These are the times when the National Economic Council should come in should come in, take leadership, and guide us through the current interest rates crisis.
The biggest shadow looming over the national economy is high interest rates. Right now, commercial banks are lending each other money on the inter-bank market at 30 per cent.
And, why is the inter-bank at this level when the Central Bank Rate is at 16.5 per cent? Clearly, there must be some distortions somewhere in the system.
Granted, interest rates are not up by default. The rates are responding to deliberate policy to tighten liquidity, stabilise the exchange rate and rein in inflation.
Just the other day, we shouted at the Central Bank of Kenya to raise the rates so that the exchange rate could stabilise. We told the CBK the pursuit of growth was not its primary duty.
The rates were jerked up. And, one of the effects is that short-term dollar inflows are oozing profusely into the inter-bank system, attracted by both the high interest rates and the tight liquidity conditions.
As a result, we are right now one of the few relatively stable economies with such high interest rates, hence the ferocity of the short-term inflows. It is all artificial; it has no relationship with economic fundamentals.
The impact on the shilling has been spectacular. The short-term dollar inflows have seen the currency appreciating by nearly 17 per cent in the past few months, from a level of Sh107 to the US dollar to around Sh90 to the dollar on Tuesday.
The pendulum has swung violently the other way. Our currency is stabilising at the expense of artificially high interests rates.
A few months ago, we were whining about the weakening shilling. Right now, we are whining about over-shooting interest rates.
Can we, really, expect any growth with these interests rates? I don’t think so.
In the first place, I just can’t see how the government is going to succeed with its borrowing programme for this financial year under the prevailing interest rate regime.
Consider the following: Right now, the interest on the 91-day Treasury Bill, which is the main borrowing instrument for the government, has risen to 16 per cent. The inter-bank is at 30 per cent.
If you are a commercial bank with money to invest, why would you put your money in the 91-day Treasury Bill at 16 per cent when you can lend it to a fellow commercial bank with whom you have maintained credit lines at 30 per cent?
Indeed, the impact of the high interest rates on government borrowing is already being felt in recent poor subscriptions for government paper.
If the trend continues, government paper will have no takers. Where is the government going to get the money to fund its development budget? Are infrastructure bonds still a feasible option?
Mark you, government spending is an important stimulus for the growth of the private sector. The state is the biggest buyer of goods and services from the private sector.
When you destabilise the government’s borrowing programme, you are stifling growth. If there is a lesson to be learnt from the crisis, it is that there is a limit to what you can achieve by tinkering with monetary policy.
Stabilising prices, inflation, the exchange rate and keeping the budget at a sustainable level are signs of good financial discipline.
But at the end of the day, you must grow your economy. When President Kibaki’s administration came, they found an economy that was in a permanent state of flux.
The main break with the past was a dramatic rise in infrastructure spending. There was growth.
We have spent billions on roads, ports, telecommunications and education. But the economy still has a relatively insubstantial base of wealth generation.
We are seeing an upsurge in worker militancy. University lecturers were on strike the other day. Doctors have also given notice that they will strike if they are not given what they want.
Under the new Constitution, we have to create a bunch of new institutions to be funded by the Exchequer. We are at war in Somalia. Is the next president ready to weather an economic storm?