Interest Rate Hikes and Agriculture

Kenya’s monetary policy is in a fix, once again. The MPC committee decided to hike rates by a surprising 550 basis points, from 11% to 16.5%. and the cash reserve ratio (CRR) by 50 basis points to 5.25 percent points. This is after raising the CBR by another 400 basis just one month ago. The CBK governor said that they did this as a measure to curb inflation and foreign exchange volatility. As @Alykhansatchu put it, “This was essentially a quid pro quo for the $250m IMF top up”. We are essentially over-reliant on the west for donor support and debt and it is hurting our economy significantly.

Inflation has risen steadily over the last 11 months from below 3% to 18.9% in October mainly driven by fuel shortages, artificially orchestrated by the big fish to eat the small fish and raise funds for next campaigning for year’s election, a widely known conspiracy but that’s the world we live in today, nothing new.

Interest Rate Hike and Agriculture

The rate hike will most definitely affect the economy and agriculture being the largest employer of Kenyans (80% of the population direct and indirect), jobs are going to be lost by the bucket load. First of all, getting credit from banks will become a pipe dream; liquidity will tighten and banks will direct their funds to more lucrative investments like long-term bonds and other several government securities that offer a handsome return on investment.

The cost of loans will not only increase by the same margin but also the risk premium is going to increase simply because it is easier to default a 30% loan than a 20% one, net effect, business will cut down costs i.e. fire workers.

Secondly is the inflation. I do not have a phD in Economics but I know one thing for sure; interest rate hike never help inflation but aggregate it. Inflation is defined as too much money chasing too few goods and/or services right… The governor, who has a phD in economics, decided that by decreasing the, ‘too much money’ he would solve the problem of too much money chasing too few goods. My thinking is this; just increase the good and services produce and let basic economics take effect, when supply is high while all else is constant, prices/inflation will go down inevitably.

We simply need to increase productivity in the economy. Our farmers need subsidies to produce food, not GMO ishh. We also need to look into our energy efficiency, there are stupendous opportunities in solar, wind, biomass, geothermal and innovations that reduce our carbon footprint hence energy requirements. Did you know that all our exports combined cannot equal our oil import bill alone?

We need a strong manufacturing industry that adds value to goods rather than this exporting of raw bamboo, we should make branded furniture and artifacts that sell Kenya to di world, don’t you think? Please share your thoughts below…

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