Title:Post Budget Analysis 2017/18
Is the extractives sector in Kenya a blessing or curse?
A Primer to the Emerging Sector in Kenya: Resource Bliss, Dilemma or Curse
Dr. Miriam Omolo, Edgar Odari, Davis Osoro, Miriam Omolo, PhD Robert Chira, PhD Leon Ong’onge, Chrispine Oduor and Katindi Sivi-Njonjo.
In any economy, the extractive sector (ES) consists mainly of oil, gas and mining activities. This is a sector with great potential to enhance an economy. Indeed, experience in countries such as Norway, Canada, Botswana and Ghana suggests that extractives can be effectively managed to contribute to sustainable economic growth. Experience, however, in other parts of the world including Nigeria, the Democratic Republic of Congo (DRC), South Sudan, and the Central African Republic (CAR), suggest that extractives if not well managed can be a curse leading to conflict.
Presently, extractives in Kenya contribute approximately one per cent to gross domestic product (GDP). The sector is however emerging. In the recent past, there have been oil and more mining discoveries in Kenya. For instance, oil has been discovered in Turkana County, and there are new discoveries in the mining sectors for minerals such as titanium in Kilifi County and coal in Kitui County. In addition, Kenya is actively undertaking off shore explorations with the aim of making gas discoveries.
The growing extractive sector in Kenya means that there is need to give more attention to the social and economic dynamics of the sector. For instance, when Kenya discovered oil in Turkana County in March 2012, the Government was faced with emergent issues such as environmental implications, community obligations and rights, a suitable governance framework, and effective utilization of resources generated from the sector.
Policy Recommendations and Further Research
This study has illustrated the massive potential gain from the extractive sector and how the new revenue inflows may impact the socio-economic landscape of the country. Because of the established economic importance of the sector, it is necessary for the government and all relevant actors to synergize efforts and institute an enabling and progressive environment for the management of the sector. A lot needs to be done at several levels by several actors but this will only happen if information and knowledge is shared widely and communities sensitized. The study analyzed the findings of the research and came up with the following recommendations necessary for a fiscally sound development of the extractive sector in the country:
- Continue to build and maintain capacity in terms of skill sets at relevant agencies and more crucially in skills of assessing the suitability of contractual terms and on other areas of the mining value chain.
- Continue to encourage the systematic integration and implementation of public finance management principles in the government activities and programmes.
- The design of policy frameworks should acknowledge that mineral resource life spans are finite and uncertain, and therefore these policies should ensure maximum possible reap (good deal) for the people of Kenya.
- Create policies that make natural resources a fuel/driver of other sectors of the economy through backward, lateral and forward economic linkages. This would in a way help avoid the “Dutch Disease” and create opportunities for employment.
- Share the benefits from the extractive sector in the best equitable way possible because all minerals belong to all Kenyans regardless of mineral locale but compensate local communities appropriately.
- Rationalize the public sector and re-evaluate the devolved county structures to control government expenditure so that ES revenues are not used solely to bridge budget deficits but for capital investments.
- Set up a Sovereign Wealth Fund with tight safeguards on its management and allocate significant portions of ES revenues into this fund.
- Encourage a political environment that is progressive in terms of promoting good management of natural resources in the country.
- Ensure citizens participation in the extractive sector development discourse to mitigate possible conflict. This is possible through access to reliable information to the citizenry and encouraging conversation around the subject.
- Encourage production and tracking of reliable data, which will guide formulation of relevant policies for the industry.
- Join and adopt international and regional development and transparency initiatives aimed at ensuring ES revenues are well managed. These include the Africa Mining Vision and the Extractive Industry Transparency Initiative (EITI).
This study explored the potential fiscal outcomes of a markedly developed extractive sector in Kenya. It looked at the general fiscal elements that characterize the sector, analyzed the composition, identified gaps and made recommendations based on information that was obtained. It will be beneficial for the country if more in-depth research was carried out on the design and management of fiscal regimes employed in the country for both the mining and oil & gas industries. This would provide stakeholders with a tool to better analyze the contracts terms and the associated socio-economic impacts. The other area that would benefit from further, more focused analysis is on extractives sector revenue management especially in terms of sub-national fiscal governance and regional development. This would provide an understanding of the nature of policies that will best inform wise revenue management at the county and local community level including the methods required to build the necessary capacity at these administrative levels.
Another interesting field of further research is on the specific methods on how the extractive sector can spur the development of other non-resource sectors such as agriculture, manufacturing, local enterprise through backward, forward and lateral linkages. Finally, more research is necessary on the design, management and oversight of a well-functioning Sovereign Wealth Fund, as the government has published the intention of establishing one.