Cheap credit is key for swift economic recovery

As the country’s monetary policy honchos meet on Thursday, it will be important for the committee to reflect on the GDP numbers that were unveiled on Friday.

For a long time, Kenya’s economic fortunes have been tied to the agriculture sector—which is the biggest employer and contributor to about a quarter of country’s wealth.

The latest GDP numbers do not support this story line. The economy slowed down to 3.5 per cent in the three months to March compared to 5.1 per cent in 2011, and the culprit was not the agriculture sector, but high inflation and expensive bank credit. Interestingly, agriculture defied the dry weather in quarter one to post a 2.3 per cent growth compared to a measly 0.2 per cent a year earlier.

But the rest of key sectors like manufacturing, retail, construction and tourism recorded drops that weighed down on the economy.

This is a pointer that the cash generated by the agro sector was not adequate to boost Kenyans purchasing power and prop up the private sector through increased demand for goods and services.

The subdued consumer demand for goods and services has slackened the capacity of many Kenyan firms to boost production that will offer some room for fresh hiring and stop executives mulling over cutting jobs to preserve cash and profits.

As a result, there is need to re-look policies geared at inflation and lending rates—which is the domain of the Central Bank of Kenya’s Monetary Policy Committee.

The expensive loans have reduced appetite for borrowing and ultimately dampened activity in the construction, retail and manufacturing sector. Last month, the committee retained the key rate at 18 per cent to shield the shilling against renewed pressure from foreign currencies.

The Central Bank raised the rate to 18 per cent in December from seven per cent to arrest foreign currency volatility after the shilling lost more than 30 per cent of its value against major currencies. Inflation had also risen to nearly 20 per cent towards year end.

These indicators have changed as inflation has dropped to 10.05 per cent and the shilling has stabilised at about Sh84 to the dollar compared to Sh107 in October.

What Kenya needs now is cheaper credit to spur consumer lending that will not only help put money in the pockets of consumers to support demand in corporate Kenya but offer business owners credit to support their expansion plans.

Analysts support this position by the fact that the gap between the policy lending rate and inflation has widened enough to warrant interest rate cut on Thursday and the Central Bank should take heed.