High interest rates the bane of Kenya’s economic growth

The Central Bank of Kenya headquarters in Nairobi. One way of containing inflation is by accessing foreign exchange reserves from development partners. PHOTO | FILE 

By MARUBU MUNYAKA

IN SUMMARY

• Efforts to stabilise the shilling should not be seen to be punishing the private sector by denying it affordable funds.

It all started with the efforts aimed at stabilising the Kenya shilling after its worst depreciation from some time in May, 2015.

Wiping out excess liquidity and raising interest rates stabilised the shilling by also containing inflation.This was due to what economists thought was mere speculation by commercial banks and other financial actors after three months in which the country went without a substantive central bank governor.

But these market interventions by the Central Bank of Kenya (CBK) have had a negative impact on the economy as well.

Firstly, since it has become lucrative for commercial banks to lend riskless to the government, they can only lend to the private sector industries at a premium that would compensate them for the perceived default risks due to presumed less performing economy.

With bank interest rates ranging between 20 per cent to 24 per cent per annum and business expecting gross margins between of 15-25 per cent, the cost of the end product must be adjusted upwards by between 35-49 per cent for the business to survive.

Secondly, if the product price is inelastic and or is subject to foreign competition or is not a must-consume product, demand would just slide and the expected profits would nosedive as we have witnessed from the financial results reported by the Nairobi Securities Exchange (NSE)-listed companies in the recent past where companies are either reporting losses or reduced profits.

Thirdly, if this trend continues in the name of containing inflation, then many companies will either close shop, cut on operating costs or simply be troubled as we have also lately noticed massive staff lay-offs at a time when the country should be creating jobs.

Many a small company particularly the new start-ups have been closing shop and those which have not yet done so are in dire need of help.

Fourthly, the reduction in profits or loss making has its own impact on government tax revenue. We have noticed recently that the Kenya Revenue Authority (KRA) is unable to meet its collection targets and the reason for this is already detailed above.

This also explains why the impact of declining oil prices has not been felt in the economy fully because the immediate reduction of pump prices would also hamper the government revenue particularly the petrol levy at this point in time when KRA cannot meet its set targets.

If experience is anything to go by, you need to go back to the last few years just before former President Mwai Kibaki took over to realise how this policy being pursued by CBK today never worked for the last 10 years of retired President Daniel arap Moi’s regime.  I do not need to go to details for we all saw and experienced the state of the economy then.

What did Mr Kibaki do when he assumed power? He simply reduced government appetite for funds by liquidating its Treasury Bills and Treasury Bonds in order to free liquidity for borrowing by the private sector businesses.

Faced with donor conditionalities for release of meagre funds like US$ 39 million (Sh3.9 billion at current exchange rates) only from the World Bank, Mr Kibaki went to China in 2006 and got US$ 649 million (Sh 64.9 billion ) from the Chinese government for projects of his choice without any conditionalities.

A few diplomats including the then ambassador and Head of EU Delegation, among other development partners, came close to castigating China for bailing us out of a financial crisis.