How Africans Destroy Their Economies

About a week ago, the Central Bank of Kenya’s Monetary Policy Committee (MPC) hiked the country’s base lending rate by 200 basis points to 12.5 per cent, ostensibly to stabilise the shilling and tame inflation. It explained that the move was necessary to ensure “inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5.0 percent mid-point of the target range”.

While the market did not expect this aggressive hike, some analysts have speculated that the committee was simply implementing what the World Bank and IMF wanted. The consequences of this move have already kicked in, with the average lending rate reportedly topping 30 per cent.

I have a fundamental problem with the so-called African technocrats who are often too eager to pursue policies designed to keep African populations locked in poverty. We would examine this example, along with another from Malawi, to demonstrate just how destructive these World Bank/IMF policies are.

Developed countries are in the middle of an inflation battle blamed on the large systemic government expenditures, bailouts and Covid handouts given to their citizens and businesses. American households, for instance, received thousands of dollars to supposedly cushion them against the consequences of lockdowns, and it is this excessive money supply that led to depreciation in its value.

Draconian Covid measures

Supply line disruptions, due to the same draconian Covid measures, led to the classic inflation of “too much money chasing too few goods and services”. To tackle inflation, American and European central banks have instituted a series of interest rate hikes with the goal of influencing consumer behaviour.

Policymakers, such as the Fed, hope that high-interest rates would persuade Americans to save or invest their extra money in government Bonds and Treasury Bills, thereby easing pressure on expenditure or consumption. And as aggregate demand falls, prices, too, would come down, heralding victory over inflation.

In Kenya, and much of Africa, where there was no significant Covid handouts, the so-called “inflation” has little to do with excessive money supply. Average prices have continued to climb due to the lingering consequences of supply line disruption and the cost of doing business. With a small fraction of Kenyans having a regular salary, it is not clear how hiking interest rates would persuade this segment of the population to spend less and save more.

Bizarre move

This bizarre move is further compounded by the fact that newly introduced taxes and levies are already garnishing more than 30 per cent of the incomes of workers, who must spend more because of the tax-induced price hikes on basic commodities.

The MPC, along with their IMF and World Bank allies, are certainly aware that the ongoing depreciation of the shilling is largely due to the increasing debt burden and insufficient dollars in the economy.

Furthermore, President William Ruto, like his predecessors, is being urged by these same institutions to take more debt. Yet to repay our debt, we must first buy dollars using the shilling, and it is this demand for the dollar that would inevitably send our currency into free-fall.

The recent interest rate hike would ultimately translate to an immediate increase in the cost of doing business—but without a tangible impact on the value of the shilling. Bank loans would become unaffordable to most businesses and households would struggle to afford necessities in an already battered economy. This was pointless and unnecessary because there is only one way of stabilising the shilling temporarily: Borrowing dollars to pay off dollar-denominated debt.

Absurd case

Now let’s now consider an equally absurd case in Malawi, where the government was recently pressured by the IMF into devaluing its currency, the kwacha, by 30 per cent, to receive a $178 million loan.

The president announced this painful deal by distracting his citizens with a declaration of stopping, with immediate effect, international travel by government officials, including him. That devaluation translated to a 30 per cent jump on all imports as well as a 30 per cent increase in all its outstanding debt—a rather outrageous move.

IMF is known for leaning on poor nations to agree to its harmful terms. These recent cases in Kenya and Malawi demonstrate that not much has changed in the manner in which the Fund interacts with its African clientele. But what makes African policymakers to accept and implement such destructive policies?

And with such gatekeepers and decision-makers, would things ever get better in Africa?