This article first appeared in my weekly column with the Business Daily on November 26, 2017
This has been a difficult year for the Kenyan economy. A combination of the drought, effects of the interest rate cap on the economy and the extensive electioneering period all slowed down economic growth and performance. However there has been a bright spot; monetary policy. Monetary policy has played a crucial role in being a stabilising anchor for the country.
The first means through which this is seen is in the value of the Kenya Shilling. Given the turbulence of the electioneering period in particular, it was largely expected that the value of the shilling would be knocked. However, through practical action by the Central Bank of Kenya (CBK), the value of the shilling remained relatively stable, hovering at around KES 103 to the dollar.
Secondly, is the effect of monetary policy on inflation. While inflation rate was above the preferred ceiling of 7.5 percent for a better part of the year, it came down to below the ceiling in July, and with the exception of August, has remained below 7.5 percent. The high inflation was, of course, informed by the drought that pushed up food prices and electricity that latter of which pushed up the costs of production. The management of inflation is particularly commendable given than the CBK basically couldn’t use changes in the interest rate, a key monetary policy tool, to manage inflation.
The introduction of the interest rate cap has fundamentally constrained the CBK’s ability to fiddle with interest rates to manage money supply and inflation. The cap has made the effects of a change in the rate unknown, thereby understandably engendering reluctance to change the CBR. Indeed, I am of the view that the interest rate cap has turned monetary policy upside down; an increase in the rate may create an expansion rather than contraction in liquidity, as more people would qualify for the higher rate risk ceiling. And lowering the rate would likely contract rather than expand liquidity as even fewer people would qualify for the lower rate risk ceiling. Thus it is not a surprise that the Monetary Policy Committee chose to leave the Central Bank Rate unchanged last week.
While on the topic of the interest rate cap, its continued effects are disturbing. Beyond engendering a massive contraction in the growth of credit, it seems the cap may be dampening private sector appetite for credit. No longer qualifying for credit lines on which they used to rely, businesses have likely changed their business models to accommodate this lack of access to credit. Thus, the real test for the economy will begin if or when the cap if lifted, and whether private sector will demonstrate robust appetite for credit, having essentially survived without it for over year.
Again, in the context of a cap, the CBK has played a constructive role in managing the dynamics of the financial sector in two ways. The first is in pushing for a repeal of the cap; the second is in urging commercial banks to price their loans more reasonably. The CBK is using the opportunity created by the cap to try bring sanity to a sector that is largely seen as extractive, saddling Kenyans with very expensive debt all in the name of profit. These efforts by the CBK should be commended.
Going forward, it is important that monetary policy continues to anchor the economy and buffer Kenyans from volatility in the macroeconomic environment.
Anzetse Were is a development economist; email@example.com
On November 22, 2017 I sat with Ramah Nyang of CGTN to discuss monetary policy in Kenya and the effects of the interest rate cap.
On September 7 2017, I was on a panel on Citizen TV discussing the effect of the elections on the Kenyan economy.
This article first appeared in my weekly column with the Business Daily on February 19, 2017
Over the past few months we have seen a severe drought ravage our country. The loss of life and livelihood for so many Kenyans is truly devastating. But what we must realise is that the consequences of the drought impacts the lives of the populations in the domicile counties as well as the rest of us. The reality of the matter is that the drought is not only affecting the lives of our fellow Kenyans, it is also affecting monetary policy.
The Central Bank of Kenya (CBK) is in a tight fix with regards to the ramifications of the current drought; there is pressure to increase the Central Bank Rate (CBR). We have a serious drought on our hands; not only will it increase the cost of food, it will increase the cost of electricity. As the drought bites, food will be more scarce and the demand for food will outstrip the supply thereby placing upward pressure on food prices. Additionally, as a significant part of our electricity grid is powered by hydroelectricity, the lack of rain means that the dams do not have a sufficient amount of water to run effectively; as a result the country will have to switch to more expensive sources of power such as thermal power that will drive up the cost of electricity. These factors will drive inflation upwards and will force Kenyans to pay more for basic goods and services. On top of this is the increase in the cost of fuel. So the pressure here is to increase interest rates and the CBR and limit money supply to control inflation. Yet in doing so, the CBK will make money even more expensive.
At the same time, we are witnessing the effects of the interest rate cap; liquidity is tightening. Kenyans are finding that they no longer have access to the loans they used to qualify for. Small and medium businesses are seeing that they no longer have access to the credit lines to which they had access to in the past. Kenyans can no longer get that loan to boost their business or pay for emergency medical expenses because banks have become very risk averse. In a country with a poor tracking system with regards to credit worthiness, banks cannot differentiate between good and bad borrowers. As a result they seem to prefer to just limit lending altogether and restrict the amount of credit they are giving out to individuals and businesses. So what does this mean for the average Kenyan? Well it means that they have less money; and when you couple this with the cost of food, energy and transport increasing, Kenyans are feeling increasingly broke. Kenyans will have to pay more for access to the same quantity of food, energy and transport that they used to access in the past. In short, life is becoming more expensive. But ironically, the best way to address the effect of the interest rate cap would be to increase interest rates to a space where banks feel they can lend comfortably. We are in an interesting space where increasing interest rates may expand liquidity as more people would qualify for credit.
So there are several sources pointing for the need to increase interest rates. However, in increasing interest rates, monetary policy by the CBK will make money expensive for Kenyans. In increasing rates to mitigate the drought and address the effects of the interest cap, the government would be doing the opposite of what the interest cap was created to do; give Kenyans access to cheaper loans.
Thus monetary policy is in a tight fix; there is a need to increase the interest rate but in doing so the CBK would engender an increase in the price of credit. It seems the CBK must ride off this season of contradictions and see when a space will open up for effecting monetary policy changes.
Anzetse Were is a development economist; firstname.lastname@example.org
Yesterday I was interviewed by Citizen TV on the state of the Kenyan economy.
Kenya’s 2016 rate caps continued to inflict damage on the wider economy. In its latest assessment of the Kenyan economy, the IMF warns that they could cut growth by up to 2 percentage points in 2017 and 2018 too. The rate caps have added to the sense of crisis triggered by last year’s liquidation of one bank, and receivership of two others. Inter-Bank lending volumes have fallen by about a third, and large banks are extremely reluctant to lend to smaller ones. CGTN’s Ramah Nyang spoke to me to better understand this crisis in the inter-bank market.