By Patrick Alushula
The World Bank has called for significant policy reforms, including removal of interest rate caps, if the Government is to achieve its ‘Big Four’ agenda. In the policy proposals outlined in the 17th edition of the Kenya Economic Update, the global lender said the Government’s ambitious priority plans for the next five years could be constrained with the rate cap in place.
It called on the Government to ‘restore potency’ of monetary policy and create a conducive environment that could incentivise banks to lend to the private sector.
The ‘Big Four’ is unlikely to be achieved without the participation of a dynamic and healthy private sector,” said the World Bank. Under the ‘Big Four’ agenda, the Jubilee administration has prioritised delivering affordable housing, rolling out universal health coverage, increasing the share of manufacturing in the economy, and improving food security. However, the Bretton Woods institution said the Government would require the significant participation of the private sector through incentives, without which the ambitious projects could crumble.
“Unshackling monetary policy, an important lever in the policy toolkit, by removing the interest rate cap should allow it to better respond to the slack in the economy,” noted the World Bank. With the rate cap still in place, the bank said monetary policy remained compromised, given that the signal rate from Central Bank of Kenya was directly linked to the level of interest rate. The global lender further argued that this linkage means that there was a perverse incentive structure for using the policy rate to spur or restrain economic activity. Lowering the policy rate in order to stimulate the economy, the World Bank said, could lead to the opposite effect since the lowering of the rate cap further narrows the spread between yields on risk-free Government securities and the maximum allowed lending rates.
It wants the State to manage the Government bond market more efficiently and lower the benchmark risk-free rate if it is to have a vibrant private sector to support the ‘Big Four’.
First Published by the Standard