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.
World Bank pushes G-20 to extend debt relief to 2021
World Bank Group President David Malpass has urged the Group of 20 rich countries to extend the time frame of the Debt Service Suspension Initiative(DSSI) through the end of 2021, calling it one of the key factors in strengthening global recovery.
“I urge you to extend the time frame of the DSSI through the end of 2021 and commit to giving the initiative as broad a scope as possible,” said Malpass.
He made these remarks at last week’s virtual G20 Finance Ministers and Central Bank Governors Meeting.
The World Bank Chief said the COVID-19 pandemic has triggered the deepest global recession in decades and what may turn out to be one of the most unequal in terms of impact.
People in developing countries are particularly hard hit by capital outflows, declines in remittances, the collapse of informal labor markets, and social safety nets that are much less robust than in the advanced economies.
For the poorest countries, poverty is rising rapidly, median incomes are falling and growth is deeply negative.
Debt burdens, already unsustainable for many countries, are rising to crisis levels.
“The situation in developing countries is increasingly desperate. Time is short. We need to take action quickly on debt suspension, debt reduction, debt resolution mechanisms and debt transparency,” said Malpass.
Kenya’s Central Bank Drafts New Laws to Regulate Non-Bank Digital Loans
The Central Bank of Kenya (CBK) will regulate interest rates charged on mobile loans by digital lending platforms if amendments on the Central bank of Kenya Act pass to law. The amendments will require digital lenders to seek approval from CBK before launching new products or changing interest rates on loans among other charges, just like commercial banks.
“The principal objective of this bill is to amend the Central bank of Kenya Act to regulate the conduct of providers of digital financial products and services,” reads a notice on the bill. “CBK will have an obligation of ensuring that there is fair and non-discriminatory marketplace access to credit.”
According to Business Daily, the legislation will also enable the Central Bank to monitor non-performing loans, capping the limit at not twice the amount of the defaulted loan while protecting consumers from predatory lending by digital loan platforms.
Tighter Reins on Platforms for Mobile Loans
The legislation will boost efforts to protect customers, building upon a previous gazette notice that blocked lenders from blacklisting non-performing loans below Ksh 1000. The CBK also withdrew submissions of unregulated mobile loan platforms into Credit Reference Bureau. The withdrawal came after complaints of misuse over data in the Credit Information Sharing (CIS) System available for lenders.
Last year, Kenya had over 49 platforms providing mobile loans, taking advantage of regulation gaps to charge obscene rates as high as 150% a year. While most platforms allow borrowers to prepay within a month, creditors still pay the full amount plus interest.
Amendments in the CBK Act will help shield consumers from high-interest rates as well as offer transparency on terms of digital loans.
Scope Markets Kenya customers to have instant access to global financial markets
NAIROBI, Kenya, Jul 20 – Clients trading through the Scope Markets Kenya trading platform will get instant access to global financial markets and wider investment options.
This follows the launch of a new Scope Markets app, available on both the Google PlayStore and IOS Apple Store.
The Scope Markets app offers clients over 500 investment opportunities across global financial markets.
The Scope Markets app has a brand new user interface that is very user friendly, following feedback from customers.
The application offers real-time quotes; newsfeeds; research facilities, and a chat feature which enables a customer to make direct contact with the Customer Service Team during trading days (Monday to Friday).
The platform also offers an enhanced client interface including catering for those who trade at night.
The client will get instant access to several asset classes in the global financial markets including; Single Stocks CFDs (US, UK, EU) such as Facebook, Amazon, Apple, Netflix and Google, BP, Carrefour; Indices (Nasdaq, FTSE UK), Metals (Gold, Silver); Currencies (60+ Pairs), Commodities (Oil, Natural Gas).
The launch is part of Scope Markets Kenya strategy of enriching the customer experience while offering clients access to global trading opportunities.
Scope Markets Kenya CEO, Kevin Ng’ang’a observed, “the Sope Markets app is very easy to use especially when executing trades. Customers are at the heart of everything we do. We designed the Scope Markets app with the customer experience in mind as we seek to respond to feedback from our customers.”
He added that enhancing the client experience builds upon the robust trading platform, Meta Trader 5, unveiled in 2019, enabling Scope Markets Kenya to broaden the asset classes available on the trading platform.