A low interest rate regime can help boost the Kenyan economy

As the Word Bank predicts, Kenya may have to navigate through another economic storm this year. Real gross domestic product (GDP) growth projections for 2011 have been revised downwards from 5.7 per cent to 4.2 per cent by the Finance minister and from 5.3 per cent to 4.8 per cent by the World Bank.

Real GDP growth rates through the global economic downturn to date demonstrate the Kenyan economy’s resilience against global economic trends. However, a drought resilient economy would be something. The Kenyan economy is highly dependent on agriculture and there is uncertainty as to the levels of rainfall expected this year.

The consumer price index rose by 10.1 points from 109.38 at the end of 2010 to 119.48 at the end of May 2011. During the same period, inflation went up from 4.08 per cent to over 12 per cent, mainly driven up by rising fuel and food prices. This had a significant negative impact on the purchasing power of the spending middle class.

During the same period, the average yield rate for the 91-day Treasury bills, which is a benchmark for the general trend of interest rates, rose from 2.276 per cent to 6.409 per cent. This upward trend is an indication of the government’s need for cash and is the only way to attract domestic funds.

This may be aimed at reducing money supply, reducing effective demand and thereby curbing inflation, but it may not work because it does not address the factors driving the cost push inflation like high cost of manufacturing due to high electricity costs, very high fuel prices etc. We should, therefore, have a low interest rate regime as this will increase disposable income and expand trade.

High cost

The shilling also reached a new low against the US dollar. This will adversely affect trade by making imports, some of them inputs into production, very expensive and further pushing up retail prices.

Further, we are approaching an election year in 2012 and as usual, there is a high degree of political uncertainty. If the past is anything to go by, we can assume that it is around that time when foreign investors refrain and even divest, demand for the Kenya shilling goes down and it worsens against the major currencies, supply and trade contract and the business community generally grows tense.

From lack of funding, lack of rainfall, political uncertainty and instability leading to post-election violence, the global economic downturn, high cost of electricity, rising oil prices, costly imports, packed technology and such like, there seems to be too many loose ends which frustrate this strategy, resulting in a zig zag, start stop trend in growth.

It is a delicate balance that needs to be carefully watched because for the economy to expand consistently at a high rate, government spending must continue in infrastructure, energy, healthcare, education and agriculture, and all the while maintaining macro-economic stability.

Muema is a consultant at PKF Consulting Ltd and the opinions expressed here are his own