Mr President, the proposed borrowing plan will kill economy

President William Ruto after an interdenominational Prayer and thanksgiving service at Kabarnet ASK showground on November 13, 2022. [Kipsang Joseph, Standard]

The hustler government seems set on self-destruct mode unless they quickly retreat to figure out the real issues and draft a coherent policy response and strategy.

In the land of my ancestors, they say ‘calling out a committee of their minds together’.

Yes, it is true they inherited an economy in shambles and empty coffers. True also, powerful business caucuses and even some media houses openly cast their lot with the Azimio formation in the just concluded elections. But so what? The hustlers emerged victors and control the government now. That is our way of democracy.

To what end does blaming the Jubilee administration or those who did not publicly embrace their campaign serve now? Aren’t the issues the hustler duo keeps whining about 60 days into their administration, not the very issues that were on the ballot in August?

Since assuming office, the President has had high-level engagements with key actors in the economy. In all this, the hustlers blame everybody else except them. Here, we must ignore the small detail of having been part of the same government for the entire duration.

It was a shocker, therefore, for the President to publicly declare that his government would not accept any money priced above 10 per cent from the domestic economy. More surprisingly, this was a forum of key leaders in the pension fund sub-sector, who are key players in the government’s bond market.

While this comment may appear loaded with political undertones, it sends dangerous sentiments to the country’s financial and capital markets.

For starters, public debt from the domestic market currently accounts for close to 50 per cent of the total outstanding public debt. The existing Treasury bills and bonds have been borrowed at high rates by the government. The net implication of this is to scare away domestic investors. This undermines the hustler’s proposal to mobilize domestic savings from which to support the government development agenda.

For any rational person to save money domestically there must be a return on investment after factoring in inflation. For instance, if the inflation in the month of October was 9.6 per cent, no investor can rent or invest at an interest rate lower than that plus some margin. Otherwise, the government would be asking for free money from its citizens which will hurt the development of the local financial and capital markets.

Currently, most countries have increased government borrowing rates to combat increasing inflation and calm financial markets. Does this mean Kenya is excluded from what is happening in the rest of the world?

Worse still, no investor will hold their money idle simply because the government is unwilling to borrow it at acceptable rates. They will simply look for better investment options outside the domestic market. The net implication is capital outflows which would further complicate the recovery efforts for the domestic market and undermine investments in the medium and long term.

Unless the hustlers are asking for Kenyans to save more simply to fatten the public social investment programmes for plunder by political elites, then they must be willing to make trade-offs to mobilize domestic savings.          

In addition, in the past few weeks, the dollar market has been under pressure due to foreign investors disposing of their holdings in the capital market. Diaspora Remittances that dominate forex inflows into the country mostly come through government treasury instruments. It is, therefore, inconceivable to imagine what informed such comments.

Thus, as the financial and capital markets open today, the questions in the minds of investors would be: what did the President really mean? Is this the official position of his administration?

Unless the president retracts this statement, the markets will definitely adjust their immediate, medium and long-term positions in the country’s financial and capital markets. Talk of scoring a decisive own goal.

Five economic concepts will ultimately prove fatal to the hustler nation should they proceed with this retarded thinking.

First, is the Central Bank’s policy and operational independence. Recognizing that financial markets operate by their own universal rules, no sensible government in the modern economic order would ever want to interfere with this institutional order. Since 1966, the Kenyan Parliament has promoted the CBK policy and operational independence through various legislations.

Drawing lessons from the disastrous Golden berg scandal in the early 1990s and its ramifications, Article 231 of the Constitution defined the CBK’s independence in formulating monetary policy, promoting price stability, issuing currency and performing any other function conferred to it by law. Its’ Governor shall take no instructions from anybody. This forms the basis of the all-powerful Monetary Policy Committee.

By dictating an interest cap on public debt, the President is usurping the Bank’s powers and appropriating it all to himself.

Second, is the economic concept of the ‘impossible trinity’ advanced by Robert Mundell and Marcus Fleming in the 1960s. Popularly referred to as the ‘trilemma’ by economists, its basic tenet is that no government can control the three macroeconomic variables of monetary policy, exchange rates and capital flow at the same time.

If any country opts to control any one of them, then it has to let one or the other two be determined by market forces. While most countries would want monetary independence, only the US has been able to achieve this. The European Union economic bloc has made significant gains in monetary policy independence by adopting a single currency for member states. That would explain why no American President in history has ever attempted to interfere with the Federal Reserve or its Chairman. Thus, for the President to insinuate potential controls on the market is not only shocking but outrightly distasteful.

Three, related to the ‘trilemma’, the monetary policy is the default pricing setting mechanism for both financial and capital assets and products in the market. For instance, the average Treasury bills and Treasury bonds rates are regarded as risk-free base rates in the economy. Commercial banks and the stock market make reference to these rates to set prices for equivalent loan facilities and determine investment returns. Political interference with this market system will kill the price discovery mechanisms of the financial and capital market.

Four, the President assumes there exist an exclusive domestic and foreign financial market from which his government could go window shopping for debts. This is naïve and ignorant of the intricate integration of the world’s financial markets. Foreign investors rely on domestic market mechanisms to cost their money and facilitate money flows. In a weak economy like ours, the final nail in its coffin will be to interfere with the free flow of capital both domestically and externally.

Five, the President completely ignores the risk analysis on external borrowing and the solemn obligation of the government to strengthen domestic financial and capital markets. The dollar exchange rate slipping to Sh121, for instance, has loaded billions into our debt burden without borrowing a single coin. The multi-lateral agencies’ loan products are not only complex but have proved to include poison pills like ‘conditionalities’ that have proved harmful to domestic economies in most developing and poor countries.

Finally, the problems ‘eating up’ this country are not a result of over 10 per cent interest on public borrowings. The fact is that both borrowed and locally generated revenues are stolen and siphoned out of the country.

While Kenya-Kwanza promised ‘real’ hustlers will form their cabinet, they cannot purport to run the economy like a village kiosk as an appeasement mechanism. The economy operates on its own rules and dictates that no man can bypass –no matter how powerful they may be.           

Dr Muinde is a Development Economist  

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