IMF: Preaching Hope and Clothing it as a Forecast.

For the time that Olivier Blanchard was Chief Economist - 2008 to October 2015 - I was a great fun of the Fund's research work. I still follow the IMF's research agenda with keen interest. As Blanchard was about to leave the Fund, the World Economic Outlook - the Fund's  twice-a-year flagship publication - was published. In there are two fantastic pieces of research in the technical chapters (i.e. besides the first Chapter that is dedicated to giving a view on the global economy).
How I wish I was as enthusiastic on IMF's policy prescription especially to the developing economies, in particular Kenya. That is why I blasted the IMF's in 2013 on their monetary policy ideas.
The IMF is at it again, giving as assessment of the Kenyan economy that in my view is misguided. This has forced me to do an opinion piece for the Business Daily to ask  a few questions as I indicate below:

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Do the rules of good economics discourse by international agencies apply equally amongst countries? Or there is an excuse of taking leave of the call for rigour when it comes to economies that are considered to be systemically not-important – meaning that even if they were to go belly-up, the global economy wouldn’t hurt?

One asks these questions because it doesn’t take a hard look to see an economy’s performance being casually characterised as robust when all we can see is anything but robust.  Take the International Monetary Fund’s September 2015 review of the Kenyan economy Kenya under the twelve-month standby arrangement (SBA) and an arrangement under standby credit facility (SCF) approved early this year.
According to the IMF, despite the global headwinds and local shocks such as insecurity that have hurt key sectors like tourism, the economy is largely on the right track. I am straining to resist the temptation of imagining that the IMF is taking us for Candide, the character in Voltaire’s 1759 classic of the same title. You see, Candide was a student of Professor Pangloss who was a specialist in preaching optimism.  
Pangloss was able to prove, at least to Candide, that “that there cannot possibly be an effect without a cause and that in this best of all possible worlds the baron’s castle was the most beautiful of all castles and his wife the best of all possible baronesses.
“It is clear, said he, that things cannot be otherwise than they are, for since everything is made to serve an end, everything necessarily serves the best end. Observe: noses were made to support spectacles, hence we have spectacles. Legs, as anyone can plainly see, were made to be breeched, and so we have breeches. . . . Consequently, those who say everything is well are uttering mere stupidities; they should say everything is for the best”.
In short, Pangloss espoused the notion that we live in “the best of all possible worlds”. If he was right, then in our case a real output growth of 5.7 percent in 2013 declining to 5.3 percent in 2014 and all signs pointing to a further decline in 2015 is a signal of buoyant performance.
What then could be driving the IMF’s characterisation if not the Panglossian inspiration? I have a hypothesis inspired by the arguments in a 2009 essay titled “The State of Macro” by economist Oliver Blanchard – IMF’s chief economist from September 2008 to October 2015 – published in Annual Review of Economics.
In the essay, which drew as much praise as critique on account of the conclusion that the “state of macro is good” as the wold was imploding, Blanchard was modest in his approach, refusing to take the brief to write about “the future of macroeconomics”. Instead he took a short-term view, demonstrating the challenge of attempting to give a projection and taking the safe approach to “express hopes without disguising them as forecasts”.
My hypothesis here is that the IMF’s latest assessment of the Kenyan economy is the exact opposite of Blanchard’s approach; it is one of expressing hopes and disguising them as forecasts. Let me test this hypothesis starting with the latest forecast of the Kenya’s real growth by the IMF’s October 2015 World Economic Outlook (WEO).
The WEO projects that the economy will expand by 6.5 percent in 2015 before that rate rises to 6.8 percent in 2016 – the exact same projection presented in the Fund’s latest review of Kenya. It is clear, at least to me, that this outlook did not benefit from the latest data on the economy’s performance by the Kenya National Bureau of Statistics (KNBS) released before the IMF outlook.         
The KNBS tells us that the economy’s real output expanded by 5.5 percent during second quarter of 2015 the compared to 6.0 percent during the corresponding quarter in 2014. The first quarter of the year registered a 4.9 percent growth compared to the previous 4.7 percent during the first quarter of 2014.
Based on the first two quarters of this year, 2013 and 2014 look like great years even though the respective real growth rates of 5.7 percent and 5.3 percent are modest – if by no other comparison – when judged against the aspirational double digit growth rate necessary for the realisation of Vision 2030.
If therefore the IMF’s forecast for 2015 is to be realised, then the economy must spectacularly grow by nearly 8 percent in each of the last two quarters of the year. And the buoyant momentum has to be maintained if the 2016 is to be realised.   
But how realistic is such expectation? Very unrealistic, in my judgment. For one, the Central Bank of Kenya (CBK) has adopted a tight monetary policy stance to stem inflationary pressure and assure medium term stability. The inevitable consequence of the justifiable monetary policy stance is short-term cost in terms of real growth, but the focus remains anchoring medium term inflation expectations.
At the moment the fiscal front is the wrong side of the coin to look at if one is in search of some solace that growth would be policy-induced. That is because of what I see as some imagined self-fulfilling prophecy on real GDP growth by IMF and others that has been the basis of revenue and expenditure but which never crystallised.
This is how it is envisioned to work: project that the economy will grow at between 6.5 percent and 6.9 percent as the IMF did just last year. Let these rosy projection be the basis for government revenue and expenditure projections. Assume that the projected expenditure will support the realisation of the growth projection, especially expenditure on infrastructure.         
One can only agree to the IMF’s observation that the on-going upscaling of public infrastructure investment is critical in boosting the economy’s growth potential if there is a strong qualification: the economic viability of these investments against which financing is secured need not be in doubt. As it is, though, such viability could be either a wish or an assumption, or anything in between the two.
So when the IMF further observes that “maintaining fiscal sustainability requires significant efforts to mobilise additional revenue and contain current spending”, it is a covert admission that the self-fulfilling growth prophesy is not crystallising. Even then, the IMF review goes ahead and builds the same growth assumption into the economy’s latest debt sustainability analysis (DSA), with the verdict being a rendition of Jazz musician Bobby McFerrin’s “don’t worry be happy”.
So what is going on here? Beyond dodgy forecasts, the wisdom of Blanchard in a more recent short essay in the September 2014 issue of the IMF’s Finance and Development titled “Where Danger Lurks” is largely ignored. That wisdom is that it always important to pay attention to dark corners from where the economy can start malfunctioning.      
 I see one such dark corner in the situation where the large government deficit that the IMF acknowledges collide with the CBK’s stability efforts. Economists describe this as a collision between inflation targeting and fiscal dominance. This ought to be an issue to the IMF if the transition of the CBK to inflation targeting – a more accountable monetary policy regime – is to be smooth.
The key policy question here is: does the central bank have a responsibility for fiscal solvency on top of its price stability mandate? If choice is an inflation targeting regime, then the optimal monetary policy rule is that nominal interest rates should increase by more than inflation expectations to slow inflationary pressure, regardless of whether fiscal sustainability so dear to the IMF is at stake.
It is curious that such policy conundrum is not a point of potential concern to the IMF, in which case one could argue that in our instance the Fund is a post-policy, post-projection enterprise. That means its stance could be mirroring that of those economists who according to John Maynard Keynes “set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again”.
I suspect that if we were talking about a systemically important economy, any forecast will be scrutinised to the decimal point and policy assessment will receive thorough screening. In the words, the answer to a 2000 paper “Small States, Small Problems? Income, Growth, and Volatility in Small States” by economists William Easterly and Aart Kraay published by the journal World Development would simply entail dropping the question mark. In that case I see why there is temptation for the messages of hope to be disguised as forecasts. 
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The Business Daily published the essay today, but the editor changes a bit of stuff on the introduction and chopped off a few paragraphs at the end. The message nonetheless passed across as the IMF resident rep in Nairobi has called me to indicate that he has noted my critique. I will have to keep pushing!