- Candidates who avoid Kenya’s acute exposure to the risks of debt distress ignore the sufficiency of “letting someone else off the hook” that we could suffer a hard landing.
- A collaboration between political leaders and the CBK must lead to actions that, although initially painful and unpopular, can put Kenya back on the path to long-term prosperity.
An economist friend is currently likening Kenya’s economic outlook to that of a character in Hemingway’s novel The Sun Also Rises. When asked how he went bankrupt, he replies – “Gradually…then suddenly.”
In the electoral commitments of 2022, the macroeconomic balance sheet of the economy and the policy-mix choices to be made (between taxation and monetary policy) are decisive.
Candidates who avoid Kenya’s acute exposure to the risks of debt distress ignore the sufficiency of “letting someone else off the hook” that we could suffer a hard landing. Strict policies are never everyone’s cup of tea. A collaboration between political leaders and the CBK must lead to actions that, although initially painful and unpopular, can put Kenya back on the path to long-term prosperity.
THE CURRENT EVITE IS HIDING THE TRUTH: The economy must be rebuilt to revive growth and employment. No promises will change the image of the Standard, Saturday March 26, 2022. He captured in a cartoon a decrepit Kenya in the guise of a car stalled high on a tree.
To lower it and start pushing it into a garage, I suggest priority repairs at two speeds: a coordinated policy-mix; and rebuilding the budget process.
POLICY MIX: Any sectoral outlook that COVID-19 has worsened will depend on the economic recovery, in turn, depending on the major macroeconomic pivots that we achieve. Long-term evidence shows that in recovery, positive results can emerge with political credibility, as demonstrated by Kibaki’s presidency during the 2002-2011 period.
Not to hurt Uhuru’s credit for implementing the 2010 Constitution and decentralization, Kibaki fixed a broken economy not once but twice. On his table fell two main macro-political crises.
Moi’s handover of power in 2002 contained an economy plundered for 24 years by (Uh-huh…you guessed it) power based on dictatorship, money and ethnicity.
Picking up an economy buried up to its neck in public debt – a 64.1% to GDP ratio with much of the borrowing wasted or stolen, Kibaki’s main objective was to reduce debt, increase GDP and rebuild tax revenues through the resulting increase in production.
When the global financial crisis of 2008-2009 threatened his recovery trajectory, he delivered a lesson on how to rebuild an African economy from the ashes towards growth and jobs again.
Both phases used standard macro-policy tools. In the latter case, it was a relaxation of fiscal and monetary policy.
The year 2022 brings us back to the drawing board. Kenyans must speak out against the mediocrity of leaders who falter in creating a macroeconomic policy path that can get us out of the current economic mess.
Extreme repairs and extreme skills are needed to save the economy. Appointments of high officials in a big government based on patronage are a no, no, no matter how passionately the leaders wish to buy a voiceless acquiescence.
Certainly, no, no to the government that shuns Kenya’s abundant (and necessary) meritocracy and expertise.
Kibaki left the current regime with a public debt of 1.89 trillion shillings (less than 40% of GDP, having reduced it from Moi’s 64.1% of GDP).
Moi having smashed the GDP growth rate to 0.5% in 2002, Kibaki raised it to 8.4% in 2010 and funded around 90% of the national budget through the national treasury. This ruled out loans from the Bretton Woods institutions or the Eurobond.
Under the current regime, gross public debt has increased to around 79% of GDP by the end of 2021. Public debt has soared to 8.59 trillion shillings, up 6.7 trillion shillings, or more than 354% of the public debt that Jubilee found in Kibaki’s books.
Even taking into account inflation and COVID, if debt had really been applied to maximize production, Kenya would be doing much better today. But the Auditor General’s audits and the unanswered debt questions – Eurobond, SGR, Pandora saga, etc. – are riddled with questions suggesting leaks.
These entrust Kenya’s future generations with debt repayment without the benefits of the debt spent to expand our economic frontier.
In the past, I have shown in this column how the policy-mix between the budgetary component and the monetary component was articulated in each of the Kibaki crises, and how it succeeded in restoring growth to the private sector. How to discover the appropriate and relevant policy mix for 2022?
There are a limited number of options based on current economic weaknesses. Kenya’s highly unsustainable fiscal deficit must be reduced while reversing the crisis/recession that threatens long-term prospects.
An appropriate policy corresponds to the choice of a strict budgetary policy and a reduced government.
We have a GDP gap (uncaptured potential output through 2022 and 2023) and room for innovative fiscal consolidation while launching looser monetary policy in a mix that eases deficit pressures while shifting the government output growth to the private sector, i.e. rebuilding private investment and a measure of consumer spending to replace big government spending.
For this, we need to strengthen and work with a monetary authority (CBK) whose monetary policy transmission margin has itself been compromised by FinTech.
Capital injections from outside take a large share in regulated commercial banks, undermining liabilities that should help intermediation (not short-term borrowing for gambling). Lending can be extended to the private sector and adjustment to a sustained deficit can be achieved.
However, we must avoid an IMF-style counter-policy-mix that tightens both fiscal and monetary policies. It would be totally inappropriate, a double error worsening the economic slump, reducing investment and consumer spending. It’s called austerity.
Historically, the power of the above combination – looser monetary policy and tighter fiscal policy – has been strongly demonstrated by Democratic Party Chairman Bill Clinton in the United States. He found in his US presidency in 1992 a historic budget deficit of 4.5%, the second highest in the United States since World War II.
He had turned the deficit into a surplus in 1998 in a strategy of fiscal tightening aided by the monetary easing of Alan Greenspan who headed the Fed.
Demand has effectively shifted from government spending (or former Republican President Reagan’s tax cuts) to increased private sector investment and consumer spending to spur growth, jobs and increased income. Public revenue.
It is therefore a “changing” policy mix whose main effect is to shift the dynamics of production from the government to the private sector.
A different mix applies if the coming regime were to target and succeed with policies triggering a foreign direct investment boom. The government is cutting taxes, increasing concessional borrowing and even county transfers and at the same time helping domestic and foreign investors to drive the investment boom.
The job of the CBK in this case is to raise interest rates to combat the resulting inflationary pressures.
Because, in the face of capital inflows, the effect of a relaxation of public expenditure, in this case, is to channel and induce expenditure which “permits” to stimulate the demand for goods and services, from which it draws revenues to start solving its public debt crisis. Growth, employment and sustainable public finances would follow.
The potency of this blend has been demonstrated in Germany and the United States. It is a compromise between growth and 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 initially fuel pressures on the inflation and the budget deficit.
To dampen inflation, the central bank is tightening its monetary policy. German unification while in EMS was the best example. From the early 1990s, unification transfers and the investment boom in the two Germanies fueled demand/production in both areas.
The Bundesbank tightened its monetary policy and Germany was briefly left with strong growth and high interest rates. In a similar interaction during the 1980s, the Reagan/Volcker policy mix rejuvenated growth in a triumph of political and economic leadership where the Fed raised rates to counter inflation.
CONTROL OF PUBLIC FINANCES AT THE PO: An urgent priority is to control the haemorrhage of public finances. In a presidential system, budget execution is normally aligned with the pre-election agenda.
Budget execution is also aligned with the winning presidential candidate. This is why a Parliamentary Budget Office (PBO) exists to engage on the budget with the President.
The absence of an Office of Management and Budget (OMB) remains a monumental shortcoming in the presidency, with the result that the president laments the theft from public coffers at the rate of 2 billion shillings a day remotely while ‘He’s lost for answers and powerless to stop the rot.
To his credit, he filed a solution on November 23, 2015, endorsing an OMB thus:
“I instruct the chief of staff and head of the civil service to design a management and budget office under the presidency. The Presidency will produce a President’s Budget in conjunction with the Parliamentary Budget Office,” adding,
“This will ensure that I drive priorities, oversight and reduce influence peddling in budgeting as ministries and departments focus on implementation and service delivery. , that we in government should take better care of your money before asking you for more taxes.
OMB should be a top priority for the next regime.