The economy will recover, but taking on more debt will exert fresh pressure


I am an optimist and a believer in the resilience of this economy. I think that in a matter of months, interest rates will start trending downwards. Mark you, interest rates are where they are because of the deliberate actions of the Central Bank of Kenya.

They had to jack up the Central Bank Rate to deal with the volatility of the shilling. High domestic interest rates is how you attract portfolio flows and consequently more dollars into the local market place.

The shilling has more or less started to respond. Still, I think the Monetary Policy Committee should have navigated the process of influencing the rise of the interest rates more smoothly. We would not have ended up with such high rates in such a short span of time.

In the coming months, with new liquidity expected from the new syndicated loan of $750 million, the Monetary Policy Committee will have to start navigating the Central Bank Rate downwards to signal to the market that rates must start sliding downwards.

A group of top non-partisan economists I consult with regularly believe that, based on the fundamentals and underlying macro-economic conditions, the Central Bank Rate should start trending downwards to 8.5 in the first months of next year.


They have calculated that the exchange rate should be between Sh95 and Sh97 to the dollar before the end of the year. As we all know, economics is an inexact science, so some of these predictions may turn out to be worthless.

The question on the minds of wananchi right now is the following: Are our economic managers doing a good job? Are the growing calls for a Cabinet reshuffle justified? The jury is still out.

I think the $750 million loan that the government has just taken is going to create enormous pressure on debt service. And the short tenure of repaying such a huge loan — two years — does not give you the confidence that the borrowing was well negotiated.

Still, this comes at a significant conjuncture. When you read the recently published “letter of intent” by Cabinet Secretary Henry Rotich to the International Monetary Fund in which he spelt out the conditions he has negotiated with the lender, the inescapable conclusion is that we are back under the dictatorship of the austerity junta.


President Mwai Kibaki ran the economy of Kenya relatively successfully with very little engagement with the junta. His record on the economy is clear. He inherited an economy suffering an anaemic growth of 0.57 per cent. His policies saw a sustained increase of growth to 4.85 per cent by the two-year mark, a growth path that continued until the 2008 post-election violence.

What was his secret? Easy credit and a huge jack-up in infrastructure spending. I still remember how intervention by Finance minister David Mwiraria in June 2003 saw the 90-day Treasury Bill rate tumble to below 1 per cent.

With most banks finding themselves with excess liquidity, commercial banks — which had long stopped lending money to wananchi, preferring to concentrate on loaning to the government through T-bills and T-bonds — were forced to start lending money to the public. Banks found themselves literally hawking loans to wananchi.

The pendulum has swung. Today, we have chosen to let the small mwananchi bear the brunt of high interest rates in the name of stabilising the exchange rate. Is this sound economics?


Indeed, Jubilee has hardly moved the economic growth needle or revved up growth the way Narc did at the same stage of its administration. The administration’s record is poor export performance (in part due to falling tea and coffee prices), major problems in tourism from insecurity, travel advisories, and restricted access to EU markets for our horticultural projects. Lapsset and Konza have not progressed in any significant way. Why has the IMF suddenly become important in our economic lives again?

Lately, there has been grumbling in some circles that too many former IMF employees hold influential positions in President Kenyatta’s administration.

Chief of Staff and Head of Public Service Joseph Kinyua is an ex-employee of the IMF. Treasury CS Rotich also worked with the fund. The principal secretary, Dr Kamau Thugge, served in many countries as a resident representative of the IMF. Talk of policy capture, soft power, and influence.