Treasury must do more to reduce the cost of loans

The building designed like a castle at Brookhouse International school in Nairobi. There are other castles in Kenya but most are as old as six decades. Photo/Courtesy  

 

Kenya’s economic fortunes have primarily been tied to the country’s weather patterns, but not recently. The cost of credit is joining the country’s rain-fed agriculture in determining wealth and pace of economic growth.

For this reason, the Central Bank of Kenya has over the past two years been working on policies geared at boosting credit flow through cheaper bank loans, but lenders are not moving in tandem.

Borrowing costs remain expensive and drastic changes in Central Bank Rate (CBR), the cost at which the regulator lends to banks, has not had a similar effect on private sector credit growth.

The World Bank is blaming the Treasury for this state of affairs. It accuses the government of distorting the loans market with its heavy domestic borrowing and unpredictable pricing of its debt.

The volatility in the pricing of government debt is forcing commercial banks to raise lending rates because they lack a reliable means of determining the expected returns from their investment in Treasury bills and bonds.

This uncertainty has pushed banks to keep lending rates high enough for private borrowers to shield them against possible losses in the event that the rates on the state paper drops.

This year alone, Treasury Bill rates have dropped to a low of five per cent and risen to a high of 12 per cent, reflecting the volatility that the World Bank is pointing at.

The expensive loans have hit key sectors of the economy like manufacturing, retail and construction that are not getting enough credit to boost Kenyans’ purchasing power and prop up the private sector through increased demand for goods and services.

The slackened consumer demand for goods and services has dimmed the capacity of many Kenyan firms to boost production that will offer some room for fresh hiring and stop executives mulling over cutting jobs to preserve cash and profits.

This outlook has since last year prompted the CBK’s Monetary Policy Committee from mid last year to act and re-look at policies that were geared at curbing inflation and lending rates by making cuts on the benchmark rate.

 

But the World Bank report notes that cuts on the benchmark rate are not enough and the State should curb its appetite for borrowing.

This should include embracing public private partnerships that will reduce the burden of funding expensive infrastructure projects that account for a huge share of the debts.

Absorption of funds by State agencies must be addressed too. Why have funds allocated to State agencies gone unused only for the government to borrow to fix deficient ministries?

Therefore, control of government debt will shape the level and pace of wealth creation.