Hawks at Central Bank will destroy economy
Central Bank of Kenya (CBK) Governor Kamau Thugge, unleashed a missile on the economy by hiking the benchmark CBK rate from 10.5 to 12.5 per cent, the highest in 10 years.
This was meant to control inflation and stop the shilling’s slide. Fair enough. First, inflation. When Thugge came in, inflation was at 7.9 per cent and has slowed to 6.9 per cent. Prices of inflation drivers, food and fuel, are on a downward trend due to rains and falling global crude prices respectively. Economic activity is very slow. So, such a huge rate hike looks completely unjustified.
Secondly, the shilling exchange rate. By the governor’s own admission, the depreciation has overshot the desired equilibrium based on fundamentals. If so, then something more fundamental is driving the exchange rate. Such a dynamic is unlikely to respond to classical economic modelling. Further, dollar holdings in banks are at an all-time high at $6.3 billion (Sh966 billion). So, why is the shilling still depreciating when the economy is awash with dollars? The problem is systemic.
Governor’s move has brought to the fore fundamental questions about his stewardship of monetary policy.
First, the rate hike will have dire consequences. Bank lending rates have soared to 26 per cent! Non-performing loans, already spiralling, will streak upwards. More businesses will fail, jobs will be lost, distressed assets will be auctioned impoverishing Kenyans. Borderline banks will start to struggle, endangering the entire banking sector. Does the Governor care?
Further, increasing rates to attract dollar inflows is a misguided strategy. Thugge cannot outmuscle the Federal Reserve Bank of the US, with whom he is competing for the same dollars. Kenyans are waiting, to no avail, to hear the government’s strategy to “grow” foreign currency at home!
Thugge might yet achieve his goals. But it will be a pyrrhic victory. This hike will lay the economy to waste! No economic activity means no borrowing, and no foreign exchange demand. So, no inflation, no forex pressures. Mission accomplished. Right?
CBK mandarins need to move out of their ivory tower. Behind these statistics are lives being destroyed. Monetary policy is not an end in itself! Since the governor took over, his economic management strategy has been to raise interest rates from Day 1, with disastrous results. Kenya’s monetary policy is now in the firm stranglehold of hawks. The only way they can take this economy is down! That grip must be loosened.
Kenya cannot afford inflexible monetary hawks who see the entire economy through the prism of one metric- interest rates! Hawks are obsessed with control of inflation as their primary objective in monetary policy. The economy must start growing- period!
What is the way forward? By all indications, the economy has stabilised. It is time to move it from crisis to recovery. This is the job of the governor, Treasury Cabinet Secretary Prof Njuguna Ndungu, and Chairman of the President’s Economic Council, Dr David Ndii, who are in office earning an arm and a leg from public funds.
It is now very urgent that President William Ruto locks his entire economic team in one room to be let out only when they have come up with a time-bound roadmap to lead Kenya from crisis to economic recovery within this fiscal year. The economy might not survive another such wild shock.
Kenya has been here before, and has been faced with seemingly near insurmountable economic challenges. That is why people like former CBK Governor Micah Cheserem, and former President Mwai Kibaki, are still held in high regard to this day for successfully stewarding the economy then from the storms without throttling it.
So, rather than keep lambasting the policies of his predecessor Dr Patrick Njoroge, Thugge needs to study how he managed to keep the economy on an even keel despite great challenges. It is shocking how the country’s economic mandarins seem so oblivious to the fact that the fabric tying the economy together is so badly frayed that it could unravel anytime.