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Kenya Economy: Political Risk and Interest Rates Capping Effects point to a Shrinking Economy

We have all felt it, irrespective of the financial class you are, the shrinking economy is becoming more of a reality as we head into the August elections. The big question would be as always, which government has the better probability to change my life and the future generations for the better? Deliberate upon this before casting your vote.

Anyway we have our own big question here. What has largely caused the current economic crisis that is a step away from a depression? When was the last time you bought UNGA without a fuss. Is it the political tension as election looms or an implemented policy that was to be used as a political tool turned South on the economy?

Let us look to statistics to point us in the right direction. In an earlier article, we had stated why the interest rate cap may fail to spur economic growth. Since the writing of the piece in November 2016, Central Bank of Kenya Monetary Policy Committee has consistently stated in their press release statements that the data on capping of interest rates was not sufficient to evaluate its immediate impact in the economy until May 2017.

Their statement release only recuperate what was expected all along; that capping of interest rates has been detrimental to the economy. I quote “the Committee evaluated available data on the impact of capping interest rates. The number of loan applications increased by 23.4 percent between August 2016 and April 2017, but the value of loan applications decreased by 18.3 percent, suggesting smaller size of loan applications. The number of loan approvals increased by 35.7 percent while their value decreased by 16.3 percent. Moreover, commercial banks’ lending to Micro, Small and Medium Enterprises (MSMEs) fell by an estimated 5.7 percent between August 2016 and April 2017, but with small banks recording an increase on average.”

Also Read: Six Lessons Learnt From 2017 General Election

Though the number of loans applications and approvals increased, the value of loan applications decreased and commercial bank lending to MSMEs significantly fell.In simple terms, the economy is funding current expenditures rather than development expenditures. The result is stagflation which is characterized by increased inflation (month on month inflation was 11.50% in April 2017) as too much money is spent on chasing fewer goods, high unemployment (39.1% according to United Nations’ Human Development Index (HDI)) and slow economic growth rate (decreased from 6.1% to 5.3%.

Despite commercial banks, Central Bank, Treasury and International Monetary Fund (IMF) being against the move, the bill was passed and legislated into law. With a unanimous agreement in parliament to pass the bill, it was a political rather than economical move.

Chronology of events may shed light on the expected political impact of interest rate capping.
24th August 2016 – Kenyatta signs interest rate cap into law.
25th January 2017 – IMF said interest rate cap would be detrimental to the economy.
15th March 2017 – Kenyatta admits commercial lending has slowed
12th April 2017 – World bank cuts growth outlook because of lending rates capping
8th August 2017 – Kenya Elections.

A Jubillee electoral victory with minimum violence and lifting of the interest rate cap after elections will spur economic growth for the foreseeable future making the Jubilee’s second term a success and increases probability of Ruto coming into power in 2022.

The current government has played a long-term political card to the detriment of the economy in the short run since data has pointed to the negative impact of interest rate capping in the economy. The next ruling government first policy may be to amend the interest rate cap.

Political risk now remains the biggest impediment to Kenya economic growth but a second ruling term for Uhuru Kenyatta may favor continuous economic growth as shift in government  may cause a shift in economical and political policies of the country creating uncertainty – the worst enemy to economic growth.

Also Read: William Ruto May Become The 5th President Before 2022

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Posted by Timothy II Aperit

True believer in numbers. Statistics never lie. Bsc Financial Engineering MBA Finance ACCA