A Mechanical Tool for a Structural Problem - ICPAK Edition

My first economics lesson in high school decades back was on the subject fancily referred to as "market structures". My teacher, Mr. Stephen Mugenyi, started by telling us that there are three types of markets - monopolistic (one market player), perfectly competitive (many players), and oligopolistic (in between the two extremes).That was a mouthful.

The following day, he went on to tell us the features of each of the three. A monopolist has total market power and plays in a market with entry barriers. A monopoly makes 'abnormal profit' based on the ability to restrict output and therefore charge high prices.
In a perfectly competitive market there is free entry and exit, and market players make 'normal profit' as the market dynamics enable prices to adjust to a common level.

As I came to learn later (as I grew to become a professional economist), monopoly and perfect competition are two extremes - what we later used to call "corner solutions". The real world is somewhere in between, and that is the oligopolistic structure. [there is also monopolistic competition; I didn't learn this from Steve]. In an oligopolistic set up, there are either few players or a few dominant players.

If one wants to move the market towards perfect competition, one needs to look at one variable: number of players - not simplistically increasing such number but ensuring that that market dominance is not by few players (in other words expand the top).

Even this will not lead to perfect competition; it can only approach but not attain perfect competition status (we used to  romantically refer to this as an "asymptotic process"). You cannot move an oligopolistic market towards perfect competing through attempting to fix the price. That is because, the reason you have oligopoly is "structural".
Now, the Institute of Certified Public Accountants of Kenya (ICPAK) leadership has chosen to argue that price controls will address a structural issue. They argue that the banking industry is oligopolistic, therefore cap interest rates will just do the magic.

This brings three things to mind.

• One, things that are expected to be obvious to some a group of professionals who are expected to be thoughtful and knowledgeable aren't usually so.
• Two, playing to the gallery is  very very tempting. I can't see the motivation though when it comes to ICPAK leaders on this issue. Is it politics? Well, I don't know. What I know though is that it is not economics!
• Three, there is a huge difference between simple solutions (carefully thought through but easy to implement) and simplistic (looking at which side of the debate is noisy and assuming that they have a point). ICPAK leaders present a typical simplistic solution. Not that there is a simple one when it comes to interest rates; but one expects logic in any conclusion and I see none of that in ICPAK's assertions.

Illiteracy in Basic Economics - Once Again!

When I saw the Daily Nation tell us today that the IMF calls for  interbank rate control in Kenya, I wouldn't help but recall that in the recent past I have asked (actually twice - here and here) whether the Nation Media Group has an economics editor. I guess I would have to go easy on the question and surmise that clearly they do not need one.

Why do I think so? Because the author of the piece hinges his sweeping observations on a recent IMF Working Paper. I happen to have read the said paper three days before the Daily Nation story was published. I would like to argue that:

• One, my reading was very careful because the paper is very technical but well written for a trained eye to enjoy [I didn't expect the Daily Nation reporter to understand what the hell the exponential generalized autoregressive conditional heteroskedasticity  (E-GARCH) specification is all about!].
• Two, the paper's conclusion - written in plain English nowhere suggests for a control of the interbank rate.
• Three, the habit of picking statements from a technical paper with the objective of fitting a particular narrative is very addictive in the media, especially when there is a desperate endeavour to appear knowledgeable on a subject where the reality is the exact opposite. 

I have a strong feeling that either the author doesn't - or chooses not to - understand  how the interbank market operates. So let me make no assumption here and observe as follows:

• First, the interbank market is an overnight market whose price (the interbank rate) is influenced by the overall liquidity in the market. 
• Second, the other money market rates such as treasury bill rates are a reflection of liquidity situation in the market and therefore have an implication of what the interbank rate could be.
• Three, (and this is for those technically inclined) the E-GARCH methodology allows for the determination of the direction of influence between the interbank rate and the treasury bill rate; and such influence can be dual (meaning the two influencing each other). The IMF paper indicates that such influence is strong from the interbank rates.
• Four, the interest of ensuring a smooth interbank rate that is coordinated by the policy rate (the Central Bank Rate[CBR] in this case) is such that the central bank could use the interbank market as an operational target for monetary policy - the CBR is the signal rate and the interbank is the operational rate
• Five, there are merits in the central banks creating a band around the CRB around which the interbank rate could fluctuate (the paper calls it a corridor). The narrower the corridor the better it is to manage volatility in the interbank market given that the CBK does not fluctuate frequently.

Does the proposal for the creation of a corridor amount to a call for controlling the interbank rate? Definitely not. The central bank can only seek to influence, but not control, the interbank rate. That is why, to let the IMF paper speak for itself, 

"by announcing a rate that it wishes to prevail in the overnight interbank market and ensuring its implementation through day-to-day liquidity operations, the central bank aims to influence and stabilize longer-term rates, important for overall level of prices and real economic activity. Likewise, the central bank’s ability to reduce volatility of overnight interbank rates should matter for monetary policy because interbank market volatility may

affect funding costs for longer-term financing".       

So where is the Daily Nation coming from with its screaming assertion about the call for interbank rate control? I do not know. I suspect it is a function of the implicit sympathy to have money market rates controlled - aligned to the silly proposal by the a section of the legislature - that the media house is shy of directly asserting.

But it all amounts to illiteracy in basic monetary economics.        

Non-economics!

Simon Wren-Lewis, one of my favorite academic economists, has a very interesting post on his blog on economic reporting without economics. I have been on this subject for a while now, but more explicitly in the recent past (see here and here).

At the very best, a new branch of economics has been "created" although it doesn't go through the formal route of rigour and logic, which Prof. Wren-Lewis cleverly calls media macro!

And still the posturing continues!

Does Nation Media Group have an Economics Editor? A Redux

I recently asked: Does Nation Media Group have an Economics Editor? This was not a pedestrian question. My motivation was that the media house makes unforced errors in matters basic economics.

In today's Business Daily, the lead story talks about inflation tax. The author talks about how proposed tax measures on financial services and consumer goods will lead to inflation. It is an accurate report, only that it does not amount to inflation tax, which is a technical word that means something else.

Am I splitting hairs? No. Instead I am illustrating how the pursuit of sounding informed by the media house often results in embarrassing inaccuracies.

If the report was about government measures that have an implication of raising medium term inflation, which then erodes the value of money - or bonds - it would be accurate.

Moral of the story: modesty - of words - is a virtue.  

What Hapenned to the Policy Reset Promise?

When I got an invitation from the IMF to attend a 9th May 2016 lecture by Its First Deputy Managing Director, Mr. David Lipton, at Strathmore University, I was excited. Part of the excitement was underpinned by the promised thrust of the lecture - Sub-Saharan Africa: Time for Policy Reset.

Is that what we got? Well, Mr. Lipton instead talked about "The Challenges of Sustaining Africa’s Growth Momentum". At the end of it all, the case for policy reset was not litigated; not even when the lecture ably navigated the terrain of remaining optimistic about the continent while being rife to the downside risks.

What struck me though was the celebratory tone that Mr. Lipton made reference to African economies' foray into the international capital markets. For what it is worth, I am all for a careful venture into the Euro bond market as well all other  capital markets but with one condition: the economies shouldn't do it as a matter of fashion; rather they should undertake a careful examination of the implications of such venture.

I honestly expected Mr. Lipton to provide some context on this subject, even from the wider perspective of debt sustainability, but he didn't; at least not explicitly.  What am I saying here?

• One, the  May 2013 issue of the IMFs Regional Economic Outlook for Sub-Saharan Africa has a brilliantly crafted chapter on Issuing International Sovereign Bonds: Opportunities and Challenges for Sub-Saharan Africa. In this publication is a list of Sub-Saharan economies that had issued Sovereign bonds in the international markets.
• Two, many of these economies are beneficiaries of the debt relief initiatives such as the HIPC and its enhanced version.  
• Three, these economies' venture into the international capital markets was premised on the argument that they were debt sustainable, at least based on the IMF-World Bank criteria.
• Four, it can be argued that without relief, these economies could have not have been deemed debt-sustainable; in other words their debt sustainability was a function of somebody else's benevolence and not their debt management ingenuity.
• Five, given the downside risks that Mr. Lipton ably pointed out, and consequently the gloomy outlook of Sub-Saharan Africa as illustrated by the IMF's latest Regional Economic Outlook, some of these economies are heading back to debt unsustainability.

One question then comes to mind: if these economies get back into debt unstainable positions - and there evidence that some could - is a new form of debt relief the policy reset that the lecture didn't allude to?

I don't know. All I know though is that Mr. Lipton brilliantly  set the base for an interesting engagement; however  the discussants who were meant to motivate the engagement were at best underwhelming!
    

"It Works in Practice; But Does It Work in Theory?"

I recently was largely reflecting on bank runs using historical episodes and relying on the 1783 wisdom of Walter Bagehot. You could be tempted to think that this was practice in search of theory; certainly not. That is precisely the point that David Ndii made three days later.

"The Dog Ate My Homework" - Third Edition

The Business Daily has a story to the effect that the sales of new luxury cars have dropped by a wopping 32% because of high cost of funds. The instructive words here are "new" and "luxury" - we are talking of Mercedes, Jaguar, et. al.

In other words, the author of the story - or the caption - is telling us that these crazy banks are coming  between the rich and their search for luxury!

While that is utter nonsense, I see a pattern in the way the Businessun Daily takes excuses and imagines they are a proper account for certain occurrences. This is what I call an attitude in search of justification.

A while back, I argued that there is tendency of the Business Daily to insinuate that the woes of Uchumi Supermarkets were occaisoned by expensive loans from banks is a kin to a akin who didn't do his homework and when asked by the teacher why he unequivocally says: the dog ate my homework!

It didn't matter to the "analysts" at the Business Daily that Uchumi was not able to issue a commercial paper - or rather the Capital Markets Authority was not keen to approve the  issuance on account of Poor financials. Yet, some people imagined that banks will ignore the risk and give the supermarket chain cheap credit - in other words provide it with an interest rate subsidy!

It didn't take long before Uchumi suffered an embarrassing closure of a section of its shops in Uganda because of poor hygiene!

This story illustrate one thing: you don't need to search very hard to see the Business Daily's attitude in search of justification when it comes to matters banks and banking.

If you don't believe me, just have a go at Mr. Jaindi Kisero's commentary in today's issue. He argues, I think logically about the goings on in the banking industry and says in passing about the industry being ripe for consolidation. This is what new mentions casually and even explicitly says that it is a digressions from his thesis for today's column.

Mr. Kisero says thus: "clearly, our banking sector has never been more ripe for consolidation. I digress". My take of this is that he is yet to make a case for consolidation. Indeed this is a debate that we can have. But the Business Daily imagines that that was the core message, for his column is so titled.

Retired President Daniel arap Moi used to wittily quip that it reached a point where everything - including failure of rain - was blamed on him. Are we seeing the same for the banking industry? May be not; may be the dog actually ate the boy's homework!