The year 2017 was a very difficult one for Kenyan citizens and enterprises due to the effects of drought, bank lending freeze and the political uncertainty caused by the presidential elections. The business environment was on the brink of breaking point.
While 2018 began well from an economic perspective and is already being predicted as the recovery year, all may not be well in Kenya unless deliberate steps are taken to ensure that we do not slide into a real depression.
So how exactly do we jump-start the economy? The most significant single factor that can turn around the economy is an end to the bank induced (Treasury driven) freeze on lending and a decline of real lending rates from 14 per cent to between 9 -12 per cent.
While the banking industry is blaming the interest rate cap on the freeze on new lending, the real reason is actually different. The government needs to stop crowding out the private sector by hogging funds at any rate, forcing banks to instead lend to government instead of lending to the private sector.
While the government needs funds to operate, fund recurrent and development expenditure ‘there is more than one way to skin a cat’.
A study of the history of debt markets will reveal that in a declining interest rate environment, the government is able to borrow more funds than it needs.
In a rising interest rate regime, Treasury bond and Treasury bill issues are usually undersubscribed. This means that the government can borrow as much as it needs strategically and still drive the rates down.
Alternatively, the government can borrow indiscriminately as happened most of 2017. This will push up interest rates and ensure that it does not make sense for any bank to lend to the private sector since the government can take the money at relatively high rates.
Banks would like us to believe that the solution to the crisis is an interest rate cap removal. This is not true as they would simply push up lending rates again to 20-24 + per cent which is not a sustainable rate level to lend to any legal entity.
A quick solution is a continued strategic push by the Treasury and the Central Bank of Kenya (CBK) to ensure that government borrows at the lowest rates possible or does not borrow at all, albeit temporarily.
Whenever the rate at which the government is borrowing takes precedence over borrowing at any rate, (which we saw much of last year), then sanity comes into the debt markets and interest rates can be allowed to decline.
While interest rates are driven by a variety of factors including inflation expectations, government demand for money is a key driver in setting the direction of interest rates in Kenya.
Therefore the government needs always to be strategic in its pursuit of funding from the local debt market and should not keep exposing a desperate hand or the market will bite it off and keep the rates high.
Last week’s rejection of the high market bids of the government 15-year Infrastructure bond was definitely a step in the right direction.
This was a bold move by the CBK. Through the tap sale that followed the rejection, the government was able to borrow 15- year bonds at 12.5 per cent. Already, this rate has declined sharply in the secondary market indicating a downward trend in interest rates.
Given that the one-year Treasury bill is still above 10 per cent; a further decline to between six to seven per cent would align the yield curve downwards and enable banks to appropriately price loans to the private sector at rates as low as single digit to a high of 12 per cent as they would now be getting an adequate risk premium via commercial lending as opposed to government lending.
No other single strategy will positively impact the lives of all Kenyans like a deliberate strategy to maintain a low interest rate regime. The government can achieve this if they so choose.
Kabaki Wamwea, CEO, Private Wealth Capital Ltd.