Mr. Trump and Kenya’s Macro
Category: Macro
By: Kwame Owino, Maureen Barasa, Peter Doyle,
It has always been difficult to tie Mr. Trump’s statements to his subsequent policy actions.
That fact qualifies any certainty in discerning his implications for Kenya’s macro now.
But in three areas, the Kenyan macroeconomic authorities should be on high alert.
- The Kenya Shilling
For much of 2024, the Central Bank of Kenya (CBK)has been seen by markets to be applying, as an intermediate target, the bilateral exchange rate against the US$. As a result, this has remained around 130 Shillings for over six months (See Figure).
However, the US$ is liable to undergo a major shock. This does not arise, primarily, from Mr. Trump’s mercurial plans for tariffs, even though the net effect of those may well be to strengthen the US$ as the Federal Reserve raises interest rates to forestall any second-round inflationary effects.
Instead, the likely more significant and enduring shock to the US$ arises from Mr. Trump intention (and ability in Congress) to extend the earlier tax cuts scheduled to expire, to add several new tax cuts, and to “balance” those with a set of expenditure cuts to be designed by the so-called DOGE, an ad hoc committee headed by a pair of tech CEOs.
Given the all but certain failure to find significant expenditure cuts, the upshot is likely to be further surges in Federal Government deficits, which in turn—following the Mundell-Flemming framework— will force the Federal Reserve to raise interest rates to stem inflation, driving the US$ higher still.
If, in that context, markets believe that the CBK is maintaining the intermediate target of a bilateral rate against the US$ at around 130, further real appreciation of the Kenya Shilling would follow. That would compound the significant Shilling overvaluation we already discern, and with inflation already low, compound deflationary forces to drive inflation below the target band.
Implication: the CBK should, at the earliest opportunity, break any perception that it regards the bilateral rate against the US$ as any sort of intermediate target. It should do so not only by its statements but principally by its actions—including by reserve acquisition and further cuts in the CBK rate, to clearly delink the Shilling spot price from the US$.
- Financial Stability
Mr. Trump has also signalled an aggressive anti-regulatory stance, including on the Financial Sector.
With global financial regulations still lax even after the post GFC adjustments made under Basel III— including still minimal required bank raw capital ratios—Mr. Trump’s libertarian stance heralds risk of further global macroeconomic and financial instability.
If that materializes, it will not play out as across the GFC mainly because the global fiscal, following the GFC itself and Covid—is in a much weaker state than it was then to absorb financial sector losses. That restricts the options for global stabilization and thus makes the fallout more challenging.
Implication: With other Africans, Kenya should add its voice of caution on this front in the relevant global fora, including at the Basel Committee and at the IMF. Further, it should reflect these concerns in the ongoing respecification of minimum bank capital requirements in Kenya itself. These Trump-linked concerns do not yield specific such minima now, but clearly indicate the right direction of travel.
- Negotiations with the IMF
Though Kenya’s misspecified IMF program since 2021 has been much troubled, it has been aided by the close working relationship between the Kenyan authorities and the United States Government, led by the US ambassador to Nairobi. This relationship was reflected most symbolically in the President’s State Visit to DC, and most substantially on the macro side in the rephasing of the IMF’s primary fiscal balance targets in the 7th and 8th Program Reviews following the mid-year protests.
However, as reflected in the unceremonious resignation of the US Ambassador following Mr. Trump’s election, that key relationship in Kenya’s negotiations with the IMF has changed, potentially dramatically, not least given Mr. Trump’s brusque dismissal of the continent and his focus elsewhere.
Furthermore, the IMF is likely to make high level staff changes because that is a US appointment and the incumbent, who had overall responsibility within IMF management for its relations with Kenya, are associated with the outgoing US administration.
So, Kenya can expect no more special favours from the US in its negotiations with the IMF, even as the quality of the global macro within which Kenya operates will likely deteriorate under Trump policies.
Implication: With the IMF medium-term fiscal primary balance target for Kenya raised a few weeks ago in the latest IMF Board Review from a surplus of 1 percent to 2½ percent of GDP, i.e., now some 3½ percentage points of GDP above best practice, the loss of leverage via the US will be costly. The right response is not for Kenya to “just to concede to get even tougher on the fiscal”; instead, Kenya has to get much smarter.
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Mr. Trump and Kenya’s Macro
| Post date: Wed, Dec 11, 2024 |
| Category: Macro |
| By: Kwame Owino, Maureen Barasa, Peter Doyle, |
It has always been difficult to tie Mr. Trump’s statements to his subsequent policy actions.
That fact qualifies any certainty in discerning his implications for Kenya’s macro now.
But in three areas, the Kenyan macroeconomic authorities should be on high alert.
- The Kenya Shilling
For much of 2024, the Central Bank of Kenya (CBK)has been seen by markets to be applying, as an intermediate target, the bilateral exchange rate against the US$. As a result, this has remained around 130 Shillings for over six months (See Figure).
However, the US$ is liable to undergo a major shock. This does not arise, primarily, from Mr. Trump’s mercurial plans for tariffs, even though the net effect of those may well be to strengthen the US$ as the Federal Reserve raises interest rates to forestall any second-round inflationary effects.
Instead, the likely more significant and enduring shock to the US$ arises from Mr. Trump intention (and ability in Congress) to extend the earlier tax cuts scheduled to expire, to add several new tax cuts, and to “balance” those with a set of expenditure cuts to be designed by the so-called DOGE, an ad hoc committee headed by a pair of tech CEOs.
Given the all but certain failure to find significant expenditure cuts, the upshot is likely to be further surges in Federal Government deficits, which in turn—following the Mundell-Flemming framework— will force the Federal Reserve to raise interest rates to stem inflation, driving the US$ higher still.
If, in that context, markets believe that the CBK is maintaining the intermediate target of a bilateral rate against the US$ at around 130, further real appreciation of the Kenya Shilling would follow. That would compound the significant Shilling overvaluation we already discern, and with inflation already low, compound deflationary forces to drive inflation below the target band.
Implication: the CBK should, at the earliest opportunity, break any perception that it regards the bilateral rate against the US$ as any sort of intermediate target. It should do so not only by its statements but principally by its actions—including by reserve acquisition and further cuts in the CBK rate, to clearly delink the Shilling spot price from the US$.
- Financial Stability
Mr. Trump has also signalled an aggressive anti-regulatory stance, including on the Financial Sector.
With global financial regulations still lax even after the post GFC adjustments made under Basel III— including still minimal required bank raw capital ratios—Mr. Trump’s libertarian stance heralds risk of further global macroeconomic and financial instability.
If that materializes, it will not play out as across the GFC mainly because the global fiscal, following the GFC itself and Covid—is in a much weaker state than it was then to absorb financial sector losses. That restricts the options for global stabilization and thus makes the fallout more challenging.
Implication: With other Africans, Kenya should add its voice of caution on this front in the relevant global fora, including at the Basel Committee and at the IMF. Further, it should reflect these concerns in the ongoing respecification of minimum bank capital requirements in Kenya itself. These Trump-linked concerns do not yield specific such minima now, but clearly indicate the right direction of travel.
- Negotiations with the IMF
Though Kenya’s misspecified IMF program since 2021 has been much troubled, it has been aided by the close working relationship between the Kenyan authorities and the United States Government, led by the US ambassador to Nairobi. This relationship was reflected most symbolically in the President’s State Visit to DC, and most substantially on the macro side in the rephasing of the IMF’s primary fiscal balance targets in the 7th and 8th Program Reviews following the mid-year protests.
However, as reflected in the unceremonious resignation of the US Ambassador following Mr. Trump’s election, that key relationship in Kenya’s negotiations with the IMF has changed, potentially dramatically, not least given Mr. Trump’s brusque dismissal of the continent and his focus elsewhere.
Furthermore, the IMF is likely to make high level staff changes because that is a US appointment and the incumbent, who had overall responsibility within IMF management for its relations with Kenya, are associated with the outgoing US administration.
So, Kenya can expect no more special favours from the US in its negotiations with the IMF, even as the quality of the global macro within which Kenya operates will likely deteriorate under Trump policies.
Implication: With the IMF medium-term fiscal primary balance target for Kenya raised a few weeks ago in the latest IMF Board Review from a surplus of 1 percent to 2½ percent of GDP, i.e., now some 3½ percentage points of GDP above best practice, the loss of leverage via the US will be costly. The right response is not for Kenya to “just to concede to get even tougher on the fiscal”; instead, Kenya has to get much smarter.
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Is Kenya’s Tax System Efficient, Optimal, and Equitable?
In my new paper, “On Efficiency, Equity, and Optimal Taxation: Reforming Kenya’s Tax System,” I examine Kenya’s tax system through the lenses of efficiency, equity, and optimality and recommend policy recommendations. I try to look at how efficiently the system generates revenue without distorting economic activity (efficiency), how fairly the tax burden is distributed across […]
Gen Z Collective Action on Taxation and Economic Policy.
Introduction The Finance Bill 2024 in Kenya sparked a wave of collective action primarily driven by Gen Z, marking a significant moment for youth engagement in Kenyan politics. This younger generation, known for their digital fluency and facing bleak economic prospects, utilised social media platforms to voice their discontent and mobilise protests against the proposed […]
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