Independence is what you want from a central banker. And Kenya’s certainly is not afraid of being a contrarian. In September 2016, the government pushed through popular legislation to control the rate of interest banks can charge for loans. Patrick Njoroge, the central bank governor, recalls the torturous negotiations as the central bank tried to convince the administration that this would be counterproductive.
“But as when you are a hammer, everything looks like a nail; when you are a legislator, to solve anything, use a law,” he says.
Njoroge says he was worried that the interest-rate cap would lead to significant rationing of credit, “exactly to the segment they were most concerned about: small and medium-sized enterprises, but also small and medium-sized people”, like those trying to add on to their houses or prepare for the arrival of a new member of the family.
The result of the law has been a lot of informal and predatory lending, says Njoroge. “The economy is paying a steep price for it, without a doubt.”
While the bottom of the market might be frozen, at the top the government has borrowed massively for various sources, with total debt now standing at KSh11.9trn ($12bn). Some critics of the government, like economist David Ndii, warn of the crowding-out of private-sector borrowers: banks, unwilling to lend to risky companies, are happy to lend to government – a safe bet. Njoroge says that while local banks have indeed lent a great deal – roughly $6bn – there are statutory limits on each bank’s exposure to government debt.
The central bank governor is relatively relaxed about Kenya’s debt levels, saying they do not pose a systemic risk to the economy. The government, says Njoroge, “have stuck to their deficit targets” and very little is due for repayment over the next two years. While the average maturity of Kenya’s debt has come down from 20 years to just under 17 years, that is still high for its African peer group. The country also has some $8.2bn in reserves, more than five months of import cover.
But Njoroge is less sanguine about contracting new debt. He would prefer the government looked more at non-debt spending like public-private partnerships and reducing the fiscal deficit to ensure that Kenya will have space to meet future debt repayments. “The borrowing pattern is also driven by the fiscal stance, meaning, ‘how big is the deficit’. So a key element going forward is to moderate that, to consolidate the fiscal deficit,” says Njoroge. In other words, ‘please spend less and raise revenue’.
On the issue of the sustainability of projects such as the standard gauge railway, which represents a significant chunk of the recent borrowing, Njoroge recommends checking with the relevant ministry.
It is certainly a touchy subject. Countries traditionally stumble into difficulties when there is a mismatch between their debt and their currencies. Having borrowed so much in US dollars, it could be a calamity if Kenya’s shilling depreciated strongly.
So when the International Monetary Fund accused Kenya of overvaluing the shilling by 17.5% in October 2018, the pushback was immediate. For Njoroge, the problem was in a new methodology. “It was a watered-down version of the external balance assessment that they do for advanced economies. So this was the first time that they were bringing it to economies such as ours.” And Njoroge says the calculations were not accurate.
Still, some look at the shilling-to-dollar rate and see a long straight graph at 100 to 1 for many months. To those sceptics, Njoroge suggests a more empirical approach: “Look at the market. If you had an overvaluation by that margin, you would have parallel markets coming out of the woodwork. And the shilling is accepted not just here but around the region.”
He says the central bank only intervenes to smooth out volatility and to prevent sudden appreciations or currency crashes: “We lean against the wind, but where it goes is the market’s decision.” On top of that, he argues, Kenya regularly tops rankings of economic openness in East Africa.
That openness is something that he is more philosophically inclined towards. Ethiopia is attempting an Asian-style developmental burst using protected markets – “for every Japan, there is a mistake,” he says. While a strong state directing credit can work, Njoroge says he would prefer a system in which Kenya nudges its private sector towards better governance.
Companies need “better business models to make themselves more resilient to shocks,” he says. “Banks may have made money for 50 years lending to trade, but there may be a day when trade goes down. So they need other sources of income.”
Njoroge argues that the current round of consolidation in the banking sector is a sign of just that – the creation of banks that have several strings to their bows and resilient capital bases.
Shocks are no doubt a possibility in a world where the US is ramping up a trade war with China and the UK is exiting the European Union (EU) with little grace. A growth shock – such as the one Kenya endured in 2017 when drought crashed the agricultural sector – is high up the list of the central bank’s concern.
The travails of the EU in particular ring alarm bells in Nairobi. “There are cautionary tales” for the East African Community, such as free movement of labour, says Njoroge, who wants nonetheless to highlight the success and benefits of EU trade and capital movements. Another is the difficulty of how to deal with an idiosyncratic shock in one country in a currency zone, given that monetary policy – the ability to devalue, for example – is off the table as a lever.
“But does that mean we should be paralysed? Probably not,” says Njoroge, who sees regional integration as the best way of dealing with a volatile world.
“We have a stake in Brexit,” explains Njoroge. It is not just about tariff barriers, but ‘ease of doing business’ concerns such as the documentation of goods.
Take the case of a Kenyan exporter. “For now, we export goods bulk. They go to Rotterdam, are broken up and then shipped to the UK.” In the future, will these need to be two separate shipments? Does that extra logistical hoop make Kenyan goods more expensive in the UK? “We didn’t get a say in it, but we have a stake in how it goes.”
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