Monday, 3 October 2011

The Curse of High Incidence of Economic Illiteracy

Our country is currently experiencing an economic trauma that is characterised with chronic inflation and a severely weakened shilling that is has put to the test the resilience of our economy. The Central Bank is pitted against commercial banks trading accusations over what is the real cause of the situation and how best to deal with it. So far opinion among economists is equally divided over where to place the blame and which remedial measures should be taken to bring relief quickly. Regrettably, due to our high economic illiteracy incidence,
this is not an argument that ordinary Kenyans can take part in despite the issue being pertinent to every citizen.

Our equally ignorant and perplexed leaders in parliament do not know what to make of the situation and as such they have elected to side with CBK and a group of well-meaning MPs has upstaged the unfazed committee on finance by proposing to create a special parliamentary committee to establish if indeed commercial banks are engaged in speculative foreign exchange trading. What I can’t help but wonder is if indeed it is a crime for banks to engage in speculative foreign exchange trading why hasn’t CBK reined in the errant banks? In which case, the special Parliamentary committee should instead investigate the CBK for serious dereliction of duty. On the other hand, the wananchi’s sympathiser-in-chief Raila Odinga has established up a high-power committee to look into the matter and to come up with recommendations on what can be done to bring quick if not immediate relief to wananchi.

Everybody it seems is groping in the dark trying to find the solution to this issue but what might shock you is that there is a tiny elite group of officials who know all too well what is happening. They are the ones who have engineered the crisis we are experiencing and so far they have managed to keep their mission a closely guarded secret pretending not to know what is happening or even how to fix it and they intend to maintain the status quo for as long as

they can.

Before unravelling who they are and what is happening, let us first agree that our economy is not run by incompetent people who are sincere but rather it is run by extremely competent professionals. Second, we need to bear in mind that there is more politics than economics in economic policymaking contrary to popular belief that economic policy is objective and scientific. Thus for example, having a balanced budget requiring tax increases or reductions in spending makes perfect sense but the reality is that this very basic economic tenet has little impact on economic policy outcomes in government circles. Similarly, many economists believe that restraining inflation enhances prospects for economic growth in the long-term and all major schools of economic theory prescribe a decrease in the supply of money during periods of inflation something which is done the world over by central banks which exist for this very purpose among others of course.

However, when the rate of inflation began to rise sharply, economists observed with consternation that CBK chose not to intervene and in fact appeared content to watch the inflation rate rise. It was not until there was sufficient pressure from the public that their indifference to the situation became untenable and it had to intervene.

No doubt, regulating the supply of money is a thankless task given that the supply of money in the economy is difficult to measure and central bank controls it indirectly something which creates unpredictable lag times between when they make an intervention and when the intervention brings the intended effect in the country’s financial system. Nevertheless, CBK’s intervention by any standard has been indecisive and at best it can only be described as piecemeal intervention characterized with half measures.

The CBK has a vast array of policy instruments at its disposal to remedy the situation and the brilliance and experience of its entire management is indisputable but it is obvious based on its actions that it is unwilling to intervene decisively to stem the tide of rising inflation. It is very uncharacteristic of CBK to want the public to believe that the chronic inflation and the weakening shilling is the consequence of policy miscalculations, oil prices shocks and the drought in northern Kenya. Moreover, given the sweeping powers the law confers to CBK, its insistence that the speculative behaviour of just but five commercial banks that it has never named is to blame for the situation is just but a smokescreen for its inaction.

What many of us do not know and others seem to have forgotten is that inflation is a rather attractive short-term alternative means of securing resources for the government given that inflation serves to increase the amount of revenue from inflation taxes which the government desperately needs to finance our trillion bob budget. As a matter of fact, experience with development strongly suggests that some inflation is indeed inevitable in developing countries seeking rapid growth in per-capita income which as you already know is exactly what Vision 2030 is aiming at.

Resource mobilization through inflation is however a knife-edged strategy that can exert serious pressure on foreign reserves consequently affecting the exchange rate and this strategy only works successfully under certain circumstances one of which is, believe it or not, that people don’t figure out what exactly is happening which explains why the CBK has been misleading the public on the issue.

Prime Minister Odinga and his high-power committee, Adan Keynan and his ragtag band of MPs, and Chris Okemo and his callous finance committee are sending themselves on a wild goose chase with their intended intervention. The legislature particularly should not be allowed to waste taxpayer’s meagre resources investigating fiction. Perhaps what is needed most is what the PM is doing; reassuring the public and the private sector in particular that everything out of control is actually in control which is what CBK has been doing all along.

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