President William Ruto's directive to the National Treasury that any borrowing should not exceed a 10 per cent interest rate will be catastrophic, economist Wehliye Mohamed has warned.
The president, during a meeting with the Association of Pension Trustees and Administrators of Kenya stakeholders on Friday, said he had instructed the treasury not to borrow exceeding a 10 per cent interest rate.
Ruto said it was no longer sustainable for the government to keep accumulating expensive debts that will be unmanageable in the future.
In a bid to remain stable, the President said if the government doesn't find a lender who offers below 10 per cent interest rate, they should consider alternative options.
"It is not possible for us to borrow beyond 10 per cent. The last borrowing we did was at 14 per cent. That is unacceptable and that is the trajectory we are going," the President said adding that they will not make a U-turn on the decision.
But in a rejoinder to the president's directive, Wehliye, a central banker, opines that it is impossible for money markets and the government itself to survive under the strict directive.
"The money markets will shut and so will the government. I am not sure these kinds of decisions have the backing of the National Treasury. If they do, then we have a bigger problem! Let's hope this was just talk and nothing more!" Wehliye, a Senior Advisor at, Saudi Central Bank, tweeted on Friday.
The economist further explained that the current minimum borrowing rate as set by the Central Bank of Kenya makes it impossible for money lenders to survive with less than a 10 per cent interest rate.
The inflation rate, he adds, makes it harder for lenders to heed Rutos demand.
"CBR is 8.5%. That is the policy rate that sets the minimum borrowing rate. Then there is something called the term structure of interest rates. How do you want to borrow 2/3/5 yr money at 0.5% above CBR? How do you borrow at a single digit when inflation is double-digit?" he posed.
The term structure of interest rate can be defined as the graphical representation that depicts the relationship between interest rates (or yields on a bond) and a range of different maturities.
The graph itself is called a “yield curve.”
The term structure of interest rates plays an important part in any economy by predicting the future trajectory of rates and facilitating quick comparison of yields based on time.
Wehliye further opines that the declaration by the President is illegal since it amounts to dictating the interest rates.
He argues that the declaration in the long run will injure the country's economy.
"Today's declaration definitely breaches Article 4. It is tantamount to controlling interest rates. With today's announcement, the Fund will not likely go to the Board. If they don't, that would be problematic for the country!" He stated.
But to President Ruto, there is no other way about it.
"I don't think anyone would approve us to continue borrowing g and take a country to debt in a way that is not sustainable. If your country goes the wrong way you have no other country to live in unless some of you have dual citizenship," he said.
