In macroeconomic policymaking, it is essential to coordinate a country’s fiscal policy and monetary policy for optimal economic outcomes. The appropriate policy mix for 2019 and beyond drew interesting questions when I addressed high-level participants at recent forums hosted by the Commercial Bank of Africa, in Nairobi and Mombasa.
In sum, Kenya has significantly better prospects than global or regional expectations. Will these opportunities be realised? Yes, only if the appropriate economic decisions are implemented with rigor. The monetary side led by CBK has tracked the appropriate prognosis of economic policy with an easier stance since 2018.
Co-ordination from the fiscal side needs strengthening on account of excessive borrowing, weak revenue collections by KRA plus leakages, and profligate spending of taxpayers’ shillings on the recurrent side while development spending faces stunning hurdles, including stalled activities. To succeed, we can draw on decades of macro-policy making.
Why are fiscal policy headwinds of 2019 and the medium term so challenging? The prevailing macro-indicators portray public debt at 57 percent of GDP; the fiscal deficit tracks -9.1 percent and -6.9 percent of GDP in 2016 and 2017, respectively.
The President endorsed wide-ranging fiscal austerity in September 2018, in observations on the Budget which he returned to Parliament for reconsideration. Thus, while we already are implementing tighter fiscal policy to match CBK’s easier monetary policy, the mix needs public commitment to fight inefficiency and expansionary spending.
Appropriate policy mix depends on macro-data and analyses. A system called the IS/LM (short run) and AS/AD (medium run) explains why. The IS-LM stands for investment-savings, liquidity-money. AS/AD stands for Aggregate Supply and Aggregate Demand. Leave aside the math. The system adds essential capacity in managing a market economy, especially interacting markets, and it gives answers to most important macro questions.
The key players are Government and Central Bank, tracking government spending and taxes on one hand and money supply on the other. Never mind that the national strategy may focus a Medium-Term Plan of Vision 2030 or the ‘Big Four” sectors. Getting it right on the above compass provides fairly reliable targeting for the common goal of growth and employment.
Over 2018, 2019, and 2020, Kenya’s expected GDP growth ranges 5.7 percent, 6.1 percent (6.3 percent as per CBK), and 6.1 per cent. It underpins potential GDP Output Gap (potential above actual performance) of between 0.4 -0.6 percent. The base data in 2018 as per 15 research houses, global agencies, and government organisations shows an average of 5.5 percent.
Kenya’s GDP growth rebound in 2019 beats projected global performance (3.7 percent), Emerging Markets (4.7 percent) and sub-Saharan Africa (3.5 percent). If we mis-target the Output Gap with inappropriate policies, it could scuttle growth and employment and keep the economy underperforming. The three main threats are a ballooning public debt (with poorly measured links to output), a relatively high fiscal deficit, and flagging revenues. Why is this?
If the economy enjoyed mild budgetary pressures, a public debt low enough (debt/GDP ratio) not to roil the financial markets; and if the CBK achieved low inflation, the current account showed improvement, and the exchange rate is stable, etc.; then there would be little constraint to adopting expansionary fiscal policy (expanded public spending) and easy monetary policy (expanded money supply and lending to the private sector). The mix would in the medium-term expand growth and employment unequivocally, filling the GDP gap.
The last time Kenya enjoyed this macro-configuration was 2008-2009 during the Global Financial Crisis. With significant policy space for growth, Kenya faced a triple economic threat: the crisis itself, the post-election violence and a severe drought, in the midst of a GDP output gap.
The Government and CBK in the 2009/2010 budget, shifted to a stimulus as the appropriate policy mix: easier money and expansionary fiscal spending (tax cuts can also be applied to stimulate spending). So did the US under Obama whose macros restarted growth to fight the deflation induced by the financial crisis. The Euro Zone dithered in austerity and saw its recessions deepen.
By dint of its stimulus and policy mix, the US economy was recovering by 2010. So was Kenya whose GDP grew by 8.4 per cent that year (from 0.2 percent, and 3.3 percent in 2008 and 2009, respectively).
The performance induced by the 2010 macro-policy mix has never been equalled since. Less commonly understood, the expansionary/expansionary mix was earned from an earlier, similarly skillful policy mix akin to that appropriate for 2019 and the medium term.
In 2002-2003 at the start of Kibaki’s first term, the economy faced a ballooning public debt that stood at 60 percent of GDP (note today’s 57 percent of GDP) and anemic GDP growth at 0.5 percent in 2002, obviously below potential. An appropriate easier monetary-tighter fiscal policy combination was implemented, and particularly escalated revenue mobilisation to mend a broken fiscal side.
The CBK achieved low interest rates on the back of cutbacks in offerings of government securities to the market, especially commercial banks which escalated private sector lending in their assets portfolios. In this policy mix, government expenditures fall and interest rates decline.
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Note: The results are not exact but very close to the actual.
