Fireside chat with Patrick Njoroge

Thank you very much for your question. But before answering the question, maybe I should express my gratitude for the invitation to be here. It's the first time for me to be in Nigeria, the first time to be in Lagos, the first time to be in Lagos Business School. So anyway, you're welcome. Thank you very much. There's so much I've learned in the last few days I've been here, and for me it's a learning experience, and I want to continue with that. So now in terms of the question, it's good that you started with that because I'm sure in most people's minds they've seen it on TV, CNN, the protests, and the connection with the IMF and many other things. But to summarize what's going on, we have had the young people, so-called Gen Z, a lot of you are in that category I'm sure. They've been quite upset about some proposals to increase taxes or tax measures that were going to be put in the finance bill for this fiscal year. This is part of the regular budgeting that happens in all countries, but they were very upset with those measures because they felt they were disproportionate, very painful, and landed on them and the poor heavily. Secondly, there have been underlying concerns about the high cost of living. Those two things are not just specific to Kenya; high cost of living even in advanced economies has been a big concern, and poverty rates are rising. But at the same time, the concern was that even as there was a need to raise revenues to pay debt, the concern was also why is it that we are not cutting expenditures? Why is it that you need to balance that equation? Why is it that you just want to raise revenues? And at the same time, there were concerns that the expenditures being undertaken were wasteful. You have a lot of waste in government, and then you have the political class flaunting their wealth. Here people are under pressure, and here the politicians on TikTok doing their thing, showing their latest watches, their latest fly trip to Dubai and car, etc. It didn't sit well with anybody, not just the Gen Z. So that is really the background. Indeed, there were protests which led to the withdrawal of the tax bill, the finance bill, and some protests continued, leading to the dismissal of the entire cabinet except one minister. There will be more protests, I'm told. Tomorrow there will be even more protests. The point is that this is still ongoing. But what is clear is that everybody in the country has gotten a piece of that action; they are very vocal about what they like and what they don't want. One little thing that has happened: ministers would drive around and push us off the road. I don't know if it happens that way here. That used to be our everyday reality, but now before they were sent away, it had become clear that they cannot do that. People stood their ground and said no, you're not going to overtake me. Even if I am in a rush, stay in line like everyone else. When I go through the airport, I have always done this, but you have to wait like everyone else, queue up like everyone else. So there's a bit of discipline in government, of the political class. Now the IMF part: the accusation is that the proposals were provided by the IMF. I don't know, I'm not going to say yes or no. But what is clear is that whatever you do in the policy space, you need to bring your population along. Gone are the times when you would say, 'I know best, I'm the Minister of Finance, this is what we're going to do, take it or leave it.' You need to actually communicate with the population. To me, that's one big element that we as policymakers have had to learn. Communication is not an add-on; it is actually part of the main. If you put together whatever you're doing and you don't have a good communication policy, and it's not just saying we have written a paper about it, we have written a press release, it's actually talking to the people that this policy will apply to, the people that are going to take the burden of the policy or even the positive side. So that to me is the firm lesson, and it is clear that this was not communicated.

Good question. I think the first thing to say is that the exchange rate is one of the key prices in an economy. It's one of them, not the only price. The other prices are interest rates, the regular price of goods, the money market, and even the labor market. If you are thinking technically, what you're telling me is that the market for foreign exchange is one-sided; it's not clearing, and that's why the price is going up. Actually, I can tell you of another market that's not clearing: the labor market. That's why you have all the issues in terms of unemployment. We can go on like that. We can talk about even the market for housing, which also may not be clearing in a lot of our countries. However, on a day-to-day basis, it is true that the exchange rate is the most visible price that we see and is reported in the newspapers. So I do understand the concern. But I put it this way because what is important is that we should have macroeconomic stability in an economy. You can hold the exchange rate officially wherever it is, just like you can hold the price of housing somewhere by dictate. You just say, 'From now on, the prices will be this.' But that does not mean that is the market price that clears the market. My point is that what you see there is a symptom of underlying problems that are much more endemic or hidden. The macroeconomic framework, something isn't right. The first responsibility of policymakers is really to have macroeconomic stability. You can beat them up about anything else, but that is the first thing they need to get right. In a sense, you have many markets, and all of them have to be in balance or close to balance for things to be stable. I don't want to talk too much about this, but I would also want to let you know that there are many types of exchange rate arrangements. You could look at our brothers in the CFA franc zone, both zones, and they have a pegged rate pegged to the euro. And you have others that have a floating regime. The choice of regime is not academic; it has real implications on the economy. But for some of us, politicians, it's easy to say, 'I have fixed the exchange rate, therefore I have won the battle.' It's like saying you're sick, and the doctor says, 'I'm only going to measure his temperature once a week.' Obviously, during the week, he doesn't know what's going on. He says, 'No, no, the problem has been resolved. I'll know if it is not resolved in a week.' But in a week, you may be dead. The point I'm making is that that choice is not academic, and you may or may not let go of a lot of information that it gives you on a day-to-day basis. So my point in all this is that it's true here in Nigeria there has been a lot of discussion of the exchange rate, but again, remember it is coming from a place where there were many imbalances in the economy. The money market was not clearing. There were controls on the exchange rate; it was not available to you. Then you had the informal exchange markets. The first thing that I noticed when I came out at the airport was black markets. Well, I don't know if we call it black market, just the informal market. I mean, you come out and there's a guy there who flashed a wad of cash, and it was all tied in a rubber band. I was quite surprised. I thought he was giving it to me. But yeah, I mean, how else? Why would he come and sort of like next to me, show me this, flash this wad? You don't see that in Kenya and other countries that actually had that. For instance, Uganda, you had barefoot foreign exchange traders. The guys didn't have a calculator; they were barefoot, they were in t-shirts, but they could tell you what the price is today: Kenya Shillings versus DRC Franc, Kenya Shilling versus Uganda Shilling. So there was a whole business that sprouted there. I want to finish with the following thing. I worry as an economist and somebody who is interested in the development of Kenya when our best minds go into what I would just call trading, particularly foreign exchange. I'm saying that because some of your colleagues have opened foreign exchange things, and they are trading these things. And some of you are told, 'Come on, trade on the exchanges on the app and things like that.' I worry because really the best minds should not be going to that. We should be going into productive activities where you create wealth and then employ others. That's how the country is going to go forward. You don't go forward by just eating the rent, those margins. What then happens when the margin goes to almost nothing? So I think it is important for you to understand that your calling should be in more productive investments. That's what we need for Africa. You didn't come to this school just to go out there and become a foreign exchange trader. I think you came to do more. Your calling is to higher and greater things. I'm sorry to tell you this, but yesterday I spent the day at the new refinery. It's an amazing piece of work. The man could have spent the money trading; he could have put all that money in a bank account and earned 2% on it. It's like 500 million, billion US dollars. It could have been sitting pretty just earning the interest. But I think this plant will change Nigeria; it will change Africa as well. To me, that's what you're called to be, as opposed to just sitting around a desk and trading.

Man, I thought we were having an engaging conversation. The point I want to make is that this incentive junction is the wrong paradigm. What drives you? What drives a human being to do the great things? Think of the people that climbed Everest. What incentives do they have? I'm talking about the first guys that climbed it. Last year was the 50th anniversary. Were they paid money at the end of it? Is that what really drove them to be up there? They overcame all sorts of risks to be there. They didn't have a whatever. Now it's true we look at Elon Musk and we say, 'Okay, money, he's rolling in it.' But Elon Musk and people like that are the wrong model for us. That's not the model. You need to look at... No, I'm serious. If anybody wants to challenge that, I'll give you the microphone. You challenge me on that. To me, it's inconceivable that at the end of our life, you ask, 'By when you die, what did you do? What did you do with all the talents you got?' 'I made money.' What's it? And then what do we bury you with? The money? I've had people... I'm getting passionate about this. I've had to deal with people who are dying at the end of their lives. And it wasn't, 'How much more you should have paid me more.' It wasn't that. They were more interested in other things, much different from just money. So we go back to this example of climbing mountains. If I want you to climb Everest, if the names were Hillary and Tenzing, the first guys, of 1953, it was the 70th anniversary just recently last year. Or even the people that went to the moon. What is it that drove them? Were they paid more by NASA? Or think of the people that have done... think of the presidents of our countries who put their life on the line. I'm talking of independence. They put their life on the line. What did they put their life on the line for? Money? So colleagues, it's not money that drives you the most. It's good to have money to make sure that you pay your bills and things like that, but that is the least issue that you should be concerned with.

Simple. The paradigm that you teach as a professor, or we were taught, it's a paradigm. Think of the paradigm of perfect equilibrium. Is there a market that actually has perfect equilibrium? Of course none. So why are you teaching me perfect equilibrium then if you know for sure there's not a single market that you'll ever come across? The reason you're teaching me that is so that it's part of the building block of my understanding of how things fit together. So it's a boiled-down version of reality. But reality is not Lego blocks. Does that mean anything, Lego blocks to you guys? So it's not Lego blocks. Reality is much more complicated. So I think the point I'm making is it's okay to learn those things, but then you need to build them more to realize that reality is actually a bit more complicated. I made the point that what drives people the most is not those financial incentives that we talk so much about. Sure, it's good to have those financial incentives, but I think the point is they are, in my view, at maximum 20%. 80% is a bit like the iceberg. You see only 10% of the incentives that drive, but you have 90% of other things. Talk about the examples I gave you. If you talk to a successful businessman who is honest, and they tell you, 'Listen, when I was beginning this project, I knew for sure what the outcomes were.' They'll be lying. If you are beginning a project, more often than not, you don't even know 10% of what you're going to deal with. It's like everything else, a relationship. Most of you have relationships or are married. When you begin, there's a whole business of many things, many unknowns. So in a sense, you have the known knowns, and then you have the unknown knowns, and then you have the unknown unknowns. The known knowns are your building blocks, those are the Lego things. Then you have the unknown knowns, those are the things that you have seen in others but you don't know how to deal with. Then you have the unknown unknowns, which is stuff happens, to put it mildly, and you have to deal with that stuff. So I hope I've answered your question.

Thank you. The summary on the payment system is true. Kenya, in a sense, is a leader in this sort of payments, M-Pesa. We are leaders in other things as well. So let's be clear. If there's anybody who wants to run long distance after this, you can just go and deal with it, 10K maybe. Anyway, on the M-Pesa thing, this started in 2006. The whole point is that you can make a transaction using... It benefited from two things. One is from the need. There was a need to send money to somebody else. In the olden days before it came into place, people in the city sending money back home had to go to the bus stop, give an envelope to the conductor, and pray that he delivers it where you told him. Often, you know the issues of trust in handing over these things. So sending money home, and then of course somebody came up with this idea. People had cell phones, or whatever you call them here, mobile phones, and having a platform on that that you could actually send a message, and the other person on the other side, a secure message, will provide the money. Actually, to be honest, that's how virtually all payment systems work. Think of SWIFT. SWIFT is the underlying system for all international transactions, and it's a messaging system really, but underlying it there's also money. This one expanded because mobile phones are ubiquitous. I don't know the penetration rate here, but in Kenya it's like 130%. So more people... What's it? We should be more... 130, yes okay. But on the other hand, what has happened is this also became ubiquitous; people are using it. So it has really been beneficial. For instance, today I can get a call from my sister, and she says, 'Look, I'm at this store. Could you send me X?' And right from here, I'll probably just go down there so you don't see my password, I'll do the thing, and boom, within a second or two, she's in Kenya, she'll get the money. So that is what has developed. It has really expanded, and in other countries we've tried to put it in place and in some sense domesticating it in all those jurisdictions. I think that has been really nice. Now it has also complicated, as your Governor has said, monetary policy. But I would say monetary policy gets complicated by all developments that are happening in the financial sector. You cannot have a static monetary policy. As these other elements develop, you could think of velocity or the multiplier for those of you that are into this business. Those numbers are changing because of new innovation. Innovation changes that, and so you have to calibrate monetary policy. Think of velocity, that's the speed at which money changes hands. That's the definition of monetary velocity. Theoretically, it's supposed to be constant. But there goes another paradigm. You're thinking MV = PT. The V is changing. The quantity theory, interest rates also change. My point is you should be aware that you have all these dials in front of you, and the dials are changing. You need to adjust them. You cannot just say, 'I have set the dials at this level, reality has to match my dials.' Monetary policy or central banking is really about knowing what's happening there. Again, we go back to these known knowns and dealing with also the unknown knowns, and knowing that every now and then you're going to be hit by an unknown unknown, like COVID. You're sitting there minding your own business, and boom, the economy gets slammed by COVID. My point is that monetary policy is not static. We have been doing that all the time. We actually wrote a paper about precisely testing and adjusting monetary policy based on... And again, adjusting monetary policy means the framework. For you, you actually have a long way to go because even the basics of inflation targeting, it's only now that you're getting there. The underpinnings, the paradigms that you have thought about, haven't changed. That's a problem. If you are thinking of inflation targeting, for it to be effective, there are certain things that need to be in place. There are actually four specific things that need to be in place. One of them is that you should have a flexible exchange rate regime. So in effect, it has been a problem for Nigeria to fully adopt that because its exchange rate has not been providing... I'm making the point that it's a journey, and all policymakers, all central bankers are on a journey, and we are happy if we make progress in it, rather than saying we are stuck where we are.

I disagree. I disagree really. I think that's a caricature of policymakers. If there's something that I think policymakers have been given a bad rep on, it's that. So here I am. I'm going to give you gangster vibes for those of you that are into this business. No, it is true that policymakers could be sitting there and not knowing what is coming. One of the things that I did when I was the Central Bank Governor is having a very robust relationship with the developers, and I understood what it is that they are producing, understood what space they are acting in. Not just me, I'm talking of the entire team. So we had a good sense of what we cannot do is to play as developers, but what is coming. So we understood each other. For instance, when this project was brought to the central bank, M-Pesa, before it was licensed, there wasn't actually a law under which it could have been licensed. So an agreement was sought between them. Why? Because they explained what it is that they were going to do, how it was going to do it, the risks were clearly outlined. You started off talking about financial stability, so the financial stability risks were well outlined, and there was an understanding that if things went south, if stuff happened, we would stop things and then we'll deal with it appropriately. So I think it is one of understanding who is doing what.

I don't understand. So let's look at cryptocurrencies. Explain to me. Explain to me how things would have been different if they were not playing catch up. You've made the point that central banks, policymakers, are playing catch up. So explain to me in one space, whichever one you choose.

No, I don't think your claim is supported by what you said. So if indeed you could tell me what you would have wanted to see in order to say that yes, they are not playing catch up, they are on the ball. It's very easy to make those claims. I've been there, so I'm challenging you. Tell me what would I have done different? Like I'm not anybody. Maybe I should finish, let me finish, and then you jump on it. If it is a doctor, I have a patient and I do whatever I need to do with the patient, and let's say the patient passes away. You tell me, you're telling me I've been a bad doctor. You need to tell me what is it I needed to do from your perspective. Your perspective is you should not have killed the patient. I tell you I didn't kill the patient. I did my best within the limits of my knowledge. So what is it that I would have done? To me, that is the question.

No, no, no. I don't want to leave that. I need you to understand. I don't want to leave that. I need you to understand three things. First, it's dangerous to make statements without appropriate data. That is something that, in my view, should not be allowed in terms of the cses of something. So if you have to make a statement, please back it up with data. I hope your students have that sense as well. If you're going to make a statement in your paper, please back it up, have a footnote that explains that. That's a first point. Secondly, going back to this issue of technology, you're absolutely right. Technology, we don't know what's coming over the hill. Nobody really has a sense of that. It's moving. But that doesn't mean we don't have a sense of what to do. It's like you drive a boat, you're crossing the ocean. You don't know which wave is going to hit you, but you have a sense of what you're doing, and you believe that within the limits of your navigation tools, you can cross from here to the Americas. So in effect, which is my third point, it's clarity about what the central bankers or policymakers are very clear about. What are the concerns? That is what the central bankers and policymakers are very clear about. I can tell you it's generally two things for central bankers: one is price stability, and the other is financial stability. You don't want whatever happens to end up having a significant instability in the system. It's true people can make money or whatever. You dropped the point about Bitcoin and all those other things, cryptocurrency. We've written about this. It is widely written about. The risks, the financial stability risks that that would bring or could bring. That doesn't mean that every single transaction has that same risk, but it's a general point that has to be dealt with. And then of course, the point is that you allow innovation because there are benefits that could come from it. It doesn't mean that everybody knows how much the benefit is. As a matter of fact, you don't know. If any of you are like me when you were in grad school, we calculated the benefits of open trade policy. It was just something like 2% of GDP. That's the number I remember. And you calculate the benefits of financial inclusion, it's actually not that much. However, in reality, it moved GDP by much more. The point is that the other ways we benefit, when you did your general equilibrium model, you did not incorporate. So I'm making the point that the benefits are huge, but the risks are there, and that's what we deal with. So central bankers, the business of central banking is all about risk management.

Okay, thank you. Excellent question. Before answering your question, I want to clarify that central banking has two specific mandates for modern central banking: price stability and financial stability. So those are the two. We haven't mentioned price stability, but it is essential; it's actually the first one. So thank you for your question and allowing me to clarify. Going back to the thing, are there any hard and fast rules? No. From a point of view of balancing innovation with the other mandates, particularly financial stability, there are no hard and fast rules. This is where judgment comes in. Judgment is very important, and in effect, judgment is also a continuum. It's very easy to say no. So why do you need to be so? Maybe test it a little and see and understand. Maybe you didn't know how it actually impacts or calibrate the impact on financial stability. That's when you put it in a so-called sandbox, understand it, and give it some data before you let it go into the native space. So I don't think there's any hard and fast rules. Now, most of the products that we are seeing now, we've actually seen them somewhere else. A lot of the products that some of the fintechs are putting out are adjustments or tweaks. You can look at other products and say they're pretty much the same. So today, to begin talking about sandboxing a product on payments, I would wonder what's the value for that because it's been tested in other places. Maybe you don't have M-Pesa here and you're trying it. Why do you need to put it in a sandbox? You already go to Kenya, go to Uganda, go to other countries around the world and see what they're doing. Just get on a plane and see the reality. So I think the issue is knowing how best to manage that space, and that's where judgment comes in. It is true, everybody calls themselves a disruptor. It's like, I don't know if you and I wanted to start up, forget fintech, let's talk about music. You're a great musician. So let's say you and I want to... What are we going to do? Are we going to call ourselves P-Square? No, I mean that's not a good name because somebody else has taken it. So we'll call ourselves something aggressive, and I'll get dreadlocks, and you will shave your head, and we'll call ourselves something and really create our niche. That's how artists behave. Unfortunately, that sort of culture has evolved into all the other spaces, the fintechs. At the end of the day, we need to ask them, 'What problem are you resolving in society?' That's how you figure out what it is. The fact that you and I didn't call ourselves P-Square doesn't mean that we are not playing music that is close to them. So we need to figure out which space you are in. After all, we need to know which radio station we'll be playing our music on. So I'm making the point that you need to calibrate the product based on what problem they are resolving. When they tell you they are a disruptor, you say, 'Okay, fine, you're disrupting. Let's see what exactly.' So you strip it down to the essentials and figure out what it is. Quite often, we've done that. I'll give you an example that we used to do in the Central Bank of Kenya, and I loved it. You had these young people like you that would come and tell us all these things, but half the time they didn't understand all the limits of their product. We've seen like a hundred other products that looked like them, so we knew a lot more about these products. So we learned on the job. For instance, there's this guy who brought this thing, and let's just call it whatever it is. It was a bit like a hackathon. You bring your thing, and you have like 20 of us in the room, and you show us. Anyway, at the end of it, I was there listening, and then we asked him, 'So how long does it take for your product to transfer the money?' And he said, 'Oh, 45 seconds.' We said, 'Absolutely not. We cannot license it at 45 seconds.' We closed the books and walked away. So he came back again, and he had brought it down to 20. 'No, it's too long.' He came back again. The fourth time, it was like 7 seconds. So he said, 'Okay, fine. In the end, we're going to license you at 7.' What was our standard? Do you know? 4 seconds. Why? Because we know you can do it in that, and there's a reason for it. There are technical reasons for 4 seconds. Visa takes 3.8 seconds to go. You run your Visa card, and for the transaction to go through, it's 3.8 on average. So we know the standard. But the poor guy didn't know. In the end, he learned, and he got there. So I'm making the point that some of these things you learn, and your judgment is shaped also by the experience that you have.

Thank you so much. Thank you, thank you. I love that. I love books. I will read this. So you have some reading material for the travel tomorrow. Yes, thank you very much. Thank you very much.