Policymakers grope in the dark on future economic numbers

It was Winston Churchill, the British Prime Minister during the Second World War, who said that if you put two economists in a room you will get two opinions.

“Unless one of them is Lord (John Maynard) Keynes, in which case you get three opinions,” he quipped.

Already, Central Bank of Kenya (CBK), a critical player in determining the financial health of the country, has changed its forecast on economic growth for 2020 twice in a month. You can blame this on the effect that the coronavirus pandemic has had.

On March 23, the Monetary Policy Committee (MPC), CBK’s highest decision-making organ, had projected that the economy would grow at 3.4 per cent from a baseline of 6.2 per cent. That was when the country had just reported its first case of the novel coronavirus.

But last week, MPC was forced to once again revise its projections downwards to 2.3 per cent.

CBK Governor Patrick Njoroge said the decision was informed by the new data that they had since received, including a report from the Kenya National Bureau of Statistics that showed the economy had registered a slower growth of 5.4 per cent last year compared to 6.3 per cent in 2018.

CBK was also forced to make the revision after going through a new report by the International Monetary Fund (IMF), which showed that the global economy would contract by as much as three per cent.

A weak global economy will negatively affect the country’s export and tourist earnings as well as diaspora remittances. But even CBK did not sound as sure as they normally are when giving their forecasts.

Economists, who in normal times cannot agree, are groping in the dark. Businesses and consumers for whom the economists produce the data are confused.

There are attempts by governments around the world to re-open their economies, but the truth is that no one knows when the Covid-19 crisis will come to an end.

And this includes policymakers who rely on this certainty to make their projections.

“There is no definite time, nobody knows. At least I don’t know. We just need to remain optimistic,” said National Treasury Cabinet Secretary Ukur Yatani in an earlier interview with The Standard.

Although economists disagree on what ought to be done, they agree fundamentally on the state of the economy. But for the first time, their forecast on how the economy will grow has diverged significantly.

IMF has revised Kenya’s economic growth projection downwards to one per cent for this year due to the adverse effects of the pandemic.

Last October, IMF had projected that the economy would expand by six per cent on a stable macro-economic environment that included removal of interest rate controls, which was expected to spur private investment.

However, the global lender said in its latest outlook on Sub-Saharan Africa that the pandemic is exacting “a heavy human toll, upending livelihoods and damaging business and government balance sheets”.

Its sister Bretton Woods institution, the World Bank, has two sets of growth for the country. The global lender in its bi-annual review of the Kenyan economy said it expects the outbreak to leave a major hole in the country’s total output this year, with the economy registering one of the slowest growths in recent times at 1.5 per cent.

But that is the best-case scenario if the stringent containment measures that have stopped most economic activities are lifted by May.

In the worst-case scenario where the stringent measures aimed at curbing the spread of the disease spill over to the second half of the year, the World Bank expects the country’s economy to plunge into a recession for the first time since the early 1990s, registering a negative one per cent growth.

On its part, financial consultancy firm McKinsey & Company has predicted that the value of Kenya’s wealth, also known as Gross Domestic Product (GDP), might drop by Sh1 trillion as the economy contracts by five per cent.

Modeling bias

The economic forecast has become a ‘Tower of Babel’ for economists, with each seemingly talking in their own language. But even more serious is that not even one of them is telling the man on the street what they need to hear - when the crisis will come to an end.

Tony Watima, an economist, said this is simply a bias problem when modeling the forecast.

“For example, CBK sees that lowering of the Central Bank Rate (CBR) and Cash Reserve Ratio (CRR) are working in improving liquidity in the market yet on the other hand banks have unfortunately not lent the money,” he said.

“From CBK lens, the transmission of more money has worked.” 

In his post-MPC statement, Dr Njoroge said the measures they have put in place, CBR and CRR (the share of deposits banks are legally required to keep with CBK), have already started being transmitted.

Briefing the Press in his office, Njoroge said recent interventions by the regulator to inject liquidity into the economy had started to pay off.

Of the Sh35.2 billion that the apex bank had freed up after the CRR was slashed by a percentage point to 4.25 per cent, about Sh15.3 billion had already been lent out to distressed sectors.

Half of the cash had gone to tourism and 14 per cent to real estate, according to CBK. “The money is going where it should have been sent,” said the governor.

Private credit growth is also reported to have grown by 8.9 per cent in March, which Njoroge attributed to lowering of CBR by 100 basis points - never mind that the governor himself had said in the past that it takes at least two months for the transmission to start being felt.

“So you find that people forecast with an optimism or pessimism bias,” said Mr Watima.

In some parts of the world, governments have started to re-open the economies; Kenya has called for partial opening of hotels. But the directive is so hazy that hoteliers are not even sure if they have been allowed to open the doors.

At first, economists were divided as to whether the pandemic was mainly a supply-shock or demand-shock. The IMF thought, at least in the short-term, it was a supply shock.

“Unlike other economic downturns, the fall of output in this crisis is not driven by demand: it is an unavoidable consequence of measures to limit the spread of the disease. The role of economic policy is hence not to stimulate aggregate demand, at least not right away,” said the IMF in one of its blogs on Covid-19.

Njoroge in a briefing last week insisted that it is both a demand and supply shock; that it is not only that traders do not have goods to sell after the disruption of the supply chain, consumers are also not buying either due to the lockdowns or loss of jobs.

His sentiments were shared by the World Bank in its latest review of Sub-Saharan Africa’s economy.

“Covid-19 is a supply shock and a demand shock. On the supply side, there is a discrete drop in employment that goes beyond the number of people infected by (the pandemic). It also includes a decline in employment as a result of workplace closures and travel bans,” said the bank in the Africa’s Pulse report.

There have also been different priorities. Some institutions such as the Parliamentary Budget Office have called for the government to find a way of cushioning tenants. Treasury says this will cripple the real estate sector.

David Ndii, a fiery critic of President Uhuru Kenyatta’s administration, does not think the measures that have been in place will have any effect. This, he said, was because people had lost jobs and businesses had been closed down.

A lot of Kenyans had lost sources of income yet rather than address their plight directly, the president, according to the economist, decided to give them tax breaks.

“I am at a loss as to how this is a rational response policy for a government that was in a fiscal crisis before the Covid-19 shock, or how tax breaks translate to food on tables of ordinary people who have lost incomes and jobs,” said Dr Ndii in a tweet.

He faulted the decision to slash taxes as an intervention, saying there would be no taxes to be paid anyway as business would have shut down.