SHAW: Rate cap ruling welcome boost for economic prospects for 2019 - Daily Nation

Rate cap ruling welcome boost for economic prospects for 2019

Wednesday March 20 2019

Bank

A Co-operative Bank customer gets assistance. Borrowing and lending is one of the key turbines of commercial and economic activity. PHOTO | FILE | NATION MEDIA GROUP 

By ROBERT SHAW
More by this Author

Last week, the Kenyan economy got a potentially welcome boost.

Interestingly, it came from the High Court, where a three-judge bench suspended Section 33 (B)(1) and (2) of the Banking (Amendment) Act 2016 on the basis of it being unconstitutional.

While there is some way to go on this, it does provide the opportunity for the government and Parliament to review and amend the rate capping law, which was initially lauded as the key to making borrowing more affordable to all.

But it turned out to be a populist fallacy as it made borrowing less and less accessible to the majority of Kenyans, especially the small and medium enterprises.

It was rooted on the mistaken command economy theory of decreeing to the market and the lenders at what rate they should lend.

FINANCIAL RISKS

This may sound a laudable theory but it just does not work in practice. Lending involves various elements of risk.

If one lends to an entity that has fully secured the intended borrowing with, say, a piece of property, the risk is less and the lending rate corresponds to that.

If one lends to someone with little or no security, then, obviously, the risk is higher, and so is the rate. There is also the factor of what the lending is for.

Some types of businesses are more mercurial and riskier than others, and banks factor that in with a higher rate. Borrowing and lending is one of the key turbines of commercial and economic activity.

When one restricts them, then commercial activity and the economy take a hit.

The rate caps, along with the prolonged election period and the drought, made 2017 a pitiful year for the economy.

They also contributed to its slower pick-up in 2018 in spite of a more peaceful political environment and good rains.

GROWTH STIMULANTS

Credit growth slowed so dramatically - February last year, at 2.1 percent, was the lowest since 2005.

So how are the other overall prospects for 2019 looking? If the Meteorological Department’s projections for heavy rains are correct, rain-fed agriculture and the economy will receive a welcome boost.

Other key drivers, such as tourism and horticulture, are doing well, and in spite of a few glitches, so are tea and coffee. Diaspora remittances have soared, further helping to close the balance of payments gap.

Another plus has been more government appointments based on merit rather than patronage. We need to see more appointments of the likes of Messers Haji, Kinoti, Kariuki, Njoroge, Matiang’i and Magoha.

DEBT

President Uhuru Kenyatta needs to complete the performance evaluation of his Cabinet and government as a whole and reshape accordingly on that basis.

As the NCPB and fictitious dams scam have shown, there is a need for more competent, professional and transparent leaders to steer the Kenyan boat and ensure it gets back and stays on course.

Those implicated in any way, whatsoever, should be relieved of their duties forthwith.

One dark cloud hanging over Kenya is our indebtedness, as Sh38 out Sh100 goes to debt servicing alone. Another Sh45 goes to public service salaries and wages, leaving a paltry Sh17 for actual goods and services.

It does not take a mathematician to work out that there is precious little left for real development expenditure. As the window for borrowing more and more closes, the need for a major fiscal overhaul becomes more urgent.

EXPENDITURE

The current and any future finance team should rationalise and trim recurrent expenditure and make it more cost-effective.

We need to revisit our devolution model as the principle has helped to decentralise development and bring it closer to people. But it has added a massive, hence expensive, layer of bureaucracy that is often not cost-effective.

The principle that funding must follow function must be the key objective, and all counties must be subjected to performance assessments.

The government must also alleviate unemployment. The President must accelerate the momentum of the makeover and restructuring he has embarked on.

Mr Shaw is an economic and public policy analyst. [email protected]

Advertisement