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Weekly Economic Overview and Commentary for

the period 13th February 19th February, 2017


Compiled By: Prince Muraguri Kanyingi

Email: princemuraguri@gmail.com
Contents
LOCAL NEWS ................................................................................................................................................. 3
IMF raises red flag on Kenyas rising wage bill ......................................................................................... 3
Investors get relief as advance capital gains tax stopped ........................................................................ 9
Kenya shifts focus from capital city to grow economy ........................................................................... 12
Weak control puts billions of Sacco cash at risk of loss .......................................................................... 15
REGIONAL NEWS ......................................................................................................................................... 17
East Africa economies set for rough ride this year ................................................................................. 17
Ugandan central bank eases key lending rate to 11.5pc ........................................................................ 18
Traders focus beyond dollar and pound as tourism grows .................................................................... 20
Nigerias debt burden equals five years national budget ....................................................................... 22
INTERNATIONAL NEWS ............................................................................................................................... 23
US household debt approaches financial-crisis level .............................................................................. 23
Fuel price surge sends UK inflation to highest since June 2014 ............................................................. 25
Chinese inflation rate beats expectations .............................................................................................. 28
IMF can't cut special deal for Greece but debt solution possible Lagarde ........................................... 30
Japan's Q4 GDP expanded 1%................................................................................................................. 32
European Commission upgrades economic outlook .............................................................................. 36
Kuroda: BoJ focused on moving economy out of deflation .................................................................... 37
Fiscal Policy or Not, Yellen Says Outlook Supports Raising Rates ........................................................... 39
LOCAL NEWS
IMF raises red flag on Kenyas rising wage bill
The International Monetary Fund has said it will hold discussions with Kenya during a quarterly review in
April, about the countrys eligibility to take up a $1.5 billion contingency loan to address external shocks.
Kenya made a commitment to the Fund when negotiating the credit that it would control the fiscal
deficit during the run up to the August 8 election.

The commitment has now been put into question after the Cabinet approved salary increases for civil
servants last week that will cost Ksh100 billion ($1 billion) from July. All these things that are happening
in an election year and especially to an economy that is still vulnerable to shocks will be assessed in our
next review in April. We are going to reassess the impact of new developments such as drought and
increases of the wage bill in the budget, Armando Morales, the IMF resident representative in Kenya,
told The EastAfrican. He, however, said the new spending would not be a deal-breaker as long as the
government proves its commitment to reduce the fiscal deficit. Last year, the IMF, through a report
presented to the executive board on May 6, 2016, observed that Kenya is among countries that exhibit
large increases in wage bill spending in the run-up to elections. Others are Kosovo and Moldova.

Analysis: Implications of high public sector wage bill on economy of Kenya

The bloated Government wage bill will have a negative impact on sustainability of the countrys growth
trajectory. Economic growth will be consumption driven rather than investment driven and is therefore
likely to be unsustainable.

The increased wage bill stimulates domestic demand due to increased disposable income. However, this
demand is largely directed to non-productive sectors hence it is unsustainable. Overall, consumption as
a percentage of GDP will increase even as investment levels decrease denoting that the new
government wage bill may perpetuate hyper consumerism in the country. The additional wage pressure
is likely to have adverse effects on the investment pattern of Government thereby impacting negatively
on Vision 2030 projects. Government expenditure will increase significantly thereby necessitating
increased borrowing and therefore increasing interest rates and crowding out the private sector from
credit. The current account balance is set worsen on account of a worsening trade balance occasioned
by increasing imports even as exports remain the same. The increased wages will impact negatively on
poverty and rural development in the long run. Financing Options for the public sector wage
adjustments:

Increased borrowing from the domestic market but this will pose a major risk to public debt
sustainability and is therefore not a feasible option. The government does not have an option of
borrowing either internally or externally to fund the wage increment
Raise general tax rates on Income tax, Pay-As-You-Earn and VAT. But taking into account the
current economic situation as well as the countrys development agenda, the government
acknowledges that raising the general tax rates will not be feasible especially due to current
economic hardships as well as the likely negative impact on tax compliance and the business
climate
Raising Income taxes, PAYE and VAT has the effect of reducing disposable income thereby stifling
consumer spending. This is likely to have a negative impact on output and employment growth. An
increase in general taxes will impact negatively on poor households due to the decreased income
levels, causing poverty levels to increase

Expenditure cuts, new tax measures and additional tax administrative measures to seal loopholes in
revenue collection. The government views this as a viable option to meeting the countrys added
expenditure obligations
Improvement in customs administration, VAT reforms and enforcement of rental income tax are all
expected to enhance revenue collection

***

Policy trade-offs

According to the report, the wage bill grows on average by 0.53 percentage points during elections in
these countries, casting doubt about the sustainability of such spending in subsequent years. The
impact of an election appears to be much larger in emerging markets and low income developing
countries (LIDCs) compared with the advanced economies. The country case studies on Kenya, Kosovo
and Moldova describe large increases in wage bill spending in the run-up to elections, said the report.

During election years, the public-to-private wage ratio in LIDCs increases by almost three per cent,
according to the Fund. Against this backdrop rising debt levels and poor infrastructure the decision
to increase spending on public sector wages is naturally a concern. It is the growth that ultimately does
not happen that may reflect the true cost of Kenyas electoral cycle, Ms Khan said.

Despite the suggested news of revenue outperformance in the 2017/2018 fiscal year released today
[last week], with the authorities raising their expectation of growth of revenues by Ksh200 billion ($1.89
billion) to Ksh1.7 trillion ($16 billion), the general trend of rising debt that Kenya has seen in recent years
means that there is still pressure on the country to consolidate its fiscal balance, especially after the
August election, she added.

Public debt

Kenyas public debt is currently estimated at Ksh3.6 trillion ($34 billion) with debt service to revenue
ratio standing at 34.7 per cent against the threshold of 30 per cent.

The Cabinet, chaired by President Uhuru Kenyatta, also approved funds for the harmonisation of public
sector salaries and allowances, pension, house and hardship allowances, and recruitment of an
additional 10,000 police officers and 5,000 teachers.

However, according to the IMF, raising government wages during elections or boosting hiring can
worsen output fluctuations by stimulating demand, hindering the stabilising role of fiscal policy and
increasing public debt as compensation increases are often hard to reverse.

High compensation spending can also crowd-out priority spending on public infrastructure and social
protection, crucial for economic growth and poverty reduction, said the IMF.

The state-owned Salaries and Remuneration Commission (SRC) recommended an upward review of
salaries for all civil servants putting the lowest paid public employee in job grade B1 on a minimum
monthly wage of Ksh14,442 ($140) per month, with the highest paid employee in job grade E4 at a
monthly salary of Ksh292,765 ($2,900).

Compare this with some of its East African Community counterparts: The lowest paid public service
employee in Rwanda earns around Rwf216,081 ($255) while the top earning civil servant (permanent
secretary) earns around Rwf16,13,167 ($1,905).

In Uganda, the minimum salary for support staff such as attendants is set at Ush187,660 ($52) while the
highest paid civil servant (Head of Public Service) earns Ush4,952,059 ($1,366) per month according to
the salary structure for the 2015/2016 financial year.

The annual growth rate in the public sector wage bill has averaged about 20.9 per cent between 2013
and 2015, surpassing the rate of growth of the gross domestic product, according to the SRC. The Public
Finance Management Act (2012) introduced a clause to control wage bill growth by limiting
expenditures on wages to a maximum of 30 per cent of the total budget. If not effectively integrated
into budget planning, high or increasing wage bills can undermine fiscal planning, the report stated.

Given Kenyas fiscal constraints, important policy trade-offs are required. While a public sector pay hike
in July may lead to a short-term boost to consumption, this will do little to support longer-term growth.
Moreover, by not creating additional fiscal space for public investment, a lot more potential growth is
forgone, said Razia Khan, the chief economist at Standard Chartered Bank. She added that decades of
underinvestment also mean that the Kenyan economy is poorly endowed with infrastructure, despite
the increase in development spending in recent years.

Table 1 : Kenya: External Debt Sustainability Framework, Baseline Scenario, 2012-2035


Historical 6/ Standard
6/
Actual Projections
Average Deviation 2015-2020 2021-2035
2012 2013 2014 2015 2016 2017 2018 2019 2020 Average 2025 2035 Average
External debt (nominal) 1/ 28.4 29.5 37.2 42.5 45.1 46.2 46.2 47.3 48.0 51.7 59.9
of which: public and publicly guaranteed (PPG) 19.3 19.4 24.0 28.5 31.6 31.3 30.9 30.1 30.1 27.9 20.9
Change in external debt 1.3 1.0 7.7 5.4 2.6 1.1 0.1 1.0 0.7 1.6 0.3
Identified net debt-creating flows 3.4 5.6 5.8 4.4 3.3 1.9 1.5 1.5 1.6 2.3 1.6
Non-interest current account deficit 8.0 8.4 9.7 5.4 3.2 7.4 7.0 5.5 5.4 5.4 5.5 6.1 5.4 5.9
Deficit in balance of goods and services 13.7 14.0 15.5 13.6 13.4 12.1 12.0 11.9 12.0 12.2 11.1
Exports 21.9 19.6 18.2 18.3 17.6 17.8 18.0 18.2 18.3 18.3 19.0
Imports 35.5 33.6 33.7 31.9 31.0 29.9 30.0 30.1 30.4 30.5 30.1
Net current transfers (negative = inflow) -5.6 -5.7 -6.2 -6.2 0.4 -6.7 -6.7 -6.7 -6.6 -6.6 -6.5 -6.2 -5.5 -6.0
of which: official -0.4 -0.4 -0.5 -0.4 -0.4 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
Other current account flows (negative = net inflow) -0.1 0.1 0.4 0.5 0.3 0.2 0.1 0.0 0.0 0.1 -0.1
Net FDI (negative = inflow) -0.5 -0.9 -1.7 -0.7 0.7 -1.7 -2.3 -2.2 -2.4 -2.3 -2.3 -2.3 -1.9 -2.2
Endogenous debt dynamics 2/ -4.1 -1.8 -2.2 -1.2 -1.4 -1.4 -1.6 -1.5 -1.6 -1.5 -1.9
Contribution from nominal interest rate 0.4 0.5 0.7 0.8 1.0 1.1 1.2 1.2 1.3 1.5 1.7
Contribution from real GDP growth -1.0 -1.5 -1.4 -2.1 -2.4 -2.6 -2.7 -2.8 -2.9 -3.0 -3.6
Contribution from price and exchange rate changes -3.5 -0.9 -1.5
Residual (3-4) 3/ -2.1 -4.6 1.9 1.0 -0.7 -0.8 -1.4 -0.5 -0.9 -0.7 -1.3
of which: exceptional financing -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PV of external debt 4/ ... ... 30.9 35.7 38.3 39.6 40.1 41.6 42.6 47.6 57.5
In percent of exports ... ... 169.5 195.3 217.5 222.1 223.5 228.5 232.3 260.6 302.5
PV of PPG external debt ... ... 17.7 21.7 24.8 24.8 24.8 24.4 24.7 23.8 18.6
In percent of exports ... ... 97.0 118.5 140.9 138.8 138.0 134.3 134.6 130.3 97.6
In percent of government revenues ... ... 91.1 109.5 122.2 118.6 116.5 114.5 114.4 109.3 84.7
Debt service-to-exports ratio (in percent) 39.3 51.1 59.3 28.8 24.8 43.1 33.9 46.0 35.9 48.8 53.6
PPG debt service-to-exports ratio (in percent) 4.0 4.5 16.6 6.4 8.0 14.8 9.1 13.9 8.7 9.7 10.9
PPG debt service-to-revenue ratio (in percent) 4.6 4.5 15.6 5.9 6.9 12.7 7.7 11.9 7.4 8.1 9.4
Total gross financing need (Billions of U.S. dollars) 9.7 11.5 13.5 10.0 10.0 11.9 12.3 15.8 17.0 35.7 123.8
Non-interest current account deficit that stabilizes debt ratio 6.7 7.3 2.0 2.0 4.4 4.5 5.4 4.3 4.8 4.5 5.1

Key macroeconomic assumptions


Real GDP growth (in percent) 4.6 5.7 5.3 5.2 2.2 5.6 6.0 6.1 6.5 6.5 6.5 6.2 6.5 6.5 6.5
GDP deflator in US dollar terms (change in percent) 14.9 3.1 5.3 7.6 7.0 -4.6 -0.8 0.6 1.9 1.9 1.6 0.1 2.5 2.5 2.5
Effective interest rate (percent) 5/ 1.8 1.9 2.7 2.2 0.6 2.2 2.6 2.7 2.8 2.9 2.9 2.7 3.3 3.1 3.1
Growth of exports of G&S (US dollar terms, in percent) 11.3 -2.3 3.1 10.5 11.2 1.0 1.2 8.3 9.2 9.9 9.0 6.4 9.2 9.8 9.4
Growth of imports of G&S (US dollar terms, in percent) 9.6 2.9 11.4 15.1 11.6 -4.7 2.4 3.0 8.8 8.9 9.2 4.6 9.2 9.0 9.1
Grant element of new public sector borrowing (in percent) ... ... ... ... ... 19.4 12.8 13.1 13.2 9.8 12.9 13.5 7.4 5.2 6.8
Government revenues (excluding grants, in percent of GDP) 18.7 19.3 19.4 19.8 20.3 20.9 21.3 21.3 21.6 21.8 21.9 21.9
Aid flows (in Billions of US dollars) 7/ ... ... ... 1.1 1.3 0.8 0.8 0.8 0.8 0.6 1.4
of which: Grants 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 1.0
of which: Concessional loans ... ... ... 0.8 1.0 0.5 0.5 0.5 0.5 0.2 0.4
Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 1.4 1.1 0.9 0.8 0.7 0.7 0.5 0.4 0.5
Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 26.1 18.9 21.5 23.2 19.0 21.9 16.8 16.2 16.1

Memorandum items:
Nominal GDP (Billions of US dollars) 50.4 54.9 60.9 61.4 64.6 69.0 74.8 81.1 87.8 135.7 327.7
Nominal dollar GDP growth 20.2 9.0 10.9 0.8 5.2 6.8 8.5 8.4 8.3 6.3 9.2 9.2 9.2
PV of PPG external debt (in Billions of US dollars) 10.5 12.8 15.7 16.9 18.5 19.7 21.6 32.2 60.6
(PVt-PVt-1)/GDPt-1 (in percent) 3.8 4.7 1.9 2.3 1.7 2.3 2.8 2.0 1.1 1.6
Gross workers' remittances (Billions of US dollars) 1.2 1.3 1.4 1.6 1.6 1.7 1.8 2.0 2.1 3.1 6.6
PV of PPG external debt (in percent of GDP + remittances) ... ... 17.3 21.1 24.2 24.2 24.2 23.9 24.1 23.3 18.2
PV of PPG external debt (in percent of exports + remittances) ... ... 85.9 104.1 123.2 121.7 121.3 118.4 118.9 115.8 88.2
Debt service of PPG external debt (in percent of exports +
remittanc ... ... 14.7 5.6 7.0 13.0 8.0 12.3 7.7 8.6 9.8

Table 2. Kenya: Sensitivity Analysis for Key Indicators of


Public and Publicly Guaranteed External Debt, 201535
(In percent)

Projections
2015 2016 2017 2018 2019 2020 2025 2035

PV of debt-to GDP ratio

Baseline 22 25 25 25 24 25 24 19

A. Alternative Scenarios

A1. Key variables at their historical averages in 2015-2035 1/ 22 23 24 25 25 26 29 31


A2. New public sector loans on less favorable terms in 2015-2035 2 22 26 27 27 28 28 30 27

B. Bound Tests

B1. Real GDP growth at historical average minus one standard deviation in 2016-2017 22 25 26 26 26 26 25 20
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/ 22 25 26 27 26 26 25 19
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017 22 24 24 24 24 24 23 18
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/ 22 27 31 31 30 30 27 19
B5. Combination of B1-B4 using one-half standard deviation shocks 22 25 27 27 27 27 25 18
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/ 22 35 35 35 35 35 34 26

PV of debt-to-exports ratio

Baseline 119 141 139 138 134 135 130 98

A. Alternative Scenarios

A1. Key variables at their historical averages in 2015-2035 1/ 119 132 132 136 139 144 158 161
A2. New public sector loans on less favorable terms in 2015-2035 2 119 146 149 152 151 155 163 142

B. Bound Tests

B1. Real GDP growth at historical average minus one standard deviation in 2016-2017 119 138 137 137 133 134 130 97
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/ 119 142 165 164 159 159 151 109
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017 119 138 137 137 133 134 130 97
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/ 119 156 172 170 165 164 149 100
B5. Combination of B1-B4 using one-half standard deviation shocks 119 143 159 158 153 152 142 98
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/ 119 138 137 137 133 134 130 97
PV of debt-to-revenue ratio

Baseline 110 122 119 116 115 114 109 85

A. Alternative Scenarios

A1. Key variables at their historical averages in 2015-2035 1/ 110 115 113 115 119 122 132 140
A2. New public sector loans on less favorable terms in 2015-2035 2 110 126 127 128 129 131 137 123

B. Bound Tests

B1. Real GDP growth at historical average minus one standard deviation in 2016-2017 110 123 124 123 121 121 115 89
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/ 110 121 127 125 122 122 114 85
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017 110 118 116 114 112 112 107 83
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/ 110 135 147 144 141 139 125 87
B5. Combination of B1-B4 using one-half standard deviation shocks 110 125 130 128 125 125 114 82
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/ 110 171 168 166 163 163 156 121

Table 4. Kenya: Sensitivity Analysis for Key Indicators of Public Debt, 201535
Table 4. Kenya: Sensitivity Analysis for Key Indicators of Public Debt, 2015-2035

Projections
2015 2016 2017 2018 2019 2020 2025 2035

PV of Debt-to-GDP Ratio

Baseline 46 48 48 49 48 47 41 33

A. Alternative scenarios

A1. Real GDP growth and primary balance are at historical averages 46 46 46 47 48 49 51 53
A2. Primary balance is unchanged from 2015 46 49 52 56 60 63 77 96
A3. Permanently lower GDP growth 1/ 46 49 49 50 50 49 48 53
A4. Fix primary balance ex-SGR 46 48 49 51 53 54 57 58

B. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2016-20 46 50 53 54 55 55 54 53
B2. Primary balance is at historical average minus one standard deviations in 2016-201 46 47 48 48 48 47 41 33
B3. Combination of B1-B2 using one half standard deviation shocks 46 47 48 49 49 49 47 44
B4. One-time 30 percent real depreciation in 2016 46 58 58 58 57 56 50 44
B5. 10 percent of GDP increase in other debt-creating flows in 2016 46 58 58 58 57 56 48 38

PV of Debt-to-Revenue Ratio 2/

Baseline 227 233 228 224 221 215 185 148

A. Alternative scenarios

A1. Real GDP growth and primary balance are at historical averages 227 223 215 216 220 222 230 236
A2. Primary balance is unchanged from 2015 227 239 245 259 275 289 350 434
A3. Permanently lower GDP growth 1/ 227 234 231 230 229 226 216 240
A4. Fix primary balance ex-SGR 227 232 231 236 243 247 260 262

B. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2016-20 227 242 249 251 253 251 243 239
B2. Primary balance is at historical average minus one standard deviations in 2016-201 227 229 226 223 220 214 184 148
B3. Combination of B1-B2 using one half standard deviation shocks 227 229 227 227 227 225 211 198
B4. One-time 30 percent real depreciation in 2016 227 280 272 266 262 255 226 199
B5. 10 percent of GDP increase in other debt-creating flows in 2016 227 280 272 266 262 254 218 171

Debt Service-to-Revenue Ratio 2/

Baseline 30 29 34 28 32 26 22 18

A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages 30 30 34 27 31 26 26 29
A2. Primary balance is unchanged from 2015 30 29 34 30 35 32 39 53
A3. Permanently lower GDP growth 1/ 30 30 34 29 32 27 25 28
A4. Fix primary balance ex-SGR 30 29 34 28 33 28 29 27

B. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2016-20 30 30 36 31 35 30 28 29
B2. Primary balance is at historical average minus one standard deviations in 2016-201 30 29 34 28 31 26 22 18
B3. Combination of B1-B2 using one half standard deviation shocks 30 30 35 28 32 27 24 24
B4. One-time 30 percent real depreciation in 2016 30 31 40 32 38 31 29 30
B5. 10 percent of GDP increase in other debt-creating flows in 2016 30 29 37 34 37 31 26 21

Sources: Country authorities; and staff estimates and projections.


1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period. 2/ Revenues are
defined inclusive of grants.
Investors get relief as advance capital gains tax stopped
The High Court has stopped the Kenya Revenue Authority (KRA) from implementing laws that will see
capital gains tax paid before transactions are completed following a lawsuit by the Law Society of Kenya
(LSK).

Justice John Mativo has ordered the KRA to suspend implementation of paragraph 11A of the eighth
schedule to the Income Tax Act which provided that capital gains tax be paid prior to completing
transfer of assets being sold. Previously, the capital gains tax was payable not later than the 20th day of
the month in which asset sales occurred. The levy is payable through the KRAs iTax portal.

The LSK now says the amount of capital tax gains due cannot be ascertained before the sale has been
completed. The advocates hold that the move has stalled several land deals and dealt a blow to several
citizens and firms property rights.

The application is hereby certified urgent and admitted for hearing on a priority basis. The KRA is
hereby restrained whether by itself, agents, servants or employees from implementing provisions of
paragraph 11A of the eighth schedule to the Income Tax Act pending the hearing and determination of
the application inter partes, Mr Justice Mativo ordered.

The LSK argues that it attempted to engage the KRA in dialogue to resolve the disputed clause, but that
the taxman stayed put forcing it to move to court.

Analysis: 6 reasons to keep capital gains tax low (Adopted from the Cato institute:
https://www.cato.org/publications/commentary/six-reasons-keep-capital-gains-tax-rates-low)

1. Inflation. If an individual buys a stock for $10 and sells it years later for $12, much of the $2 in capital
gain may be inflation, not a real return. Inflation and expected inflation reduce real returns and
increase uncertainty, which suppresses investment, particularly in growth companies.One solution is to
index capital gains for inflation, but most countries instead roughly compensate for inflation by reducing
the statutory rate on gains or providing an exclusion to reduce the effective rate.

2. Lock-In. Capital gains are taxed on a realization basis, which creates lock-in. Taxpayers delay selling
investments that have large unrealized gains to avoid the tax hit. As a result, people hold assets too long
and forgo beneficial diversification opportunities. For the overall economy, lock-in reduces growth
because it blocks the beneficial shifting of resources from lower- to higher-valued uses.

3. Double Taxation. Corporate share values generally equal the present value of expected future
earnings. If expected earnings rise, shares will increase in value, creating a capital gain to the individual.
But those future earnings will be taxed at the corporate level when they occur; thus hitting individuals
now with a capital gains tax is double taxation. Dividends are also double-taxed, with the result that the
U.S. tax system is biased against corporate equity and in favor of debt. This destabilizes companies and
the overall economy. Ernst & Young calculates the current U.S. combined corporate and individual tax
rate on capital gains at 50.8% compared to an OECD average of 42.0%. Our tax burden on dividends is
equally out of line. The U.S. disadvantage will get much worse next year with the scheduled tax hikes on
capital gains and dividends.
4. Competitiveness. Capital has become highly mobile across borders, prompting nearly every country in
recent decades to cut tax rates on corporations, wealth, estates, dividends and capital gains. U.S.
politicians get on a high horse and denounce individuals and firms that shift investments abroad, but the
mobility of capital is a permanent reality. The higher the tax rates on capital, the more job-creating
investments are scared away. When Canada cut its federal capital gains tax rate to 14.5%, a
parliamentary report proposed that international competitiveness be the criterion guiding the choice of
a capital gains tax regime.

5. Growth Companies. Reduced capital gains taxes encourage entrepreneurship because the capital-gain
payoff from a successful start-up is improved relative to a wage job. Low taxes also boost outside
investment from angels and venture capitalists because their reward for taking risks on unproven young
companies is a possible gain years down the road. The higher the tax rate on gains, the fewer potential
projects will get the green light. Angel investors are usually high-earners who could alternatively invest
in safer assets, such as in tax-free municipal bonds. The capital gains tax rate directly affects their
willingness to fund start-ups and growth companies. Furthermore, when angels exit their investments,
they often use their after-tax returns to fund more young companies in an ongoing virtuous cycle.
Higher capital gains taxes would drain cash out of that reinvestment cycle, which has been at the core of
Silicon Valleys success since capital gains taxes were slashed in the late 1970s.

6. Government Revenue. A recent Congressional Budget Office study found that the longer-term
responsiveness of capital gains realizations to the tax rate is quite large. It found a persistent elasticity of
-0.79, which means that a 10% cut in the tax rate would increase ongoing realizations by 7.9%. This
indicates that the governments revenue loss from a capital gains tax cut would be a fraction of what a
static score would show, and its gain from a tax hike would also be very small.

Aside from increasing realizations, capital gains tax cuts would boost share prices, increase investment
in growth companies and spur greater entrepreneurship. The economy would enjoy more innovation
and higher productivity, which would translate into higher incomes for all workers over time. As the
economy expanded, the government would also win as tax revenues from all sources increased.

These advantages of low capital gains taxes have led many economists over the decades from Irving
Fisher to Alan Greenspan to call for ending these taxes altogether. Eleven OECD countries today dont
tax long-term capital gains. So rather than hiking capital gains taxes, U.S. policymakers should be helping
to revive investment and growth by moving toward a zero-tax regime for capital gains.

***

The KRA began implementing the disputed clauses on January 30, and the LSK argues that it risks
affecting Kenyas economy by frustrating land deals which have now stalled. The above action by the
KRA now obliges the seller of a property to assess and pay capital gains tax at a time when it is not due
and is not capable of being ascertained thereby prejudicing property rights by fettering free alienability
of property.

The above action has accordingly caused sale of land transactions to stall thereby causing extreme
prejudice, not only to the vendors and purchasers of property, but to the Kenyan economy, the LSK
argues. The lawyers hold that the disputed clause contradicts Article 40 of the Constitution which
protects citizens right to enjoyment of property whether by occupying, selling, leasing or renting it out.
Kenya reintroduced the capital gains tax in January 2015, 30 years after it was scrapped as part of a
move to woo foreign investors into the country. The reintroduction of the tax caused a storm that saw
stockbrokers challenge it in court, albeit unsuccessfully.
Kenya shifts focus from capital city to grow economy
Kenya is seeking to exploit economic opportunities in regions outside Nairobi to hasten the countrys
transformation into an industrializing middle-income status in the next 13 years.

The change of plan follows the the countrys failure to reach the 10 per cent growth target required to
propel the economy to middle-income status with a per capita income of between $1,045 and $12,736,
according to the World Bank classification criteria (2016). In the second Medium Term Plan covering the
period 2013-2017, Kenya expected the economy to grow from around 6.1 per cent in 2013 to 8.7 per
cent in 2015 and reach 10.1 per cent in 2017.

We have not yet hit the target of 10 per cent and therefore we have to look into ways of achieving that.
One of the ways is to promote local industries at the grassroots level. We are going to market the
potential of these regions to both local and international investors, said Idi Masoud, an assistant
director in charge of enablers and macro at the Kenya Vision 2030 Secretariat.

Our focus is on new investments, mergers and acquisitions. We believe industries at the grassroot level
will contribute significantly to our economic growth, he told The EastAfrican.

This comes as the government, in collaboration with the private sector, grouped 46 of the countrys 47
counties into four economic zones to increase their competitiveness as investment destinations. These
are the Lake Basin, North Rift, Mount Kenya and Coastal economic zones.

Lake Basin economic zone

The 12 counties that form the Lake Basin economic zone are set to showcase their investment
opportunities during the Lake Basin Expo and Investment Summit scheduled for February 12 to 16 in
Kisumu. These are Bungoma, Busia, Kakamega, Vihiga, Bomet, Kericho, Kisii, Nyamira, Migori, Homa Bay,
Siaya and Kisumu.

The conference, sponsored by a Kenyan-based investment firm Aremant Group Ltd, aims to bring
together local and foreign investors from the US, the UK, China, India and Turkey to explore investment
opportunities in agro-processing, textile, construction, tourism, fishing, finance, health and conference
facilities. We have a lot of potential in the counties. What we need is to open up these regions to
investors, said George Kiondo, the acting chief executive of the Kenya National Chamber of Commerce
and Industry.

The government says that exploring the economic strengths of the counties will support the growth rate
generated by activities in Nairobi. The capital accounts for about 60 per cent of the countrys annual
gross domestic product. The idea of targeting counties as economic blocs is important in driving
economic growth for the country, as several counties come together to showcase the investment
opportunities they have to potential investors, said Laban Mburu, a regional officer at the Kenya
Investment Authority.

Analysis: 8 Tips for A Successful Job Relocation (For employees)

1. Stay organized. Much of moving related stress comes from managing all of the logistics, like
leaving your current home, and finding a new one, Terry says. Try to be very organized. Keep
to-do lists for both your departure and arrival locations so that you can stay on top of
everything.
2. Know whats available to you. Many companies offer a variety of relocation services and most
are flexible in what they provide, Kahn says. Make sure you take the time to learn whats
available to youand use it. For example, some companies will pay for things like house hunting
trips, transportation of your cars, assistance in selling or buying your home, help figuring out
how to rent out a property, and event organizers to settle you into your new home. They might
also be able to help your spouse with job placement or employment leads in your new city,
Stimpson adds.
3. If your employer doesnt typically offer relocation assistance, ask for it. If you learn that
assistance isnt typically given, dont be afraid to negotiate, Stimpson says. Start by researching
moving costs (truck rentals, quotes from professional movers, transportation expenses,
temporary housing, storage, etc.) so that you can present your employer with a detailed
estimate of how much your relocation is expected to cost you. Having this supporting
information is crucial to the success of your request, he says. Also ask about preferred
providers when it comes to relocation companies and real estate agents. Reimbursement for
your relocation may be contingent upon the usage of designated professionals with whom your
employer has established relationships.
4. Take time to get to know your new environment before you move. If you have the luxury of
taking some time to explore your new area before arriving, do so, Terry says. Explore the
neighborhoods in the area to make sure that you find the best suited one for your lifestyle, she
says. If youre not able to visit the new city before you move, take the time talk to people that
live there or used to live there, and get as much perspective as you can on what youre walking
into, Kahn says. You should also read the local news or any local blogs to understand the vibe
and learn whats going in your new town, Terry adds.
5. Know the cost of living in the new city. There are significant differences in cost of living among
US cities and states, Stimpson says. Typically, these differences will be compensated for in your
salary, but its still important to check. Do the research and plan accordingly.
6. Dont make any long-term commitments. Renting at first is a great way to settle into a new
city without making a commitment to a neighborhood you might end up not liking, Terry says.
Kahn agrees. He says a common mistake many people make when relocating for a job is to buy a
home or commit to a long-term lease immediately, and later find that they dont like the
neighborhood, or the job. timpson says to ask about temporary corporate housing. Some
companies offer apartments or condos for a fixed length of time to allow relocating employees
to familiarize themselves with their new surroundings and make an informed housing decision.
7. Find out if any of your moving expenses are tax-deductible. Even if your new employer doesnt
offer any financial assistance for your relocation, you might be eligible for partial
reimbursement come tax time, which can definitely ease some of your financial stress, Stimpson
says. (See IRS Tax Topic 455 for details on which expenses qualify.) Generally, the moving tax
deductions requirements are: the move must be because you started a new job; your new home
must be at least 50 miles from your old home and your old job. (This is to prevent folks from
simply moving across the street every time they changed jobs in a design to take advantage of
the moving tax deduction.); and you must work full time for at least 39 weeks during the last 52
following your move. Self-employed movers need to work at least 78 weeks over the last 2 years
to qualify.
8. Build a social support network. Use your friends to network to make new friends in the same
way that you would try to network for a job, Kahn says. Use online services like MeetUp to find
others in the area that have similar interests or hobbies. Your new company may also offer clubs
and interest groups to meet new people. The faster you can build a support network, the more
at home you will feel and the happier you will be with your decision to move, he says.

***

Establishing a social network in your new town is going to make you feel more grounded and happy,
which will allow you to perform better in your new job, Terry adds.

Kenyas economy has grown at an average of 4.2 per cent over nine years (2008-2016), against a
targeted rate of 10 per cent, weighed down by the poor performance of key economic sectors such as
agriculture, manufacturing and tourism. It is feared that drought, interest rate controls and uncertainty
in the global environment related to Brexit and US President Donald Trumps new policies will result in a
decrease in Kenyas growth rate for 2017 to 5.7 per cent, from 5.9 per cent in 2016.
Weak control puts billions of Sacco cash at risk of loss
Kenyas savings and credit co-operatives (saccos) are operating without effective accounting and control
systems, putting billions of savers funds at risk, the Financial Sector Development Trust (FSD Kenya) has
warned. FSD in a new study, whose outcome has just been released, questions the Sacco Societies
Regulatory Authoritys (Sasra) role in ensuring compliance with prudential guidelines in the key saccos
sub-sector and protection of savers money.

FSD says most, if not all, saccos are currently operating high risk models that are prone to liquidity risks
citing the rampant failure to monitor or report loan defaults that ultimately expose them to systemic
risk of insolvency. Most, if not all, saccos maintain a high risk operating model. The response of many to
pressure for increased levels of capital assets has been a strategy of rapid expansion of membership that
masks, and potentially exacerbates, continued liquidity risk. Whilst new members bring deposits, their
incentive to join is to access loan funds, placing ever greater demands on sacco liquidity, says FSD.

Superficial compliance

Systemic instability is fuelled by weak or non-existent oversight among Kenyas saccos, FSD says,
pointing to weak oversight in a sector that controls billions of shillings in savings. FSD, a non-profit
organisation that researches and offers financial services sector advisory, says that although most sacco
managers are unwilling to reform, Sasras failure to effectively oversight the sector is holding back that
change.

It claims the risk of default and unrecoverable loans is high as sacco compliance remains superficial.
Kenya has over 5,000 registered saccos with more than $5 billion in savings and an asset base of $6.9
billion. An estimated 230 saccos offer front office services activities (Fosas) through 550 outlets,
enabling them to compete effectively in the retail banking business and lend non-members. Saccos are
seen as better lenders because they are member-focused and largely dedicate all the resources to
meeting the borrowing needs of members.

Financial rot

Despite the financial rot in the management of saccos, FSD says the incentive to change is unclear and
most are trapped in poor management cycles because of failure by the sector regulator to crack the
whip. The ability of Sasra to monitor and sanction non-compliant saccos would appear limited. As a
consequence, Sasra relies heavily on data provided by saccos themselves when considering applications.
Past experience suggests there remains considerable inaccuracy in the information available from many
saccos, FSD says.

The study reckons that despite their financial vulnerability, most saccos have been using whatever cash
is available to pay out dividends even in the face of apparent insolvency, rather than invest in business
improvements. Sacco compliance remains superficial. Whilst a significant number of saccos are
converging to the compliance criteria, the regulatory framework introduced has not yet driven any real
change in the sacco operating model or attitudes of sacco management. Sacco businesses and,
therefore, their members remain at significant, if not greater, risk from default or unrecoverable loans,
it adds.

Reform: The need to stay afloat has seen many saccos recruit more members instead of adopting
stringent systems of control to guide lending, making them a ticking time bomb.
The need for greater liquidity has been met by increasing membership, not by overhauling often highly
entrenched business practices. Few have invested significantly either in advisory services, staff
recruitment and capacity, or upgraded protocol such as loan application assessment, FSD says, adding
that the push to grow membership has encouraged further loosening of protocol.

Acting Sasra CEO John Mwaka did not respond to queries on the reports findings by the time of going to
press.

The report, titled A Technical Solution to a Political Economy Problem: FSD Kenyas Intervention in the
Sacco Sector, highlights the need for urgent fiscal reform in the sector to forestall a crisis. It comes
amid efforts to clean up Kenyas financial services sector and improve its stability. The banking sector
has in past couple of years faced deeper scrutiny to enhance compliance with prudential guidelines.

FSD estimates that from 2006 to 2013 the proportion of Kenyans using financial services rose from 60.7
per cent to 74.5 per cent and of those 13.9 million with access to financial services, 1.9 million used
saccos.
REGIONAL NEWS
East Africa economies set for rough ride this year
The below par performance by East Africas economies in 2016 is expected to carry over to this year,
although prospects remain broadly positive, a recent assessment by Citi Research notes.

A crisis of confidence triggered by elections in the past two years has already taken its toll of the big
three economies, Citi analysts note.

Tanzania and Uganda held elections in 2015 and 2016 respectively, while Kenya (as well as Rwanda) are
expected to do so this year. This, plus other shocks like drought, food inflation and weakening
currencies, have seen countries perform way below expectations, a trend that is projected to continue
in 2017.

Overall, there is a sense that the economic party of the past decade is now over; instead there is a
pressing need to refocus on medium-term policy issues, said Citi Africa economist, David Cowan.

Chief economist at Mentoria Consulting Ken Gichinga said that major macroeconomic indicators suggest
that the economies of Kenya, Uganda and Tanzania will have to navigate strong headwinds in 2017.

Across East Africa, governments are grappling with widening fiscal deficits, weakening currencies, rising
inflation, runaway public debt and tightening of lending to the private sector.

In Uganda, Citi Research contends that there has been little recovery in confidence since the elections in
February 2016 that saw President Yoweri Museveni re-elected for a fifth term.

Business confidence

Business optimism, which stood at around 50 per cent in mid 2015, plunged to 45 per cent after the
election and is yet to show signs of recovery. This is attributed to political uncertainty, impending
constitutional reforms, uncertain government fiscal policy, rising inflation and banking sector crisis.

This trend is projected to persist this year, particularly because the Ugandan shilling has come under
severe pressure in recent years and is not expected to stabilise.

The Uganda currency has depreciated from Ush2,500 to the dollar in mid 2014 to close last year at
Ush3,600. Inflation on the other hand is forecast to average 7.1 per cent compared with an average of
4.9 per cent in 2016.

Despite the challenges, Citi predicts that business confidence and the economy will continue to pick up
slowly, with real GDP growth forecast to rise from around five per cent in 2016 to 5.5 per cent this year.

The focus, however, is now on Kenya, where elections have the potential of degenerating into violence
whose ripple effects could be felt across East Africa. While some violence around the August elections
seems possible, notably around closely contested county elections, it should not be overplayed and we
think it is unlikely that there will be more widespread unrest, said Dr Cowan.
Ugandan central bank eases key lending rate to 11.5pc
Ugandas central bank Wednesday cut its benchmark lending rate by 50 basis points to 11.5 per cent
amidst a long dry spell that has hit the economic growth outlook. Below is a graph showing Ugndas
base interest rate:

The Bank of Uganda Governor, Emmanuel Tumusiime-Mutebile said as a result of the prolonged drought
the regulator has had to revise its growth estimates downwards to 4.5 per cent from a previous forecast
of 5 per cent for the 2016/17 fiscal year. While the slowdown is due to temporary factors, economic
growth could remain weak in the remaining part of financial year 2016/17, reflecting a combination of
domestic and external factors, Prof Mutebile told a news conference in Kampala on Wednesday.

The Bank of Uganda judges that a further cautious easing of monetary policy is warranted to support
economic activity Prof Mutebile said adding that the easing will also be consistent with achieving the
annual core inflation target of 5 per cent over the short-term.

Ugandas inflation rose to 5.9 per cent in January from 5.7 per cent in the previous month, on the back
of rising food and fuel prices.
Poor weather conditions have led to food shortages in many parts of the country, driving food prices up.

BoU interest rate cut is the sixth in a row since April last year when it had reached a peak of 17 per cent.
The bank expects the reduction will stimulate increased lending by financial institutions to the private
sector. The fact that we continue to ease the policy rate is because we see private sector credit pick up
from a position where it had contracted, said Dr Adam Mugume, BoUs executive director of research.

The Bank said it is optimistic that the economy will grow to 5.5 per cent in the 2017/18 fiscal year,
driven by improved public infrastructure investment, a recovery in private sector investment and
improvements in agricultural production and consumption.
Traders focus beyond dollar and pound as tourism grows
Changing trade patterns and transaction losses in the face of a strong dollar have helped make Kampala
a more vibrant forex market after years of domination by hard currencies, the Kenya shilling and the
South African rand.

The dollar, the pound sterling and the euro have been the key denominators of forex trade for decades
but times are changing with previously illiquid legal tenders like the Australian dollar, Canadian dollar,
New Zealand dollar, Hong Kong dollar, Norwegian kroner, Zambian kwacha and Malawian kwacha now
exchangeable at forex bureaus.

This is reflected in the number of forex bureaus trading in the less popular currencies increasing from
one in 2015, to six at the end of 2016. Forex dealers project the basket of currencies available will
increase, driven by the demands of traders and tourists.

Gains by the dollar since 2015 have led to the growing interest in direct conversion of currencies with
less reference value as traders try to avoid losses. Clients converting Uganda shillings into different
currencies with the dollar as a middle currency have suffered conversion losses.

For example, if one converts Uganda shillings to dollars and then converts the dollars to Saudi riyals, one
loses about 17.2 per cent of the transaction value between the shilling and dollar. However, one would
make a transaction gain of about five per cent between the dollar and riyal because the latter is fairly
stable given the controlled float system deployed in many oil rich Gulf states.

At the end of the day, the client would make a net currency transaction loss of 12 per cent. Under these
circumstances, a direct currency conversion option would minimise such losses.

The Uganda shilling lost 17.2 per cent against the dollar during 2015/16, a drop largely attributed to
seasonal capital flight, especially before the general election held last February, and a widening current
account deficit.

The shilling is expected to weaken further against the dollar before the close of the first quarter of 2017
as large companies repatriate dividends to foreign shareholder.
Manufacturing base

Whereas Uganda imports a huge variety of goods from China annually, gradual relocation of
manufacturing operations from the worlds second largest economy to other Asian countries such as
Indonesia and Malaysia that offer cheaper labour costs has forced local importers to change their
currency preferences.

China accounts for around Ush2.8 trillion ($832.8 million) of Ugandas total imports, which amounts to a
24 per cent share, according to Uganda Revenue Authority data. Some of the affected importers include
businesses engaged in distribution of household products, particularly kitchenware and electrical
appliances.

The dollar has strengthened a lot in recent years and this has forced some traders to avoid indirect
currency conversions involving it, which usually cause transaction losses. As a result, a trader who
imports goods from Singapore would prefer to convert Uganda shillings directly into Singapore dollars so
as to avoid currency conversion losses, said Edward Kigongo, the chief executive officer of Ken Group
Ltd, a stationery materials supplier, adding, Growth in the number of tourist arrivals from countries
outside the United Kingdom, especially oil producing nations like Norway, and a shift in production
zones from China to countries such as Indonesia, has also caused indirect demand for less popular
currencies.

Currently, the Norwegian kroner is quoted at Ush6,000/Ush10,000, reflecting a wider trading spread
compared with the Australian and Canadian dollar, which are quoted at Ush2,000/Ush3,000
respectively.

The dollar and Kenya shilling in contrast have smaller trading spreads, with forex bureaus quoting them
at Ush3,570/Ush3,590 and Ush32/Ush34 respectively.

The spreads attached to less popular currencies are determined by volatility and uncertainty risks
perceived by forex traders, argued Stephen Mwanje, a forex bureau owner.
Nigerias debt burden equals five years national budget
Nigerias total debt has hit $59.39 billion (N17.36 trillion) which is equivalent to about five years national
budget, official disclosed. The Director-General of the Debt Management Office (DMO), Dr Abraham
Nwankwo, unveiled the debt profile when defending the agencys 2017 budget before the Senate
Committee on Local and Foreign Debts.

Dr Nwankwo pointed out that in spite of the recession, the economic indices had not portrayed Nigeria
as a weak economy to warrant seeking debt relief.

Nigeria is not in a position to beg for debt forgiveness,'' he said.

Domestic and foreign

The profile includes domestic and foreign debts as at the end of 2016.

The external debt was estimated at $11.41 billion (N3.48 trillion), while the domestic share stood at
$45.98 billion (N13.88 trillion). Dr Nwankwo noted that a borrowing genuinely committed to
infrastructural development would go a long way in developing the economy.

Revenue generation

He said the Ministry of Finance was expanding the nations tax base to help repay the debt. The
expansion, Dr Nwankwo said, would be realised by ensuring that people and companies that were not
paying taxes began to do so to boost the revenue base and reduce the need for borrowing. He lamented
that tax collection in Nigeria had been poor, contributing to reduced revenue generation.

Nigeria debt to GDP forecast by tradingeconomics.com is as below:


INTERNATIONAL NEWS
US household debt approaches financial-crisis level
Total household debt climbed to $12.58 trillion at the end of 2016, an increase of $266 billion from the
third quarter, according to a report from the Federal Reserve Bank of New York. For the year, household
debt ballooned by $460 billion -- the largest increase in almost a decade.

Below is a graph showing United States Households Debt To Gdp for the past couple of years (Data up to
July 2016):

That means the debt loads of Americans are flirting with 2008 levels, when total consumer debt reached
a record high of $12.68 trillion.

Mortgage originations increased to the highest level since the Great Recession. Mortgage balances make
up the bulk of household debt and ended the year at $8.48 trillion.

However, growth in non-housing debt -- which includes credit card debt and student and auto loans --
are key factors fueling the rebound in debt.

Student loan debt balances rose by $31 billion in the fourth quarter to a total of $1.31 trillion, according
to the report. Auto loans jumped by $22 billion as new auto loan originations for the year climbed to a
record high.

Credit card debts rose by $32 billion to hit $779 billion.

At these rates, the New York Fed expects household debt to reach its previous 2008 peak sometime this
year.

But while that may sound alarming, there is one big difference between now and 2008, according to the
Fed: Fewer delinquencies.

At the end of 2016, 4.8% of debts were delinquent, compared to 8.5% of total household debt in the
third quarter of 2008.
There were also less bankruptcy filings -- a little more than 200,000 consumers had a bankruptcy added
to their credit report in the final quarter of last year, a 4% drop from the same quarter in 2015. Below is
a graph showing the total debt balance and its composition:
Fuel price surge sends UK inflation to highest since June 2014
British consumer prices rose last month at the fastest pace since June 2014 and are set to rise further,
propelled by higher global oil prices and the Brexit-fueled fall in the pound, official data showed on
Tuesday. Below is a chart showing the UK inflation rate:

Below is a chart showing the prevailing crude oil price

Consumer prices increased by 1.8 percent compared with a year earlier, picking up from 1.6 percent in
December, and prices paid by factories jumped by more than 20 percent.
The Bank of England expects inflation to approach 2.7 percent by the end of the year while many
economists say it will go above 3 percent, putting to the test the BoE's decision to keep interest rates at
a fraction above zero. Stronger inflation will strain the spending power of British households who have
so far helped the economy withstand the shock of last June's vote to leave the European Union.

Sterling fell below $1.25 and government bond prices rose after January's inflation reading came in
slightly below expectations for a 1.9 percent annual rise in a Reuters poll of economists, as clothing
prices dragged.

"We're only seeing the thin end of the wedge in terms of inflation," said Richard Lim, chief executive of
consultancy Retail Economics. He noted that hedging contracts taken out by retailers to protect against
sterling's fall were unwinding. "We expect inflation will accelerate sharply in the coming months, hitting
3 percent by the end of the year," he said.

Factories suffered the sharpest annual rise in prices since September 2008 as raw material costs
jumped. The major factor was the price of oil: in dollar terms, the cost of North Sea crude at the end of
January was around 60 percent higher than a year earlier, when it had touched a 12-year low.

A Reuters poll of economists published on Tuesday suggested inflation will average 2.6 percent this year
and next - similar to the BoE's forecasts.

The pound's fall - it is down about 17 percent against the U.S. dollar and 11 percent against the euro
since the Brexit vote - is starting to hit consumers, whose spending has helped the British economy to
grow since the vote.
Last week BoE rate-setter Kristin Forbes said she was beginning to become uncomfortable with the
central bank's commitment to a neutral policy stance, arguing instead that interest rates may need to
rise soon if price pressures continue to build.

But most of her colleagues have given no sign they want to raise rates soon, given the uncertain outlook
for Britain's economy as the country leaves the EU. BoE Governor Mark Carney this month warned of
"twists and turns" ahead as Prime Minister Theresa May starts two years of formal Brexit talks. Food
prices showed the smallest annual decrease since July 2014 as the cost of chocolate and sweets rose by
almost 5 percent on the month.

Retail price inflation - tracked by British inflation-linked government bonds and many commercial
contracts - also rose to its highest since June 2014, at 2.6 percent.

Excluding oil prices and other volatile components such as food, core consumer price inflation held
steady at 1.6 percent, confounding economists' expectations for a rise to 1.8 percent.

Data on factory gate prices underscored the inflationary pressures in the pipeline. Output prices rose 3.5
percent on the year, the biggest increase since January 2012, compared with forecasts of a 3.2 percent
increase.

December house prices showed an 7.2 percent annual rise across the United Kingdom, compared with
6.1 percent in November. Prices in London alone rose 7.5 percent on the year.
Chinese inflation rate beats expectations
China's consumer inflation rate quickened to 2.5 percent in January from a year earlier, the highest since
May 2014 and beating market expectations. Below is a graph showing the Chinese inflation rate:

Chinas consumer price index is as below:

Analysts polled by Reuters had predicted the consumer price index (CPI) would rise 2.4 percent, the
biggest gain in nearly three years, versus a 2.1 percent gain in December. The producer price inflation
rate accelerated to 6.9 percent, the National Bureau of Statistics said on Tuesday, compared with the
previous month's rise of 5.5 percent.

The producer price index (PPI) rose the fastest since August 2011. The market had expected producer
prices to rise 6.3 percent on an annual basis. Inflation expectations have been rising in most major
developed economies, except Japan, since mid-2016 in line with a global recovery in manufacturing,
which has boosted prices of crude oil and other resources such as iron ore.

That has sparked talk of tighter monetary policy, though consumer inflation in China is believed to be
still well within the central bank's comfort zone.
IMF can't cut special deal for Greece but debt solution possible Lagarde
The International Monetary Fund is doing the best it can to agree on bailout loans for Greece but cannot
compromise its principles and cut a sweetheart deal for the country, IMF Managing Director Christine
Lagarde said on Monday. She said, however, that a reduction in Greece's debt load could occur without
international lenders having to take write-downs of their loans - an issue of specific concern to European
Union creditors.

Below are some images showing facts about Greeces debt, obtained from nationaldebtclocks.org

***

Greece, the IMF and official European creditors are locked in a review of the country's bailout program
and need an agreement to permit new loan disbursements and save Athens from default. The three
parties have had sharp disagreements, however, on what reforms Greece needs to make and its fiscal
targets. The IMF has said it cannot participate in a program which could keep Greece in a never-ending
cycle of indebtedness.

European Commission President Jean-Claude Juncker said at the weekend that the bailout was "on
shaky ground" because the IMF had not decided what role it would play, while Greek Prime Minister
Alexis Tsipras accused the IMF of being "cowardly" and making "new demands for Greece".

In an interview with Reuters during a visit to Dubai, Lagarde responded to those criticisms by saying the
IMF was actively trying to resolve the disputes but had limited room for maneuver. "We have been
asked to help, but can only help at terms and conditions that are even-handed. In other words we
cannot cut a special sweet deal for a particular country because it is that country," she said.

She added: "We need to apply the principles that we apply to all countries because we are lending
international community money." The IMF has been pushing for Greece to enact long-term reforms of
its income tax and pension systems to avoid deficits. It has also suggested Greece's official creditors may
need to take "haircuts" - outright write-downs of their loans - an idea which has been opposed in
European capitals such as Berlin.

Lagarde said on Monday, however, that it might still be possible to make Greece's debt sustainable
without haircuts, though she did not give details of this strategy. "The Europeans have extended very
long-term facilities at low interest rates. They have recently proposed a few measures to lower even
further the burden of the debt," she said.

"More needs to be done and we believe it can be captured within a mechanism that will not require
actual haircuts, provided that the reforms that I just mentioned are actually delivered upon by Greece."
Japan's Q4 GDP expanded 1%
Japan's economy grew for a fourth straight quarter in the final three months of last year as a weaker yen
supported exports, but tepid private consumption and the risks of rising U.S. protectionism cast doubts
over a sustainable recovery. Below is a graph showing Japans GDP annual growth rate over the past
couple of months:

Data on Monday showed the world's third-largest economy grew an annualized 1.0 percent in October-
December, roughly in line with the 1.1 percent increase markets had expected, following a revised 1.4
percent expansion in July-September.

Japan's export-driven growth over the quarter has helped fill the economic shortfall left by anemic
domestic demand, but accompanying this tailwind are concerns Japan's persistent trade surplus with
the U.S may make it a target of U.S. President Donald Trump's criticism.

Academic Analysis: Export-Led Growth Strategies Through History

In matters of economic development, the last 40 or so years have been dominated by what have come
to be known as export-led growth or export promotion strategies for industrialization. The export-led
growth paradigm replacedwhat many interpreted as a failing development strategythe import
substitution industrialization paradigm. While there has been relative success with the new
development strategy, including in Germany, Japan, as well as East and Southeast Asia, current
conditions suggest that a new development paradigm is needed.

From Import Substitution to Export-Led Growth

Import substitution, far from being a deliberate development strategy, became a dominant strategy in
the wake of the U.S. stock market crash in 1929 up until around the 1970s. The fall-off in effective
demand following the crash helped cause international trade to decline by approximately 30% between
1929 and 1932. In these dire economic circumstances nations around the world implemented
protectionist trade policies such as import tariffs and quotas to protect their domestic industries.
Following the World War Two, a number of Latin American as well as East and Southeast Asian countries
deliberately adopted import substitution strategies.

Yet, the post-war period saw the start of what would become a prominent trend towards further
openness to international trade in the form of export promotion strategies. Following the war both
Germany and Japan, while taking advantage of reconstruction aid from the U.S., rejected policies that
shielded infant industries from foreign competition, and instead promoted their exports in foreign
markets through an undervalued exchange rate. The belief was that greater openness would encourage
greater diffusion of productive technology and technical know-how.

With the success of both the post-war German and Japanese economies as well as a belief in the failure
of the import substitution paradigm, export-led growth strategies rose to prominence in the late 1970s.
The new institutions of the International Monetary Fund (IMF) and World Bank, which provided financial
assistance to developing countries, helped to spread the new paradigm by making aid dependent on
governments willingness to open up to foreign trade. By the 1980s, a number of developing nations
that had earlier been following import substitution strategies were now beginning to liberalize trade,
adopting the export-oriented model instead. (For more, see: What Is International Trade?)

The Era of Export-Led Growth

The period from about 1970 to 1985 saw the adoption of the export-led growth paradigm by the East
Asian TigersSouth Korea, Taiwan, Hong Kong and Singaporeand their subsequent economic success.
While an undervalued exchange rate was used to make their exports more competitive, these countries
realized that there was a much greater need for foreign technology acquisition in order to compete in
auto manufacturing and electronics industries. Much of the success of the East Asian Tigers has been
attributed to their ability to encourage the acquisition of foreign technology and to implement it more
efficiently than their competitors. Their ability to acquire and develop technology was also supported by
foreign direct investment (FDI).

A number of newly industrializing nations in Southeast Asia followed the example of the East Asian
Tigers, as well as a number of countries in Latin America. This new wave of export-led growth is perhaps
best epitomized by Mexicos experience that began with trade liberalization in 1986, which later led to
the inauguration of the North American Free Trade Agreement (NAFTA) in 1994.

NAFTA became the template for a new model of export-led growth. Rather than developing nations
using export promotion to facilitate the development of domestic industry, the new model became a
platform for multinational corporations (MNCs) to set up low-cost production centers in the developing
country in order to provide cheap exports to the developed world. While developing nations benefit
from the creation of new jobs as well as technology transfer, the new model hurts the domestic
industrialization process. (For related reading, see: Pros and Cons of NAFTA.)

This new paradigm would soon be expanded more globally through the establishment of the World
Trade Organization (WTO) in 1996. Chinas admission into the WTO in 2001 and its export-led growth is
an extension of Mexicos model, albeit China was much more successful in gleaning the benefits of a
greater openness to international trade than was Mexico and other Latin American countries. Perhaps
this is partly due to its greater use of import tariffs, stricter capital controls and its strategic skill in
adopting foreign technology to build its own domestic technological infrastructure. Regardless, China
remains dependent on MNCs illustrated by the fact that 50.4% of Chinese exports come from foreign-
owned firms, and if joint ventures are included, the figure is as high as 76.7%.

The Bottom Line

While export-led growth in its various guises has been the dominant economic development model
since the 1970s, there are signs that its effectiveness may be exhausted. The export paradigm depends
upon foreign demand and since the global financial crisis in 2008, developed nations have not regained
strength to be the main supplier of global demand. Further, emerging markets are now a much greater
share of the global economy making it hard for all of them to pursue export-led growth strategiesnot
every country can be a net exporter. It looks like a new development strategy will be needed, one that
will encourage domestic demand and a greater balance between exports and imports.

***

During a weekend meeting with Prime Minister Shinzo Abe, Trump held off from his previous rhetoric
against Japan for using its monetary stimulus to weaken the yen and gain an unfair trade advantage. But
analysts doubt a honeymoon would last long.

Economy Minister Nobuteru Ishihara said Japan remained in a moderate recovery trend and expected
the positive momentum to be maintained, but he sounded a cautious note on the outlook. "Attention
should be paid to uncertainty over global economy and fluctuations in financial markets," he told
reporters after the GDP data release.

Analysts were equally cautious about the outlook even as a weak yen has provided exports a lift. "The
fact that the economy grew a fourth straight quarter on the back of exports should be considered a
passing mark for policymakers," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
"Still, the corporate sector strength has not spread to households who are facing higher costs of living
and future uncertainty. The key is how price-adjusted real wages grow to support private consumption
from now on."

The preliminary reading for fourth-quarter gross domestic product (GDP) figure translated into 0.2
percent growth on a quarter-on-quarter basis, versus a 0.3 percent gain expected by analysts.

External demand - or exports minus imports - contributed 0.2 percentage point to GDP, with exports
rising 2.6 percent, the fastest growth in two years, on shipments of cars to China and the United States,
and those of electronics parts to Asia.

Private consumption, which accounts for roughly 60 percent of GDP, showed no growth, largely in line
with a flat reading forecast by economists. Rising prices of fresh food and vegetables are likely to have
dented households' purchasing power.

Protectionist risks

Underlining a struggle to accelerate inflation to the Bank of Japan's 2 percent target, the GDP deflator, a
broad gauge of prices, fell 0.1 percent in October-December from the same period a year earlier, down
for a second straight quarter of declines. Housing investment, a bright spot in the economy thanks to
the central bank's aggressive monetary easing, rose 0.2 percent, the slowest expansion in four quarters.
On the upside, capital expenditure - a key component of GDP - rose 0.9 percent, reversing from a 0.3
percent decline in the third quarter.

Just the same, some economists saw risks stemming from weak domestic demand as well as trade
protectionism.

During the October-December period, the dollar rebounded to as high as above 118 yen following
Trump's election, after hitting lows around 101 yen in October. A weaker yen helped Japan's exports
mark the first annual growth in 15 months in December. It was fetching 113.91 yen on Monday.

Trump's protectionist policies, which have rattled global markets and regional economies reliant on the
vast U.S. market, have kept investors guessing about the outlook for world trade, investment and
growth.

Despite the positive diplomatic overture, the Trump-Abe meeting on the weekend has done little to
allay deeper concerns about growing U.S. protectionism.

"I don't think this summit was any indication of change in Trump's stance of negotiating with its trading
partners based on recognition that a U.S. trade deficit is bad," Yoshimasa Maruyama, chief market
economist at SMBC Nikko Securities, wrote in a note to clients.
European Commission upgrades economic outlook
The EU Commission has raised its outlook for the bloc's economic growth, saying Europe's recovery
remains on track but is vulnerable to the "exceptional risks" of Brexit and the new US administration.
The European Commission published its winter economic forecast on Monday, slightly revising up its
predictions for growth in both the euro currency area and the wider 28-nation EU.

The Euro Are GDP growth rate is as below:

Even though Europe was still navigating "choppy waters," Economic Affairs Commissioner Pierre
Moscovici said the European economy had proven "resilient to the numerous shocks it has experienced
over the past year." As a result, the Commission sees the 19-country eurozone expanding by 1.6 percent
in 2017 and by 1.8 percent in 2018, compared with predictions made in autumn of 1.5 percent this year
and 1.7 percent in the next. For the wider 28-nation EU, the Commission predicts growth of 1.8 percent
in both 2017 and 2018.

The report speaks of "exceptional risks" facing the recovery in Europe, stemming mainly from Britain's
vote to leave the EU and uncertainty over the policies of US President Donald Trump. "The particularly
high uncertainty is due to the still-to-be-clarified intentions of the new administration of the United
States in key policy areas," it said, adding that the numerous elections to be held in Europe were also
weighing on growth prospects.

In view of "uncertainty at such high levels," Moscovici called on political leaders to use "all policy tools
to support growth." Regarding Europe's fight against stubbornly low inflation rates, the Commission
sees consumer prices only "creeping" higher over the next two years, as energy prices were rebounding
from historic lows. At the same time, it warned the European Central Bank (ECB) against ending its
massive stimulus program because it had strengthened the economic recovery in the past few
years.Overall, inflation in the eurozone is predicted to increase from a low 0.2 percent in 2016 to 1.7
percent in 2017 and 1.4 percent in 2018, with the Commission expecting increasing international
pressure on the ECB to taper its stimulus.
Kuroda: BoJ focused on moving economy out of deflation
The Bank of Japan will not change its policy stance of forming a bond yield curve that is suitable for
domestic economic conditions just because interest rates in other countries are rising, BOJ Governor
Haruhiko Kuroda told lawmakers Tuesday.

Under the yield curve control policy framework adopted in September, the BOJ is trying to keep the
overnight market interest rate at -0.1% and the 10-year Japanese government bond yield at around zero
percent. Below is a graph showing interest rates of some of the major world currnecies:

Japans interest rate is as below:

"We conduct our policy purely from the viewpoint of moving the Japanese economy out of deflation and
achieving the 2% price stability target," Kuroda told the Upper House Budget Committee. "Therefore, we
will not change our yield curve control just because interest rates rose internationally."

The BOJ has been trying to contain upward pressure on JGB yields from the recent rise in U.S. Treasury
yields which has been led by the prospects for a stimulative fiscal policy under the new U.S.
administration and continued rate hikes by the Federal Reserve.
In September, the BOJ shifted its policy target to interest rates from the quantity of monetary by
adopting yield curve control and inflation-overshooting commitment. It also dropped the politically
sensitive "negative interest rate" from the name of its policy framework.

The 0.1% interest charged on a small portion of excess reserves that lenders park at the central bank has
been unpopular among financial institutions since it took effect in February 2016. Bankers complain that
it is squeezing their profit margins while pension fund managers deplore the lower return on their bond
investments.
Fiscal Policy or Not, Yellen Says Outlook Supports Raising Rates
Federal Reserve Chair Janet Yellen sounds like shes on a mission to raise interest rates this year -- no
matter what President Donald Trump does on tax cuts and spending. In a clarifying point during Senate
questioning on Tuesday, Yellen said her monetary policy panel doesnt need to wait for the Trumps
administrations plans on fiscal stimulus to hike rates.

We are not basing our judgments about current interest rates on speculation about fiscal policy,
Yellen told Nevada Republican Senator Dean Heller. She added that the economys solid progress is
what is driving our policy decisions. Its a subtle but important switch from a year ago, when the
Federal Open Market Committee started with a plan for four rate hikes, and was already worrying by
March about the state of the global economy. In the end, they hiked a single time, in December.

The committees conviction about its plans for three hikes this year boils down to a shifting sense that
upside risks this year look as potent as downside risks, if not more. Business sentiment indicators are up,
and that could lead to stronger investment. The committee in December forecast that labor markets
would slightly overshoot their estimate of full employment, which could put some momentum behind
inflation.

You really have to turn over a lot of stones to find that shadow slack in labor markets, said Michael
Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who said the Fed chairs comments
were consistent with a rate hike in the first half of this year. For her, it is really about inflation risks as
the unemployment rate heads lower, Feroli said.

Yellen also said that the committee in the coming months will provide further guidance on how it
plans to shrink its $4.5 trillion balance sheet. I would anticipate a balance sheet thats substantially
smaller than at the current time, she said in response to a question.

U.S. Treasury securities sold off on her testimony, raising the yield on the government 10-year note to
2.48 percent from 2.43 percent the previous day. Probabilities for a March rate increase moved back
above 30 percent.

Yellens semiannual report on monetary policy is her first since Trump became president. During the
hearing, Yellen addressed a question about her future, saying she has no plans to leave before her
current term as Fed chair expires in a year.

New Administration

Speaking separately at the White House press briefing when asked about the administrations view of
Yellen, newly installed Treasury Secretary Steven Mnuchin said he looks forward to meeting with her to
continue the tradition of regular discourse between the Treasury and the Fed.

Yellen reiterated that falling behind on inflation could do more harm to the economy and possibly cut
short the expansion. The Feds preferred inflation benchmark, the personal consumption expenditures
price index, has been below the central banks 2 percent target since April 2012. It finished with a gain
of 1.6 percent last year. Waiting too long to remove accommodation would be unwise, potentially
requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and
pushing the economy into recession, she added. Tom Porcelli, chief U.S. economist at RBC Capital
Markets LLC in New York, said Yellens view was that things are looking pretty good from the labor
market perspective.

Shes had plenty of opportunity to back away from three hikes this year, and she did not, he said.