Lubricate the economic engine with more credit

The contraction of Kenya’s economic growth from 5.2pc in the first quarter of 2013 to 4.1pc the same quarter in 2014 is worrisome.

This is a manifestation of several factors including overzealous legislative and judiciary oversight that has delayed the presidency from rolling out its transformative agenda. Such oversight is driven and fuelled by unusual political bickering oblivious of our economic challenges.

The role of credit in a free market system is to lubricate a complex two-pistols economic engine. While the private sector’s pistol encompasses consumption, investment and trade which generates economic wealth, the public sector one distributes the created wealth through public service delivery.

Inadequate lubrication of the private sector by either government or market forces may decelerate the generation of wealth resulting into a recession. Conventionally, the recommended recipe for a shrinking economy is easing credit indirectly through credit markets, government spending or both.

The market solution of easing credit is governed by the monetary policy that must delicately strike a balance between under-lubrication and over-lubrication of the system. The available credit must create its demand and if not, excess credit may unleash inflationary pressure of too much money chasing few goods.

Kenya’s monetary policy has been obsessively aimed at taming inflation with notable success. However, the achievement of this policy goal has come with enormous costs of systematic credit starvation of the private sector relegating Kenya’s economic growth to a single digit.

Due to minimal economic growth, the government has not created enough jobs for the youth who constitute 75 per cent of the population.

Evidently, notwithstanding the on-going financial liberalisation reforms that started in 1990s, high interest rates have stubbornly persisted. High cost of credit has locked millions of Kenyan investors out of credit market, denying them opportunities to engage in economic activities.

It has been also identified as a major impediment of the growth of Small Medium Enterprises (SME). Furthermore, the stagnation of manufacturing sector and its declining contribution to GDP has been attributed to high credit cost among others.

This high cost of credit is attributable to credit market failure. A double digit economic growth cannot be envisaged if only 1 out of 1,000 Kenyans is on mortgage. It is inconceivable to entertain the ideas of becoming an industrialised country when manufacturing sector contribution decreased from 9.5pc in 2012 to 8.9pc in 2013.

Taking cognizance of the credit market failure, the government laudably has embarked on policy interventions that are likely to stir economic growth by increasing credit.

o improve credit accessibility, the government has introduced a transparent credit pricing framework known as the Kenya Bank’s Reference Rate (KBRR). This rate has been set at 9.13pc being an average of Central Bank Rate and 91-day Treasury bill rate. The banking sector is obligated to set the cost of credit using the KBRR as the base and must report to the CBK of any deviation.

Confidence in Kenya

Against stiff opposition, the government took an audacious and ground breaking move of issuing a Eurobond. The bond became controversial because it was pegged on the payment of government’s contractual obligations that were related to the unpopular anglo leasing scandal. But the government was vindicated by the success of its issuance process as evidenced by the oversubscription, demonstrating high global confidence in Kenya.

Admittedly, the bond was issued out of fiscal necessity of seeking alternative sources of funding government’s fiscal deficits. However, it was a strategic exit from government’s dominance position as a major borrower in the domestic credit market. Such exit will mitigate the crowding effect by availing credit to private sector.

The combined effect of the two policy interventions has been impactful as evidenced by the banks’ willingness to comply with KBRR rates. Their compliance is likely to intensify, given the government’s new credible threat to shame the non-compliant banks.

The Central Bank effective execution of KBRR rate and the minimisation of crowding effect will definitely reduce the private sector’s cost of borrowing. It will at least meet the surge of demand for credit.

In 2013, Kenya witnessed a notable surge of foreign direct investments despite the security concerns.

A case in point is the recent launch of the Toyota Kenya Academy, Toyota Corporation’s Corporate Social Venture and official opening of Toyota’s new business park. Locally, demand for credit by private sector has notably increased.

Finally, the discussion of the easing credit must be contextualised within the on-going governance reforms. Unfortunately, the public policy space is completely saturated with the politics of entitlement. Economic efficiency debate that encompasses easing credit is conveniently ignored.

However, such debate must take cognizance that our economic growth is shrinking. A developing country that spends its political capital on entitlement rather than policies of economic growth to reduce unemployment and poverty can neither save the many who are poor nor the few who are rich. There is evidence across the globe to support this proposition.

Prof Kieyah, is a principal policy analyst at Kenya Institute for public Policy Research and Analysis; views expressed in this article are the author’s alone.