Ruto's cheap credit dream for hustlers dies

President William Ruto speaks ay Kangeta Market, Igembe, Meru County, in January 2024. [PCS]

The banking regulator has dealt a massive blow to President William Ruto’s ambitious dream of offering cheap credit to businesses and individuals, a year and four months into his presidency.

Borrowers are staring at expensive loans after the Central Bank of Kenya (CBK) increased its benchmark lending rate by 50 basis points to 13 per cent.

The Monetary Policy Committee (MPC) - the highest decision-making organ of CBK - on Tuesday this week cited a persistent rise in prices of goods and services and the elevated global risks and their potential impact on the domestic economy, as major reasons for tightening the supply of money.

This is the highest Central Bank Rate (CBR) over a decade ago and comes at a time when the country is grappling with a spike in prices of goods and services as well as a weakening shilling.

“The proposed action will ensure that inflationary expectations remain anchored, while setting inflation on a firm downward path towards the 5.0 percent mid-point of the target range, as well as addressing residual pressures on the exchange rate,” said CBK Governor Kamau Thugge, who chairs the MPC. 

“The MPC, therefore, decided to raise the Central Bank Rate (CBR) from 12.50 percent to 13.00 percent.”

President Ruto had anchored his agenda for the next five years on largely making credit affordable, especially to small traders who have in the past found themselves paying more for loans.

But this rosy promise of disbursing cheaper loans is now more remote and appears to have gone up in smoke thanks to CBK’s actions.

Shock monetary policy

The shock monetary policy therapy by Dr Thugge appears set to cause negative ripples throughout the already battered economy, analysts said.  “The raising of the base cost of capital, means the economy faces a powerful headwind,” said Deepak Dave of Autonomi Capital. 

“Monetary policy is making things harder for business, fiscal policy is already anti-growth, and the worst burden will fall on the poorest.”

And now with CBK combating inflation and the weakened shilling, the President’s plans for cheap credit have been dealt a massive blow as the apex bank tightens money supply by raising the rate at which it lends to banks.

The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies.

The National Treasury had earlier feared that Thugge’s aggressive fight to rein in inflation could tip the battered economy into a temporary recession. The warning came last year at a time the CBK made attempts to squeeze high inflation out of the economy through the toughest round of rate increases in recent years.

Thugge, Ruto’s top money man at the banking regulator, maintained yesterday however the record rate was a necessary evil to tame rising inflation and the volatile exchange rate despite its unintended risks of slowing the economy, adding that tightening interest rates has already borne some fruits.

Most of the inflation being felt in the country is imported with the dollar strengthening against major currencies including the shilling.

The shilling traded at Sh160.3246 on Wednesday, sustaining a low against the dollar - and setting the stage for costly imported goods such as cars, electronics, farm inputs and second-hand clothes, electricity among others.

The depreciation of the shilling is causing negative ripples throughout the economy, dealing a blow to Ruto’s economic recovery pledge.

The weakened currency has raised the prices of a wide range of consumer goods, bursting hopes of a soft landing for millions of Kenyans who expected the cost of living to ease this year.

Since taking office in September 2022, Ruto has struggled to deliver on his campaign promises at a time Kenyans are struggling rising living costs, according to the Opposition which wants him to do more to bring down the cost of living.

“More affordable credit will boost borrower confidence and inject significant amounts into productive activity across the economy,” said President Ruto when he launched “Hustler Fund”, the flagship measure of his campaign intended to give the poorest access to credit. 

The latest fallout in the costly credit market is likely to further put additional spotlight on Ruto’s top moneymen and a host of elite advisors whom the President relies on to make crucial decisions. They include National Treasury Cabinet Secretary Njuguna Ndung’u and Thugge.

The duo was expected to work closely to steer the economy through rising inflation, a depreciating shilling and a heavy debt burden.

But according to Mbui Wagacha, a former senior economic advisor to President Uhuru Kenyatta and former chairman of CBK, the two economic managers of the Kenya Kwanza administration are presiding over a “broken macroeconomic policy framework” that is benefiting the rich and hurting the poor - the opposite of its famed bottom-up policy.