The proof is easy to find
that our economic policies do not fail for lack of expertise. Kenyan
economists competing for international jobs had reached the top tier
when I chaired interview panels. If we accept anything International
Monetary Fund (IMF), World Bank or the US (for trade talks), among
others, welcome to find it.
But sometimes, they are ideas other countries sidestepped in the past and prospered.
The
topsy-turvy structural reforms of the 1990s left a graveyard of
corrupted policies that hold our country back despite untapped growth
potential.
After widening our fiscal side with debt, wastage, and corruption, coronavirus should have tested the subservience.
Instead,
current Budget proposals inflict fresh scars. We focus here on the
Treasury tax on retirees even National Social Security Fund (NSSF) in a
hunt for revenues, and by extension the underlying weakening of an
already weak financial system.
The push to suspend
interest income on pension funds’ holdings of government securities to
shore up Covid-19 projects seemed game. In the 2020/21 Budget, it
morphed into a home-cooked U-turn on retirement incomes with the
Treasury slapping a tax. An English idiom goes: You cannot run with the
hares and hunt with the hounds.
Risky portfolios
This opportunistic economic policy during coronavirus outbreak
queues behind another trend — the all-consuming ambitions of the
political class to make political hay for 2022 while the sun of Covid-19
scorches people to death.
We say a U-turn to highlight
real-economy risks the proposal of the actuaries and the pensioners’
taxation proposal trigger but focus on the financial sector, which could
die slowly except for bank shareholders. First, Covid-19 spending is
perpetuating a semi-permanent structural impediment and policy weakness
that drains deposits from the liabilities of the commercial banks to
government securities at the expense of financial intermediation (credit
to the private sector on the assets side) retarding the growth of
investment.
Called the fiscal-dominance trap, the
strategy sustains otherwise insolvent governments. Covid-19 narrows the
policy options to opt out of the trap. Yet, licensed fund managers have
long ridden the bandwagon. Most of their assets under management are in
government securities, with predictable earnings.
The
2020 first quarter Capital Markets Authority (CMA) statistical bulletin
reports 52.8 percent of the Sh76.1 billion of assets under management.
With equities held in the Nairobi Securities Exchange at 12.1 percent,
much of the rest is bank deposits.
Some 81.1 percent of
assets under management (Sh61.5 billion) is in combined government
securities and bank deposits. Guess what? Banks holding some 54.6
percent of government total domestic debt — fed from pooled liabilities
owned mostly by bank customers, including deposits of assets under
management — then convert the assets under management resources to
government securities in their investment portfolios.
Banks
rake in super-profits in Kenya, even by world standards. The assets
under management exposure to government securities are thus closer to 90
percent of total assets under management of Sh76.1 billion. Upshot? Our
commercial banking system is under capture by government securities
absorbing key assets of pensions, institutional investors, and bank
depositors. Lending to the real economy stalls, even with falling
interest rates at a 29-year low.
For our development,
the strategy of piling domestic debt in the financial system stands
exhausted and unfit for purpose. Yet, public spending under Covid-19 and
fund managers who direct personal savings and investments of public and
pensioners in the same securities will only deepen the problem.
No
matter how the Central Bank of Kenya’s Monetary Policy Committee
directs policies to guide credit, it breeds an ineffective monetary
policy — an under-funded private sector.
Numbers may clarify magnitudes on how pensioners and a bigger mosaic of private funds fall in this trap.
Pension
funds in Kenya hold assets under management at Sh1.3 trillion, a ratio
of 13.4 percent to gross domestic product (GDP). These cover about 20
percent of the working population with about 40 percent invested in
securities (Treasury bills and bonds) and earning about Sh60 billion
annually in interest income to enhance pensioners’ accumulations.
The
Unclaimed Financial Assets Authority (UFAA), NSSF, National Hospital
Insurance Fund, and other institutional investors also need innovation
to change the negative built-in feature of our financial system.
The
UFAA holdings — private assets meant to be subjected to measures aimed
at facilitating reunification of unclaimed financial assets with their
rightful owners, as envisioned in the enabling legislation — reached an
estimated Sh241 billion as of October 2018, unclaimed by a potential
477,000 assets holders in Kenya. Actual holdings recouped at the UFAA
are Sh40 billion. The NSSF holds more than Sh230 billion in assets.
Fund Managers
Fund
managers earn living meeting targets on returns for pensioners and
other institutional investors. If they find fit to offer other peoples’
money (interest income) for Covid-19 projects, it is because they are
beholden to our moribund strategy.
They expose pensioners to the same risks government debt does.
Apart from inequity, the illegality of their proposal or the so-called earmarked funds of such projects teems with opaqueness.
The
US Congressional budget long ago mocked them as pork-barrel spending,
meaning corrupt, wasteful spending on personal agendas. The US banned
them.
The Bias and Risks
The
sanctity of pensions has some history in Kenya. During the 2020/21
Budget, Sh123 billion or 3.9percent of the budget is pensions or other
similar payments mandatory and nonnegotiable as per Article 214 of the
Constitution, where public debt is a claim on the Consolidated Fund.
The
government should scrap the tax not just to safeguard the commitments,
but because of collateral damage to Kenya’s risk and creditworthiness.
Evidence is already accumulating.
With commercial banks
awash with liquidity, subscriptions to CBK auction target of Sh50
billion on May 5 for a five-year fixed coupon issue failed
spectacularly.
Markets brushed off the CBK’s revamped
liquidity in which Cash Reserve Ratio fell from five percent to 4.5
percent on March 23. Moody’s then downgraded Kenya’s sovereign debt risk
to negative from stable in May. It further downgraded commercial banks
holding domestic debt from stable to negative on risk exposure in their
holdings of government securities in their asset portfolios.
This
links creditworthiness of banks to that of government debt. The IMF
also calibrated Kenya’s risk of debt distress to high, from moderate,
despite its analytical flip flops.
Kenya’s borrowing
costs will rise with higher yields just when prudent external borrowing
would be a lifeline from pandemic-induced economic contraction. Costs
could well exceed amounts reaped from pensioners.
A long-term view
As a footnote, consider pension benefits since Kenya’s Independence in 1963.
So
important are moral rights to pensioners that the bulk of employees who
held pensions from service to the colonial government — mostly white
civil servants, including regional civil servants — stand guaranteed by
statute, still paid by the post-colonial governments. For the 2019/20
financial year, budgeted outlays tagged Sh104 billion.
Dr
Wagacha was the senior economic adviser, Executive Office of the
President (2013-2018) and former acting chair, board of Central Bank of
Kenya.
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