Judging by what has happened in the past few days, one can only conclude that an appropriate macroeconomic policy mix — of easier monetary policy (low real interest rates on average) and tighter fiscal stance (austerity) — is now taking shape in Kenya.
Unfortunately, the tightened Sh2.97 trillion Supplementary Budget Estimates are only coming after we have screamed ourselves hoarse on monetary policy (interest rates – the cap, reserves), and fiscal policy (fiscal deficit, borrowing, spending, VAT and the navel-gazing at an umpire called IMF).
Without the expert scrutiny necessary for accountability to edge out weaknesses, the leadership, including Parliament, receives only too late the appropriate advice needed for speedy action to steer the country forward. In such an environment authorities get away with policy mistakes.
Consider the current GDP gap — the difference between potential output performance and the actual. Kenya’s GDP growth accelerated clocked 5.8 per cent in the first quarter of 2018, below the estimated 6.5 per cent potential.
Constrained by high debt levels and the deficit, the appropriate policy mix for the medium term is expansionary monetary stance and tighter fiscal policy. This mix offers us the best chance of stimulating the private sector to yield the required output through growth of credit that has remained in single digits and below the CBK targets since June 2016.
In the meantime, the public sector must engage austerity as the President has now signalled, mobilising revenue, preserving development spending of the “Big Four” categories and some social spending, while avoiding excessive tax increases.
When the CBK in its last two MPCs (May and September, 2018) and I (in this newspaper, June 10 and July 30) pinned down this logic from modern macroeconomic policy co-ordination, they cited the preoccupation of the fiscal side with borrowing, spending and poor consolidation (austerity) and its poor grasp of Kenya’s positive economic outlook as the elephants in the room.
A narrowing of the GDP gap, a stable inflation outlook, a positive outlook on currency stability (with foreign reserves standing at 5.9 months of import cover), a manageable current account deficit, is what the doctor ordered.
This context is what led the MPC to cut the policy rate to 9.0 per cent from 9.5 per cent) — expecting the Treasury to match the monetary side with austerity. It didn’t.
We will never know whether the fiscal side’s reluctance came from capacity shortcomings, or one-upmanship. Its expansionary fiscal stance contradicted even the crucial World Bank’s Country Policy and Institutional Assessment (CPIA) showing a mismatch of expenditure, revenue collection and indebtedness.
The result is Kenya has wasted time and resources on controversial fiscal policy proposals of Budget 2018/19. The Treasury’s belated Supplementary Budget as a convert to austerity leaves questions as to whether fiscal authorities should be held to account for mumbled inconsistent numbers, or failures to match accommodative monetary policy with fiscal consolidation.
Since bad macro-policy is never self-correcting, and has long shadows, expect testing questions in the medium term. Why?
Fact is that unless austerity holds, secular stagnation will set in, which means that CBK’s monetary policy alone can’t do the job of closing the GDP gap to raise output, and drive the economy towards higher income and employment. The ensuing low-level economic performance will continue, perhaps remain the norm, if not worse.
This doesn’t say that policy thinkers should give up or that there are no policies that can promote growth and employment.
To the contrary, it’s a justification for more policy activism, especially on the fiscal front. The need for accommodative monetary policy is underpinned by inflation performance in recent years tracking the targeted five per cent plus or minus 2.5 per cent.
The pushback of the banking sector and IMF for un-cupping is to be answered in this context: it would push the band higher and serve (only) the interests of the sector, not long term gains of closing the GDP Gap.
It is also a fact that we’ve been in appropriate policy mix before, with success; we even taught a few lessons to the world. In 2003, at the start of Kibaki’s macros, Kenya’s debt stood at 60 per cent of GDP. Then, through the easier money-tighter fiscal policy mix, particularly strong revenue mobilisation and lower interest rates, economic growth followed. Government gradually brought the debt to below 40 per cent of GDP by 2008.
In fact, Kenya has even managed shifting of policy mix to match different outlooks, successfully. When Kibaki’s macro-policy mix had achieved growth-with-stability by 2008, government faced a triple economic threat sufficient to kill growth. The global financial crisis, the post-election violence and a severe drought.
With President Uhuru Kenyatta as Finance minister, government shifted to a different appropriate policy mix — easier money and expansionary fiscal spending. By 2010, Kenya’s GDP growth had risen to 8.4 per cent, (from 0.2 per cent, and 3.3 per cent in 2008 and 2009, respectively), which has remained the peak, ever since.
At the centre of Kenya’s many challenges is the fact that policy advice that leaders receive is compromised by lack of backroom consultation, scrutiny, and speed, with competent high calibre of manpower available but hardly used in relation to economic policy and politics.
Policy thinking needs repair with co-ordination, skills and modernisation from a wealth of macro-knowledge spanning over four decades now. In crises, avoid flip-flopping and stay the course on growing the economy through structural reforms. Let me portray a recent context of the problem.
The Economist of London of September 6, 2018 cites the consequential theory of second-raters who always appoint third raters, for fear of scrutiny by first raters.
Applying this to Britain’s quandaries in the economics and politics of Brexit, it explains how an ‘equilibrium of incompetence’ arises, where 2-3 raters with low cut-off points for professional embarrassment destroy Britain’s outlook and opportunities.
The inescapable conclusion is that the results are self-inflicted negative equilibrium, flip-flopping, that are high costs that are much harder to get out of than to get into. If such “equilibrium” takes root in Kenya, weak scrutiny, lack of credibility and low speed of uptake will dog the policy advice that leaders receive.