An Economic Battle of Wits
There is a Chinese proverb that transliterated goes rather like this “may you live in interesting times. The interesting times here are actually more an invite to topsy turvy times. They might as well have said may you know no peace well alas; here we are, in interesting or rather tospy turvy times.
The price of oil is bellow a dollar, the transport hubs from Paris to London are totally locked down and Dubai a city that never slept is now suspiciously quiet.
In every airport planes that roared every millisecond now fill the runway on a road to nowhere. In some cases, nature has taken its course as Dolphins were spotted in Venice and wild goats in Wales; yes we are in Interesting times
Africa, has not been spared, the ravages of this Chinese curse.
The economies of Nigeria and Angola that balance budgets based on a particular price of oil are facing uncertain times. Africa’s economy on the whole is mostly extractive in nature with little value addition to the Primary products.
The African continent faces an uncertain economic future just like the rest of the world.
Experts have postulated that the expected economic downturn and its subsequent lock down will kill more people than the virus itself.
Duels were up to the 19th century a gentlemanly way to solve conflicts, Savage as that may seem today back then any seething issue was amicably by two men staring at the end of the barrel of a gun
Thankfully the name duel has been consigned to history and exists only as a metaphor
In Kenya, an intellectual Duel (Thankfully) arose between two gentlemen on Twitter over the best way to jump start the economy once the COVID crisis is over .
Donald B. Kipkorir a lawyer of considerable repute voiced his support for Quantitative Easing, as a way of increasing liquidity in the sluggish Kenyan economy. Quantitative easing is a practice of printing money to increase liquidly in the economy
David Ndii the other intellectual disagreed with Quantitative easing calling it myopic crass economics and bound to cause rampant inflation.
The Duel on twitter went back and forth with each intellectual sticking to his guns. At one point it degenerated into crass name calling.
My aim is not to get into a moral polemic but to decipher which of the two gentlemen was right regarding the viability of Quantitative easing as an economic policy tool
In one way both intellectuals David B Kipkorir and Mr David Ndii were right
One was focused on the Micro aspect of the economy, the other on The Macro or Long term structural issues facing the Kenyan economy
The Duel talked about was as to the viability of quantitative easing or in layman’s terms, printing of money as a way of increasing liquidity in the economy.
Now obviously the economic comatose Kenya is expected to witness is as a result of a lack of cash in the economy so it makes sense to increase liquidity or money supply in the economy
They are many ways to increase liquidity in an economy and Quantitative easing is one of them .It has been done by Japan and America and on a Macro scale The Bank of England is considering it
Dr. David Ndii, however in his rebuttal warned against quantitative easing as a way of increasing liquidity in the economy. Quantitative easing he said is a radical expansionary form of monetary policy, Open market Operations on steroids that involves going beyond buying back government bonds.
Mr David Ndii warned of not only rampant inflation but he rightly pontificated that Kenya serious structural economic issues that cannot be solved by cheap money supply
On the plus side however Quantitative easing in the Micro does increase liquidity in the economy and by proxy; it competitively devalues the currency of the country in question.
This increased money supply would make the cost of production cheaper and thus goods and thus exports cheaper.
In a nutshell Quantitative easing amounts to competitive currency devaluation.
China has long been accused of competitively devaluing its currency as a way of making economic production cheaper
In the wake of the Subprime crisis in the year 2009 America did Practice Quantitative Easing
Quantitative easing can have adverse affects if simply implemented without the strength of the economy being looked at.
In 1971, as a result of a widening trade deficit with the rest of the world president Nixon suspended the American Dollars convertibility to Gold.
In effect, he made the US, Dollar the de-facto Gold standard.
Nixon, who was to leave office ingloriously in 1975, could do this because of the strength of the US economy and the trust people confided in the US Dollar.
Look around and most countries foreign reserves and it is not hard to see what they are denominated in.
Oil is also traded in Dollars helping up the demand for the greenback
Trust in a countries economy makes its currency valuable, that’s why more people us the greenback as a store of value.
Nixon was strategic and knew that because the American economy was running a deficit against a resurgent German and Japanese economy, he could not keep America’s convertibility to Gold. The oil crisis which came as a result of Nixon supporting Israel during the Yom Kippur exacerbated the need for Nixon to end convertibility with the Gold
Nixon as the French finance minister said had exorbitant privilege, which is the ability to pursue an expansionary monetary policy without worrying about runaway Zimbabwe like inflation because of the strength and trust people had in the American economy as the bedrock of the world economy
As Dr Ndii said Most African economies do not have the privilege of pursuing unlimited printing of money
That’s not to say a country cannot pursue QE on a micro or short term basis but that it has to be done carefully and as part of a combination of other policies
In Kenya, quantitative easing can be pursued on a limited scale, as an extension of an expansionary open market operation but to pursue printing of money recklessly would lead to rampant inflation.
To put it mildly reckless printing of money by the Kenyan government would cause, if not a Zimbabwe style crisis, depreciation in the country’s already floundering currency.
One could argue that part of the aim of quantitative easing is to competitively devalue a countries currency, like China has been accused of doing To that I say yes, however without the strengths, weaknesses opportunities and threats of the country’s economy being dissected an economy can end up with runaway inflation.
TheQuantitave Easing debateis a classic example of right or wrong depending on context.
Dr Ndii however took the cake as offering more reasons as to why Quantitative easing should be abandoned altogether as a viable economic strategy
A combination of factors and policies will be needed to rejig the economies of Kenya and East Africa once the crisis is over.
In what turned out to be a faux pas moment. The president sent flowers to National Health Service Workers in England.
He called it an expression of solidarity with the people of the U.K plus a way of ensuring that they make Kenya their destination of choice once the crisis is over. Clearly a more ingenious economic policy than sending flowers will be needed
What is clear is that the long term effects of the virus will be with us long after the last man dies from the virus.
The country in the micro could pursue lowering of interest rates as well as a moratorium on paying back of loans to encourage liquidity.
The key sectors of the economy like tourism will need tax rebates to reduce over head costs.
In the macro, a realignment of the economy to a more value addition based rather than extractive economy is long overdue.
More Intra African trade as opposed to reliance on foreign markets is also a strategy to cushion against a fall in external demand.
That’s a tall order given the fact we have been preaching inter-economic dependence for decades now.
Intra African trade is vital to ensuring the economy keeps running when the demand in Europe goes out of the door. Yet Africans mostly overlap producing the same goods and services making intra African trade hard.
If there is a silver lining it’s that the price of oil will lower costs of production in the short term because of a fall in demand.
In the meantime, let’s ride out the virus as we ponder the various Micro and Macroeconomic options we can use to sanitize the struggling Kenyan economy.