Business

Discourse on Kenya Rebasing to Middle Income Status

Featuring
Leonida Mutuku: Research Manager
Patrick Costello: Data Scientist
Christine Mahihu: Research Assistant
Chris Orwa : Executive Producer 😉
14860074544_42e0fb1bfa_zImage Courtesy of Jesse McKee

SET

(iHub Coffee bar, everyone having a cup of their favourite stimulant)

Chris Orwa: Hey guys, check out this article

Christine Mahihu: Kenya will become middle-income state by September.

 Leonida Mutuku: Patrick, any thoughts on this rebasing?

 Patrick Costello: Sounds like a useful exercise although the move to middle income status will definitely mean changes for things like donor funding. Should create benefits such as attractiveness for foreign investment – you could measure this via relative impact on Kenyan government funding rate.Might take a few years to show up. Does change in status affect borrowing rates? Is there a pickup in rate of FDI with change in status? How much donor funding, subsidies etc actually gets lost in the move.

Christine Mahihu: I do know, Kenya lost access to funds when it moved from underdeveloped country to a developing country in terms of climate change project financing. We also lost access to the European carbon market. May not be directly related, but this move stalled major projects countrywide and forced involved organization to raise funds elsewhere, something that could also happen in other sectors if this change in status actually happens.

 I like Patrick’s highlight on the benefits of rebasing. The earlier analysis seems to concentrate more on the negative. I also wonder what path other countries took when they were faced with the same situation. I agree, this is a great opportunity to compare the positive and negative effects. With regards to the carbon market, the idea was to provide funding to developing and underdeveloped countries so that they can take a more ‘green’ approach in their path towards development. Unfortunately, China was the biggest beneficiary (and did not necessarily reduce emissions) causing the EU to rethink funding to developing countries, where both China and Kenya fall. The whole thing is big and complicated but no use getting into that.

 Patrick Costello: Hmmm, it’s interesting to note from that bit the rebasing only just squeezes Kenya over the middle income status at $1,036. I think you could make a pretty good argument to hold-off on cancelling donor aid/preferential treatment if cutting that aid pushed you immediately back to down poor country status, and that aid should only be stopped if removing the aid did not push a country back to poor income status.

 Also remember that the downside of loss of donor funding/world bank loans due to increased economic development should be offset by lower risk premiums on loans, hence cheaper loans from regular sources over the longer term. E.g as Kenya is seen to be more stable and a better investment hopefully Kenyan government credit rating goes up and government funding goes down which will lower Kenyan borrowing rates (as most debt will price at a spread to government debt). Will be interesting to see if this happening in practice, but should be easy to track. In fact it would be interesting to look at credit rating vs development status.

 In relation to carbon market access – I don’t think this is development related, rather an EU decision affecting eligibility of all CDM (Clean Development Mechanism) projects across the board post 2012. Not sure why they made it, there’s a pretty opaque description about wanting to develop some new migration scheme.

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