Economic advice in times of crisis: Recollections from the former chief economic advisor to Tanzania
Updated: Mar 1, 2021
CEoG initiated a program of writing support to African economic policymakers who have played senior advisory roles at the heart of governments in sub-Saharan Africa. The goal is to gather recollections of key economic events during their tenure as economic advisors. CEoG helps contributing policymakers transcribe and edit their recollections into at least one chapter that will form part of a ‘Handbook for Chief Economic Advisors to Government’.
These chapters will be organized around key economic events and the roles of that the senior economic advisors played in navigating their countries through the events. The chapters will document successes and mistakes, elaborating the practical challenges associated with bridging economic evidence to effective policy making. They will provide a vivid account of what it takes to be an effective advisor to political leaders. At their discretion, contributing authors will be encouraged to share practical lessons and tips for how to organize advisory functions.
Part 1: Policy responses to the Global Financial Crisis of 2007-9
Q: What it is like to become Central Bank Governor with the wider knowledge that you have as a development economist? Did you start 2008 as a Central Bank Governor or as an economic advisor in a more general sense?
I would like to preface my answer with a short history just before that might prove relevant here. When President Kikwete came to power when I was still at the World Bank, then as Manager and Advisor to the Vice President Africa region. President Kikwete requested the Vice President to allow me to spend a bit of my time providing advisory support to him and initially to help him set up an Economic Advisory Council.
As often is the case, this initiative stirred up the typical sort of conflict regarding who is the real advisor to the President, whether it is the cabinet or this entity that is created on the side. In the end, the decision was made not to proceed with the Council format, but to set up a private office to the President instead. I helped him find and select his economic advisory team as part of his private office.
Previously, when I worked at the World Bank as lead economist in Tanzania, I worked with a wide spectrum of colleagues in the Government, academia and development community and helped set up most of the policy dialogue framework and policy instruments. This in turn was built on my long standing involvement in the country’s reform process during my days in academia. I sustained fairly deep roots from having been involved in that pioneering work. When I was asked to find candidates for the advisory team I naturally leaned towards those whose competence I knew well and trusted.
It was after I helped the President set up his economic advisory team that he asked me whether I could come back and serve as a Central Bank Governor starting first as Deputy Governor understudying the then current Governor who was due to finish his term in some months.
Q: President Kikwete formed a Crisis Committee in 2009, which you co-chaired. How was the Committee different from your role as an economic advisor?
The first phase of the Global Financial Crisis did not have much consequence on the financial sector in Tanzania, like in many other African countries as we had limited exposure to troubled assets in developed markets. But we were already seeing on the horizon the second round effects, which would come from the global recession. The Committee was formed with concerns in the horizon being the main charge.
The Central Bank Governor in Tanzania is also the key economic advisor to the country. I sat in all cabinet meetings as an advisor. And I was given the lead role in the Crisis Committee as Governor of the Central Bank, not from the private office side. Once I assumed the responsibility of the Central Bank Governor, the private office was not anymore part of my supportive task. The Crisis Committee was comprised of people from the Ministry of Finance, the central bank and a few of the other stakeholders from key sectors that were most deeply affected. The Committee prepared the draft rescue plan with broad consultations and it was the President who approved and delivered it to the nation in a public speech.
I had a very trusted position with the President. He had asked me to return to serve Tanzania and I obliged notwithstanding the fact that I had to give up much better pay. The President was aware of what I had given up in order to serve and he said as much in a meeting which involved all the key leadership of the country. He left me significant space to advise independently. I also worked closely with the Minister of Finance – which was a key relationship to ensure coordination between monetary and fiscal policies during crisis management and of course in better times. It's very important to have the trust of the head of the state to function effectively both as Governor and economic advisor to government. If both the President and Minister of Finance don’t have confidence in you, irrespective of your position and capabilities, you can never succeed.
We looked at the impending crisis from two perspectives. One was to ride the storm – survive the pressures of the crisis. If you don't, you cannot continue with your journey in terms of returning to the growth path and all other development programs after that. The second was to keep the economy and society as going concerns by protecting investment and economic capacity as well as providing safety nets for the vulnerable to persevere through the crisis. This was as important then as it is now when we’re dealing with the Covid crisis.
Q: How were ideas generated in the Crisis Committee? What was the process from brainstorming with all these different ministers and sectoral interest regarding the final rescue package?
The starting point was to identify the vulnerabilities from the global recession that the country faced. Many key sectors such as agriculture faced the consequences of collapse of global demand and therefore prices for some key crops and commodities, in particular cotton and coffee. The most pressing issue then arose because crop marketing agents who had bought cotton and coffee at the time when prices were still good and had to export these when prices collapsed on account of the global recession. The country was faced with a possible situation of collapse of the crop marketing system with the new crop buying season approaching. The losses were irrecoverable and all marketing agents faced the risk of not qualifying for new credit for crop purchase since they could not pay the outstanding loans from the previous season.. We knew that is one part of the economy that couldn't just wait for the situation to improve because the entirety of the marketing system was at risk.
Many enterprises in the other sectors, including SMEs also suffered major losses and arrears increased. The plan had to look at how to restructure their debts and give them space to recover before they start repayment of non-performing loans. Safety nets and particularly social welfare programs like the Social Action Fund needed to carry on in spite of a collapse of fiscal revenue because the numbers of those in need of support swelled. And because survival was accepted as the key to quick recovery we didn't have much pushback on proposed measures from anybody.
Nevertheless, there were pressures to manage from parties who were non-deserving of the rescue plan. For example, since the rescue plan had provisions for covering losses for marketing agents for coffee and cotton, coffee processing firms and textile manufacturers tried but were refused to seek compensation for losses. We told them very clearly that they did not qualify since their challenges pre-dated the crisis and were not immediately caused by it. The government supported them through loan rescheduling or loan guarantees instead. There were of course tough choices that had to be made, there's no doubt about it.
The IMF provided a loan to support our balance of payments and agreed to government’s request for enhancing space for deficit financing up to 1.6% of GDP in 2008 and 1.2% in 2009. The challenge was how to raise the needed cash against that provision. We had a discussion with the Fund, which recognized that the domestic capital market was too shallow to absorb emergency bond issuance to cover the required financing (320 billion shillings). The IMF agreed to allow the Government to issue the bonds to the central banks (direct long term borrowing from the central bank) on an exceptional basis. Timing of finance was critical - we needed money quickly and there was no way, with the market being so underdeveloped, we could get that kind of response from the private sector during that time.
Q: You developed and vetted ideas within the Crisis Committee. How did you decide when these ideas were ready to be taken to the President?
We worked with substantial technical support from various institutions, including the central bank and Ministry of Finance and also some of the sector ministries. We did a couple of drafts of the rescue package itself and iterated it among the top group within the Committee. Definitely the Fund was important, as was the World Bank in the process of consultations as the plan was being developed. When both the Minister and myself thought this is ready, we took it to the President. I think he felt comfortable with our plan because we were able to credibly explain how the resources would be found. And himself being also an economist, he internalized that quite well and he was able to speak to the whole nation about the rescue package after taking it through the formal bureaucratic processes, albeit expeditiously given the situation.
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