A few days ago, I was asked on TV to offer my opinion on why Kenyans are angry with the current administration. Economic fallout, I replied, and then explained. Although the increase in general prices (inflation) has slowed down considerably, prices across all goods and services are higher than they were three or four years ago.
Moreover, peoples' real incomes have not increased sufficiently to enable them recover lost ground. When the citizen goes in search of groceries, or pays for other typical household needs, they find that their budget can buy much less compared to two or three years ago for the same amount.
This is because interest rates, the key transmission mechanism to confer the benefits of low inflation to the citizen, remains very high.
If commercial lending rates were low, credit to private sector would recover, allowing companies to expand production, thus improve productivity and peoples’ incomes.
With the failure of this latter part, folks are interpreting as hollow, government’s claim of having tamed inflation. We can’t feel it in our pockets, citizens are saying in frustration.
Managing the economy is a policy balancing act, akin walking on a tightrope. And just like walking the tightrope, it requires discipline, and focus. Some excel at it. Others tumble at every attempt.
The Canadian Jay Cochrane, set multiple records for sky walking in the 1990s, including across the Quang Gorge in China and Niagara Falls in North America.
Australian Con Colleano, became known as the “wizard of the wire” decades before Jay, for completing a forward somersault on a tightrope. Kibaki is similarly praised for his astute management of the economy.
There is a whole science to tightrope walking that can be understood through physics concepts such as moments, inertia, and mass. And there are ways to improve your chances.
Using a balancing tool such as a pole, or stretching out her arms perpendicular to the body, gives the performer several advantages.
It distributes mass away from the pivot point, in this case the ankles, increasing moment of inertia. This in turn reduces angular acceleration and therefore tipping.
The phrase walking a tightrope is, of course, often used in a metaphorical sense, to describe politicians and their actions. My colleagues from Mt Kenya and I, are right now "walking a tightrope" as we try to balance two opposing views – to join the broad-based government as our ODM colleagues or stay out of it, like the Wiper colleagues.
To (mis)manage the economy, governments use various means, from licensing, to controlling quality standards, and enforcing measurement units in commerce.
This latter important work is the province of the not so glamorous sounding county departments called Weights and Measures.
That is not all. Governments also have to influence the exchange rates, and domestic borrowing charges. They have to control inflation, public expenditure, taxes and borrowing.
Governments have to influence costs of production such as electricity, fuel and labour. They can improve access to markets for Kenyan business through treaties such as the Africa Continental Freed Trade Area.
Of all these decisions, public expenditure is probably the most foundational. Taxes and borrowing are not independently determined. Rather, the primary government decision is how much it wants to spend.
The decision of how much to tax, and therefore the gap or deficit that must be borrowed, follows. Related, but subsidiary decisions are the balance between local and foreign loans, as well as the types of loans.
Inflation may appear completely independent but it is not. First, the price stability or inflation target creates a self-fulfilling prophecy. Once determined by the Cabinet secretary for Treasury, it becomes the input into labour negotiations and price increases by manufacturers and traders.
The Central Bank, by adjusting the level of interest rates, controls money supply, and with it, inflation. But two factors also feature here – rain, and international price of oil. Government has no influence on these two, despite claims to the contrary.
In this delicate balancing act, the current administration has remained focused on rapid increases in public sector expenditure, and therefore higher taxation and borrowing, while at the same time, using high interest rates to contain inflation and support the Kenya shilling.
This policy combination has left it using most of the taxes to pay debt, and completely slowed down growth of credit to private sector.
If credit to the private sector doesn’t recover, the economic fallout, and the citizen’s anger that comes with it, will continue to increase.
The writer, an economist, is partner at Ecocapp Capital and former governor of Laikipia County.
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