Last week, I attended launch of the World Bank’s Kenya Economic Update Edition 20, an occasion that was attended by senior fiscal and monetary policymakers.
National Treasury PS Julius Muia, being the chief fiscal policymaker in the room, when hard-pressed to respond to the hakuna pesa (there is no money) chants that have dominated street talk, pointed to the banking (Amendment) Act, 2016, which stifled credit growth to the private sector.
He went on to state that it’s repeal will reverse the situation. His statement probably speaks to a broader consensus within policymakers that removal of interest rate cap will open floodgates of money.
Well, the rains started pounding way back in 2014 and the removal of the caps may deliver little as an ameliorative. It’s true that the cap exacerbated the growth deceleration in broad money supply. However, the onset of the plunge traces back to pre-cap period.
We only need to look at the demand side of the economy. Core (non-food non-fuel) inflation has remained subdued for some time. Core inflation is a better way of looking at prices because it excludes the more volatile categories of food and energy prices and can be a better window to the heart of private sector consumption. As a result, any weakness in core inflation points to underlying weakness in private consumption.
Beyond prices, private sector investments has also remained weak, declining from a high of 14 percent of gross domestic product (GDP) in 2012 to just under 12 percent in 2018. Essentially, private entities have been slowing down on capacity expansions (capital expenditure-capex).
In regard to external position, Kenya’s current account deficit has narrowed from a high of 10 percent in 2014 to five percent in 2018, and is forecast to settle around four percent in 2019. Current account deficit is simply the gap between money flowing into the country and money flowing out.
The narrowing of the current account deficit is being driven, to a very large extent, by decrease in merchandise trade deficit (the shortfall between exports and imports).
However, the improving current account deficit is not being supported by an equivalent growth in exports, an imbalance which masks the country’s weak export position.
Essentially, while the country’s imports have been declining, there has been an equal lack of growth in exports. This implies that the narrowing of the current account deficit is not sustainable and could flip if import volumes begin to build up (especially if global oil prices surge).
At a household level, indebtedness is on the rise, as suggested by different surveys, thanks to the country’s fiscal indiscipline. Indeed, the country has run ‘arrogant’ fiscal policies over the past four years.
The policies, which have been focused on curing a weakening fiscal trajectory, have resulted in overburdening the working class with taxes with the next effect being falling household disposable incomes.
Additionally, the elevation in the country’s debt levels has constrained the fiscus’ ability to organically fund development projects, which tends to generate tangible multipliers. Bilaterally-financed development projects (especially Chinese funded) make little landfall.
Finally, we have an election just around the corner. Of which, in the usual Kenyan fashion, politicking intensifies in 2020 through to 2022.
Broadly, the overall net effect on the economy has been two-pronged: first, household’s indebtedness is elevated, which may mean constrained ability to take additional borrowings; and second, businesses may have postponed capex decisions until after the election cycle. Effectively, the removal of the caps may not have immediate impacts as policymakers may think so.