The Central Bank of Kenya (CBK) building in Nairobi. file photo | nmg
Indications are that the Kenyan economy may be performing worse than official projections by government.
When companies are either retrenching staff, closing shop or relocating to other countries; the net effect is increased unemployment. This state of play lies squarely on the country’s shaky monetary policy.
First, there is no money flowing into the economy in sizeable amounts due to the impacts of the Anti-Money Laundering Law and the Central Bank of Kenya (CBK) directive requiring any funds receipt of payment over $10,000 be explained.
Although rational, banks have abused this and flagged clients’ funds even in cases where sufficient explanation has been provided.
What is most interesting also is the fact that when some of these expected investment funds remain in banks in the United Kingdom, Germany and elsewhere, they are not flagged. It is only when they are transmitted to Kenya that they get flagged.
How then would one expect an economy to grow from a monetary economist’s perspective when funds are not transacted via the financial markets like in any other developed or developing economies?
Recall, growth in Gross National Product (GNP) using this perspective is a Function of Monetary Base (Money Supply) and the Velocity Factor (rate at which money is transacted).
Secondly, any seasoned economist will advise you that developed countries do not borrow from Bretton Woods institutions - the World Bank and International Monetary Fund (IMF) - or from development partners. Rather, they float government bonds through the financial markets to raise development funds.
Further, the private sector, which is recognised as the engine for growth, likewise raises its money via the financial markets.
Developing countries or countries in economic transition borrow money through the private sector wing of the World Bank Group, i.e. International Finance Corporation (IFC), which mainly lends to the private sector.
Poor countries borrow interest free loans from the International Development Association (IDA) wing of the World Bank.
Kenya is in the category of fast developing countries with a vibrant financial market, which we should be nurturing instead of muscling it down via anti-money laundering law and payment and receipt limits, like we are doing via flagging of funds flowing into the economy.
The other problem the economy is facing is the mispricing of interest rate structure. Once again, any seasoned economist who has done interest rate structure will refer you to “Irvin Fisher Equation”, which says that Nominal Rate of Interest is a function of Real Rate of Interest and Inflation.
This Nominal Rate of Interest is what we refer to as the Return on 91-Day Treasury Bill. If the 91-Day T. Bill is quoted at 8.15 per cent per annum and the inflation is six per cent per annum, we are saying that the Real Rate of Interest would be 2.15 per cent.
To arrive at a savings rate that commercial banks should offer savers at the very minimum, then you have to add a premium on default risk that is usually a few basis points over and above the Treasury Bill Rate.
In our case in Kenya or Africa for that matter, this would range between 100-200 basis points, which is 1 -2 per cent.
In this regard, we would expect the savings rate in Kenya to range between 9.15 per cent and 10.15 per cent p.a. The 91 Day T. Bill I have taken is a recent one for September 2017 and, therefore, savings rate at seven per cent is far below the T. Bill Rate, which is contrary to the conventional wisdom and practice in the pricing of financial instruments.
Going back to Irvin Fisher Equation and by the international best practice, banks should put up a spread of at least three per cent over and above the Treasury bond rate representing default risk on lending to the industry.
Otherwise, it would invest its money in Treasury bonds. This is where we are in today, where the government is offering a handsome return on Treasury bonds while expecting banks to lend to the industry at the same rate at the same time. This is neither practical nor rational for any banker.
The end game is that banks are finding it more profitable to invest in treasuries.
Marubu Munyaka is independent banking / financial analyst.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
