- Candidates who dodge acute exposure of Kenya to risks of debt distress ignore the smugness of ‘let-someone-else-figure-it-out,’ that we could be in for a hard landing.
- A collaboration of political leaders and CBK must rise to actions that, though initially painful and unpopular, can return Kenya to the track of long-term prosperity.
An economist friend currently equates Kenya’s economic prospects to those of a Character in Hemingway’s novel, The Sun Also Rises. When asked how he went bankrupt, he answers – “Gradually…then suddenly.”
In the 2022 electoral commitments, the macroeconomic assessment of the economy and policy-mix choices to be made (between fiscal and monetary sides) are pivotal.
Candidates who dodge acute exposure of Kenya to risks of debt distress ignore the smugness of ‘let-someone-else-figure-it-out,’ that we could be in for a hard landing. Tough policies are never everyone’s cup of tea. A collaboration of political leaders and CBK must rise to actions that, though initially painful and unpopular, can return Kenya to the track of long-term prosperity.
CURRENT AVOIDANCE HIDES THE TRUTH: The economy must be rebuilt to reignite growth and employment. No promises will change the image of the Standard, Saturday, March 26, 2022. It captured in a cartoon a decrepit Kenya as a car wedged high on a tree.
To lower it and start pushing it to a garage, I suggest priority repairs of two gears: coordinated policy-mix; and rebuilding the budget process.
POLICY MIX: All sector prospects which COVID-19 worsened will hinge on economic recovery, in turn, contingent on the headline macro-pivots we make. Long-term evidence shows in recovery, positive results can emerge with policy credibility as the Kibaki Presidency demonstrated during 2002-2011.
Not to detract from Uhuru’s credit for implementing Constitution 2010 and devolution, Kibaki repaired a broken economy not once but twice. On his table dropped two main macro-policy crises.
Moi’s handover in 2002 contained an economy despoiled to a shell during 24 years by (Uh-huh…, you guessed it) power reposed in dictatorship, money, and ethnicity.
Taking over an economy buried to its neck in public debt- 64.1percent ratio to GDP with much borrowing squandered or stolen, Kibaki’s key plank was to taper the debt, grow GDP and rebuild tax revenues from the resulting upswing in output.
When the 2008-2009 global financial crisis threatened his recovery trajectory, he executed a lesson on how to re-build an African economy from the ashes towards growth and employment again.
Both phases used standard macro-policy tools. In the latter case, it was an easing of both fiscal and monetary policy.
The year 2022 finds us back to the drawing board. Kenyan’s must call out the mediocrity of leaders who wobble in creating a macroeconomic policy path that can take us out of the current economic mess.
Extreme repairs and extreme competences are required to rescue the economy. Appointments of top public officials into big government based on patronage are a no, no, however passionately leaders wish to purchase voiceless acquiescence.
Certainly, no, no to government that avoids the meritocracy and expertise teeming (and needed) in Kenya.
Kibaki left the current regime a public debt of Sh1.89 trillion, (below 40 percent of GDP, having tapered it from Moi’s 64.1 percent of GDP).
Moi having trashed GDP growth rate to 0.5 percent by 2002, Kibaki grew it to 8.4 percent by 2010 and was financing about 90 percent of the national budget from the National Treasury. This sidelined loans from either Bretton Woods institutions or Eurobond.
In the current regime, gross public debt increased to an estimated 79 percent of GDP at end-2021. Public debt ballooned to a projected Sh8.59 trillion, up by Sh6.7 trillion- over 354 percent of the public debt Jubilee found in Kibaki’s books.
Even discounting inflation and COVID, if the debt had truly been applied to maximize output, Kenya would be far better off today. But audits from the Auditor General and unanswered queries on the debt- Eurobond, SGR, Pandora saga, etc.- are ridden with questions suggesting leakages.
These consign Kenya’s future generations to debt repayments without the benefits of debt spent to expand our economic frontier.
I have in the past demonstrated in this column how the policy mix between fiscal side and the monetary side was articulated in each of Kibaki’s crises, and how it succeeded to return growth to the private sector. How do we discover the appropriate policy mix relevant for 2022?
There is a limited number of options based on prevailing economic weaknesses. Kenya’s highly unsustainable fiscal deficit must be reduced while reversing the slump/recession that threatens long-term prospects.
Appropriate policy fits the choice of a tight fiscal policy and smaller government.
We have a GDP gap (potential uncaptured output going into 2022 and 2023) and room for innovative fiscal consolidation while unleashing a looser monetary policy in a mix that redresses deficit pressures while transferring growth of output from government to the private sector i.e., replenish private investment and a measure of consumer spending to replace big Government spending.
For this, we must strengthen and work with a monetary authority (CBK) whose room for monetary policy transmission has itself been compromised by FinTech’s.
Capital injections externally take a big bite from regulated commercial banking compromising liabilities that should help intermediation (not small-time borrowing for gambling). Loans can be expanded to the private sector, and adjustment to a sustainable deficit can be achieved.
However, we must avoid IMF-style counter policy mix that tightens both fiscal and monetary policies. It would be highly inappropriate, a double error deepening economic slump, reducing investment and consumer spending. It is called austerity.
Historically the power of the above mix – easier monetary policy and tighter fiscal policy- was strongly demonstrated by Democratic Party President Bill Clinton in the USA. He found in his US Presidency in 1992 a historic fiscal deficit of 4.5 percent, the second-highest in USA since World War II.
He had turned the deficit to a surplus by 1998 in a strategy of fiscal tightening aided by monetary easing by Alan Greenspan who headed the Fed.
Demand was effectively shifted from government spending (or tax cuts of the earlier Republican President Reagan) to an uptake of private sector investment and consumer spending to drive growth, employment, and rising government revenues.
It is thus a “switching” policy mix whose main effect is to shift output momentum from government to the private sector.
A different mix applies if the coming regime were to target and succeed with policies triggering a boom in Foreign Direct Investments. Government lowers taxes, increases concessional borrowing and even County transfers and at the same time, and facilitates domestic and foreign investors to drive the investment boom.
The work of CBK in this case is to raise interest rates to fight consequent inflationary pressures.
For, in the face of the inflows, the effect of government loosening spending, in this case, is to channel and induce “crowding in” expenditures that ‘enable’ boosting of the demand for goods and services, from which it reaps revenues to begin resolving it’s public debt crisis. Growth, employment, and sustainable public finances would ensue.
The power of this mix was demonstrated in both Germany and the USA. It is a trade-off of growth with high interest rates. During a large investment boom and/or large fiscal transfers (such as County Revenue allocations), economic activity, employment, and growth increase, but this could stoke inflation and fiscal deficit pressures initially.
To mitigate inflation, the central bank tightens monetary policy. The German Unification while in EMS was the prime example. Starting from early 1990s, the unification transfers and investment boom in the two Germanys stoked demand/output in the two zones.
The Bundesbank tightened monetary policy and Germany ended with high growth and high-interest rates briefly. In a similar interplay during 1980s, the Reagan/Volcker policy mix rejuvenated growth in a triumph of political and economic leadership where the Fed raised rates to counter inflation.
REINING IN PUBLIC FINANCES AT OP: A pressing priority is to control hemorrhaging public finances. In a presidential system, budget execution normally is aligned to the pre-election agenda.
Budget execution is similarly aligned to the winning candidate for the Presidency. That is why a Parliamentary Budget Office (PBO) exists to engage on the budget with the President.
Absence of an Office of Management and Budget (OMB) remains a monumental gap in the Presidency, with the consequence that the President laments theft from public coffers at the rate of Sh2 billion per day from afar while lost for answers and powerless to stop the rot.
To his credit, he tabled a solution on November 23, 2015, endorsing an OMB thus:
“I am tasking the Chief of Staff and Head of Public Service to design an Office of Management and Budget under the Presidency. The Presidency will produce a President’s Budget working with the Parliamentary Budget Office,” adding,
“This will ensure that I drive priorities, oversight, and reduce influence-peddling in budgeting, while ministries and departments concentrate on implementation and service delivery. I am of the mind fellow Kenyans that we in government should take better care of your money before we ask you for more taxes.”
The OMB should be an early priority for the next regime.