18 Jul

A Government that operates both Expansionary and Contractionary Economic Policies concurrently  not only sends mixed signals to the market but clearly shows lack of sync in Government coordination mechanism.

A scenario where the central government through the Ministry of finance signals increased economic activities through expansionary fiscal policies and the Central bank partially practices expansionary monetary policies  and majorly focus on reduction of inflationary pressures through tight monetary policies clearly leaves the market players confused on which way forward. With such contrast in the economic policy the macro economic variables are left wobbling at the fence, non is achieved. This has been the scenario in Kenya. CBK has failed to curb inflation whilst the Government has failed to achieve its main objectives of reducing unemployment, increasing economic activities and reduction in tax burden

Our policies are not focused and we are not likely to achieve any of our objectives as long as the Central bank and government do not match in the same direction. The question is are we seeing a more robust economy in the near future or do we need to reduce the amount of money in circulation to curb the run away inflation we are currently experiencing in the economy. Currently inflation stands at 14.5% and is likely to reach above 20% before the end of 2011 unless the necessary macro economic variables are controlled to acceptable levels.

What is the Government Doing?

The government influences major economic variables through its fiscal policies which can either be expansionary or contractionary depending on the objectives it intend to achieve

The government economic stimulus plan majorly focus on injecting more funds into the economy in turn increasing the amount of money in circulation, Reducing unemployment thus fueling inflationary pressures which the CBK is so much trying to rein on.

section of thika road under contraction

The 2011/2012 Budget was the biggest budget ever in the history of Kenya,  A whopping Kshs.1.155 Trillion the ministry of finance is projecting the government to spend this financial year alone, this is a clear indication that the government is planning to increase its fiscal expenditure thus expansionary fiscal policy.

With the ongoing constitution implementation, creation of new offices and administrative structures through the County governments the we needs more than the budget provided if we are to beat deadlines.

With projects such as The ongoing Thika superhighway construction The government is pouring more money into the pockets of Kenyans, This might make it difficult for CBK to control the inflationary pressure.

What is CBK trying to Achieve

A Circular Dated 11th July 2011 to commercial bank clearly shows that the lender of last resort is gearing up for even more tighter monetary policies. Among the issues that confirms this  despite the bank’s reduction of its overnight lending rate from 8% to 6.25% includes:

  • Restricting Any bank lending in the interbank market access to funds through the discount window on same day.
  • In any week (mon-fri) banks will be restricted to borrowing a maximum  of their statutory cash reserves
  • Requirement for banks to consider other avenue to satisfy their liquidity needs before considering the discount window, that is,Liquidate TBills/Bonds and FX Positions held prior to resorting to the CBK

By restricting commercial banks access to easy funds CBK is basically trying to reduce the amount of money in circulation. Banks will be more cautious on lending.

CBK had already warned commercial banks not to increase their base rates (interest rates charged on loans) on the contrary CBK itself had increased the Rate at which it lends out to commercial banks from 6.25% to 8% Before reverting to 6.25%. A few commercial banks had clearly shown signs of increasing their rates.

The way forward

The Central bank of Kenya (CBK) Clearly needs to move in the same direction with the central government. However much difficulty  this might be due to prevailing shocks in the market, for the two institutions to achieve their objectives their policies must be aligned in one direction. We either focus on reducing inflation through the contractionary monetary and fiscal policies or Increase the economic activities in the economy through expansionary monetary and fiscal policies.

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Posted by on July 18, 2011 in Economical, Financial


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