to be the focus. Although much has been done on the tax front over the last few years, the question of tax reform is still not on the table. With regards to export diversification, policy is almost non-existent.”

 

PATRICK ATUANYA, Nairobi