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Acting fast will avert economic meltdown

By The Standard | October 27th 2015

Two things have happened in the last three months at the macro level of the economy that have far-reaching consequences on all Kenyans. According to the 2014 Economic Survey, financial services, transport and communications boosted economic growth.

Most of the other key sectors including agriculture and tourism performed sluggishly. There was hope of rapid growth after a new government came into office in 2013. With a stable macroeconomic environment, low inflation rates, infrastructural investment inherited from the previous government, there was nothing to stop the imminent economic take-off. But, alas, all that hope faces serious test now. The economy is wobbling. The macroeconomic environment is strained and unless something is done quickly, the pinch will be severe.

First, the Central Bank of Kenya (CBK) raised interest rates to stem the precipitous drop of the local currency and thereby avert a possible hike in the cost of living, (economists call that inflation). That occurs when there is too much money in the economy but few commodities to buy. Or put it another way, people spend more without a corresponding increase in production of goods and services.

Second, the Government, faced with revenue shortfalls to fund key projects, raided domestic financial markets. As a result, in just four weeks, the cost of short-term borrowing in the bond market jumped up to 22.49 per cent from single-digit interest rates. In the same period, two banks (Dubai Bank and Imperial Bank) have been placed under receivership in an unclear circumstances, sending tremors in the banking sector.

And now, all hell has broken loose for ordinary borrowers. Essentially, the State is competing for money in banks with individual and corporate customers. This negates the Government's commitment to ensure the private sector can access affordable credit. That means therefore that the private sector is starved of cash for operations, expansion and innovation, which is key for economic growth.

What is more worrying for Kenyans is that the Government's appetite for cash is coming at a time when the Kenya Revenue Authority (KRA) is struggling to meet revenue targets. It is easy to know why; the sectors of the economy that bring in money through taxes are growing at a painfully slow pace, or not growing at all. The economy could yet be suffering from the folly of putting more focus on infrastructure that offers no instant returns.

That has seemingly killed the little economic activity that has supported revenue flows to the Exchequer. Yet the Government could halt what is clearly a slide down a steep slope:  First, it needs to re-evaluate its spending and ensure that only critical sectors key to the growth agenda are handsomely funded. Investors need reassurance that the trauma won't last long.

Secondly, it should go ahead with plans to borrow the $750 million (Sh76.5 billion) syndicated loan next month (another one worth $600 million was secured a few weeks ago) from the IMF. There is nothing wrong with borrowing, especially to protect the shilling or supplement development funds. Indeed, had the Government not borrowed, the fear is that the shilling would be exchanging for nearly Sh200 to the dollar. But it is important to ensure that the money borrowed does not go into recurrent expenditure but is used to fund development projects that have tangible returns on investment.

Thirdly and most importantly, it ought to educate the public. Kenyans have a right to know. The facts about Government borrowing and expenditure should be put out for the public to see. It ought to reassure the already jolted market. Yet this is where the Jubilee-led government has failed. Its sleek PR machine seems out of depth, with key economic issues always playing catch up. Information is power. But it means nothing to hold onto what could assuage public fears over what many think is an impending economic implosion.

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