Confusion or Desperation - or Both

The Business Daily has an interesting story on the proposed increase in taxes on bank charges. The author of the story, Brian Ngugi, is my friend. He is hard working and often seeks my views on topical issues when he believes that my opinion will add value.

On this one, which masquerades as an analytical piece, he makes three core assertions.

1. That “banks have said they will pass on the additional taxes to customers”. This is trivia. This is a tax on the service so banks are merely collecting it on behalf of the Kenya Revenue Authority.

I thought this should be obvious to a guy who is indicated to be reporting on business and economics.

2. That “this new tax will also affect stockbrokers, fund managers and insurances firms that charge fees for their services”. Actually not; it affects the consumers, not service providers. This is a consumption tax. I thought this should be obvious too. Oh, and these other financial service providers are mentioned just as a by-the-way. 

The core story is about bank  charges and interest rate caps, two aspects that are not at all linked to the tax. But hey, this is the favorite of reporters and editorial writers, whose pretense to expertise on the subject,  is manifest in as many contradicting arguments as the number of stories/editorials that have read over the past two years. 

3. That tax amounts to increase in fees and commissions, which will go to boost bank profits. This is nonsense. See No 1 above.

In the same issue of the newspaper, Brian has another piece on the proposed new tax on mobile money transfer (it is actually not on Mpesa alone as the caption in the story erroneously screams). He correctly sees this as a pain to the consumers (see its equivalence to No 1 above). He does not see this as a possible increase in fees for the benefit of mobile network operators.

This begs the question: how can a guy get it wrong and right on the same subject in the same newspaper on the same day? 

This is either confusion or desperation, or both.

Bad Ideas Are Cockroaches!

Thanks to Paul Krugman, Economics Nobel Laureate, I know that bad ideas are like cockroaches: no matter how many times you flush them down the toilet, they just keep coming back.

Just look at this piece of nonsense (below)! It is not the IMF that is on the spotlight; it is our bad polices. This is basically a distraction from the real problem - a fiscal policy gone haywire.

But as I have argued before, it is easy to seek to blame somebody, anybody; so the IMF it is. But any critical thinker will tell you that all our mess was not a creation of the IMF.

Feigned Thought Leadership

"Eyes on the shilling as Sh152 billion IMF cushion ends ". This is how the Business Daily   screamed today (see picture).



To non-suspecting members of the public, this catchy headline represented deep thinking; it gives the impression that the Business Daily leadership is thoughtful of the fact that of the IMF stand-by facility lapses, as it now seems, the Kenya shilling will be vulnerable.

That could well be the case, as some of us have argued so in the past. Even though the Central Bank of Kenya (CBK) seems to argue that it has sufficient foreign exchange reserves to "defend" the local unit, there is limit beyond which inevitability of depreciation will come.

For those of us who engage in policy research and discourse, the Business Daily is yet again engaging in feigned thought leadership - I have called its editorial pages being a platform for intellectual pretence.

Why do I say so? Because in mid August, the same newspaper that now deeply concerned about the possibility of foreign exchange instability in the event  of the IMF facility lapsing had an editorial to the effect that we may well not need that facility! Oh, I forget; somebody must write stuff that - even when making little sense - can sell a newspaper.

That is why for instance, there is an editorial in  its pages today to the effect that  interest rates capping law - a misguided peace of legislation - is working now that banks are making profits ( a nonsensical argument) while a while back the same pages argued that it was a hasty policy no good for the economy.

It is not that they saw any sense; it is because at that point in time, the Nation Media Group's back was against the wall as its television station had been shut by Government. Now that it is on, it is back to the usual business of taking leave of all logic and donning the feigned thought leadership hat! 

   

 

Nudging Economic Normalcy - "The Animal is Innocent" (A Bit Techical)

I have just finished reading David Pilling's interesting new book (2018) titled 'The Growth Delusion - The Wealth and Well-Being of Nations". It is an easy read with a compelling story on how an economy can be seen, at least by policy makers, to be doing well while that is all delusional (my review of the book is forthcoming). 

If we were to talk matters economic and public policy, Pilling's book is a reminder of two other classics, one by Paul Krugman in 1995 (Peddling Prosperity) and the other is by William Easterly in 2001 (The Elusive Quest for Growth).

But if we were to talk of economic policy discourse in Kenya as propagated - and sometimes actually initiated by a pretentious media - then Pilling's book reminds me of  John Ward's 1993 The Animals are Innocent. I am serious! The book is about the Mr Ward's search for the killers of  his daughter who disappeared while on a trip to Masai Mara. The popular stories about the death that Mr Ward discounts in the book shifted from suicide to "she was killed by wild animals".

If you are wondering how this relates to economic policy, you just need to look at headlines such as Kenyans to feel the pinch as Treasury implements IMF's 'painful' reforms.  If you substitute wild animals with the IMF, then you know what am talking about. As a society, we have become experts in looking for somebody to blame for problems of our own authorship.

It all starts with our misplaced sense of optimism that has blinded us from seeing grave undercurrents (hey, don't get me wrong; I too listen to motivational speakers who tell anybody within their headshots to always be positive!).  Recent episodes illustrates this vividly.

The beginning of 2018 has been characterised by an official feel-good sense insofar as the economy is concerned. The extent of such feeling varies, ranging from expectations of modest recovery to a drastic upward swing form the slow growth seen in 2017. If one was to take the Central Bank of Kenya's 2018 output projection of 6.2 percent as the exemplar of optimism of the state of the economy, then one need sot ask oneself: what will it take for the "stellar" growth to be realised?

The answer, I could argue, lies in looking at how far the economy's performance is from its potential - the so-called output gap. Unfortunately, not many analysis - even economists - look for answers from on economic growth or stability from that front. Instead, the preoccupation is on how the economy is "doing better" than the global or continental average - which in itself may look interesting but not very helpful.

There are a few critical things  to appreciate about potential output - which is also referred to as the production capacity of the economy. One is that just like GDP can rise or fall, the deviation of the economy's output from its potential can be bi-directional - it can be positive (meaning actual output is more than full capacity) or negative  (meaning actual capacity I less than what the economy can produce at full capacity).

Either way, an output gap is a pointer that the economy is running inefficiently (either under stretching or over-stretching its resources). While potential output is unobservable, therefore needs to be estimated, there can be tell-tale sign on whether we are on the negative or positive side.

All indications are that we are currently on the negative side, meaning that there is spare capacity of slack in the economy due to weak demand. The fact that core inflation (also called underlying inflation) - which excludes food and fuel, therefore signals demand pressure - is very subdued.

Meanwhile, the headline inflation (overall inflation) has not been consistently low; in instances it has breached the official target and hit double digit levels largely on account of challenges on the real economy (supply side challenges that monetary policy has no tools to directly address).

It is from here that the second critical issue about output gap - the employment gap - enters the equation. Unemployment gap is tightly linked with output and both are central to the conduct of both fiscal and monetary policies.

In order to appreciate this link, one must have an understanding of a situation that economists call the nonaccelerating inflation rate of unemployment (NAIRU). This is the unemployment rate that is consistent with a constant rate of inflation.

In the event that there are deviations of the unemployment rate from the NAIRU,  they point to deviations of the output from its potential. If for argument sake the actual unemployment is equal to the NAIRU, the economy will be producing at its maximum level without straining resources. That will be an economic nirvana - no output gap; no inflation pressure; all good!

Reality Check

But the nirvana in our case can only be imagined, not real. The dipping of real output growth to below 5 percent means that a quick reversal that must confront four factors.

1. Private sector investment needs to be on a positive trajectory. That is not happening; the intuitive sequencing when firms are operating at excess capacity means that there has to be optimal capacity utilisation before demand for new investment becomes a priority.
2. while the dynamics on the investment side represent the supply side of the equation, there has to be a corresponding demand side response. As already noted, demand is muted an inflation - which if low and stable promotes a predictable environment for investment and consumption - is hardly anchored to the target (a recent paper on this subject is my authority here - Hachem K., and Wu J.K., 2017, "Inflation and Social Dynamics", Journal of Money, Credit and Banking, Vol. 48, No. 8, December);  the reality is that inflation expectations could be undertaking econometrician's "random walk". So you can imagine the random walk in the field of sagging consumer confidence (according to a recent survey)!  
3. It is a no-brainer that the public expenditure led growth often runs its course; in our case, the party that has lasted for well over four years has run full cycle. Now its time to pick the tab; such growth having bee a function of a huge fiscal deficit running over an equivalent of 8.0 percent of GDP. Public debt  is now an issue of great concern even to those (IMF - World Bank) who not too long ago argued that "Kenya's risk of external debt remains low, while overall public sector debt dynamics continue to be sustainable" - if you can't take me for my word,  read what they said in December 2016!  Of course, the hot and cold rating agencies do not want to be left out of the loud cry of "fire!" 
4. There is a premature declaration victory on the external sector.  The closure of the current account deficit from double digit levels in GDP equivalent to below 6.0 percent is attributable more to less imports bill than vibrancy of exports. It's hardly surprising that the stand-by arrangement with the IMF remains critical (see here) no matter what a senior advisor loudly muses (see here). We needed the IMF arrangement in March 2018; nothing has changed to make us say we don't need it now. The oil prices are on the rise; add VAT on fuel (what the media is lazily calling the IMF tax while it truly is a lazy response to the need for the necessary fiscal consolidation) and you see how household's disposable incomes are eroded. The downside risks to the global economy have been by the potential dire consequences of the US trade tariffs.

The Delusion

On the back of the foregoing arguments it is easy to see why it is difficult to nudge optimism and think all is well. It is also easy to see why IMF could well be an acronym for "It's My Fault". It is a delusion that we are anywhere close to the nirvana. Unemployment is sky high and wages are low and sticky; we hardly talk of wage inflation in this country. It is a delusion to imagine that reducing fiscal deficit by way of rationalising expenditure is symmetrical to reducing the deficit by way of levying arbitrary taxes. It is a delusion for any proposal -policy or otherwise - to be portrayed as an IMF policy. As things stand, "the animal (in Washington) is innocent".

When Even Reading a Paragraph is Asking Too Much from A Reporter

Recently the Oxford Business Group (OBG) published its inaugural Business Barometer: Kenya CEO Survey 2018 (see report here). I attended the launch event and participated in the deliberations.
Let me quote the first paragraph of the Report:

"While numerous factors have contributed to Kenya's declining GDP expansion rate, one of the main reasons is the slowdown in private sector credit growth as a result of the interest rates cap introduced in 2016. In the inaugural OBG  Business Barometer: Kenya CEO Survey 2018, 89% of the CEOs say than the newly imposed interest rates cap has made it more difficult or much more difficult to access credit".

It is in plain English!

But this is what Wainaina Wambu of The Standard read (or was told to read):

" Kenya's chief executives give rate cap the thumbs up".

And here is his distortion:

"A sizeable majority (89 per cent) of respondents said the decision to cap interest rates at four percentage points above the Central Bank Rate had improved the cost of borrowing, but had made borrowing more difficult"

This cannot be laziness. It is a case of a reporter (may be a newspaper editor) falling in love with a bad idea and not letting any facts come in between him and his love for the bad idea.

What a pity! It is perfectly understandable to be entitled with your own opinion . But to imagine that you are entitled to your own facts is simply crazy!

Business Daily Editorial Pages - a Platform for Intellectual Pretence

I don't want to make any assumptions regarding what music the editors of the Business Daily love to  listen to. That is why I want to take the liberty of making a prescription, just in case the old rock and roll is not their thing but this one piece may be appealing.

There is a group called The Platters whose hit "The Great Pretender" is an apt description of what I often see in the editorial pages of the Business Daily, especially on matters economic policy where the newspaper unashamedly pretends to take a stance based on knowledge, logic and intellect - and not whim.

It the hit, The Platters croon:

"Oh-oh, yes I'm the great pretender
Pretending that I'm doing well
My need is such I pretend too much
I'm lonely but no one can tell"

It its editorial page today, the Business Daily is evidently miffed (and deservedly so) by the Government's crackdown on media. Its core argument is that the heavy hand on the media is not good for investment.

That is all fine until you read the last three sentences where it asserts:

"Ironically, this is just one of the cases where hasty State action has threatened jobs and enterprises.

From interest caps to anti-gaming war, people with no access to power are sleeping hungry. The government must decide whether ruining the private sector is one of its mandates".

What caught my interest in these sentences is the mention of interest [rate] caps as one of the hasty State actions that threatens jobs and enterprise. Really? Is this a Business Daily editorial?

I had to ask myself these questions because the same newspaper, on the same pages has been playing games that are not so funny.

On June 6, 2017, this is what it had to say: "State should not cave in to pressure to undo rates cap law". I found editorial pretensions and argued as much in a blog post then.

So where is the wisdom suddenly coming from? I would like to proffer an answer. There is a hypothesis that ones level of honesty an level of drunkenness have a positive correlation. The same can be said with the Business Daily and honesty and political siege of its sister or cousin.

And that often makes its editorial pages a platform for intellectual pretence. And The Platters' "The Greatest Pretender"  then easily passes for the official mantra for these pages.

It's "OK" Until Minsky Comes Calling!

There is a strange story in today's Business Daily to the effect that "experts back Treasury's plan to pay debt using Eurobond funds". It's strange in two respects. One, it attributes the views to one expert while giving the impression that some kind of polling amongst economists and other experts was the basis of such assertion.

But two, it seems to suggest that economists are now happy with a Ponzi scheme, for that is what it really is. There is something that in our school is called the "Minsky moment" - named after a great economist by the name Hyman Minsky. This is when there a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures. Are we courting it?

No expert worth his or her name will call for an unqualified Ponzi programme. Kicking the can down the road will catch up with us.