Kenya: Interest rate cap being blamed for lurking mix of high inflation, unemployment on the way

Parliament must humbly accept to untie the hands of Central Bank by removing the interest rate cap legislation.
To avoid sinking to the lowest depths, take money away from the white elephant project and drop interest rate capping

The Kenyan economy is starting to buckle under the weight of weak economic policies.

The latest estimate of Growth Domestic Product shows that economic growth is slowing down.

Last week alone, three major corporates – Stanbic, EABL and Telkom — announced plans to lay-off employees in a trend that will contribute to higher levels of unemployment.

Inflation has steadily been rising in recent months and for the first time in Kenya’s history, the country bought more goods from African countries than it sold to the continent, creating an unprecedented trade deficit.

If the existing economic policies do not change, Kenya will find itself in stagflation — a precarious situation that presents a toxic mix of high inflation, high unemployment and low growth.

Standard economic theory holds that policymakers face a trade-off between unemployment and inflation.

When more jobs are created, leading to increased levels of employment, we should expect to see higher rates of wage rises which should lead to higher inflation.

However, economic history shows that this model is only applicable in the short-run but collapses in the long-run, leading to the situation we are now facing in Kenya where both inflation and unemployment are rising within the context of an economic slowdown.

But how did we get here? It must be said that key economic principles have been largely ignored in recent years.

Monetary policy, which is the handmaid of economic growth, has been weakened since the introduction of the interest rate cap in 2016, and the central bank’s ability to control money supply in the economy has been greatly undermined.This is despite a court ruling that described the rate cap legislation as unconstitutional. As with any price-capping policy, the natural effects of shortages soon started emerging and growth of credit to the private sector declined from highs of about 20 percent to lows of about five percent, resulting in an immense strain on businesses while lowering the overall aggregate demand for goods and services.The fiscal policy coming from the Treasury has also not inspired confidence. Several years of piling up public debt has taken its toll on the economy.Tax revenue is increasingly being directed towards servicing debt while precious little is left for development.Furthermore, […]

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