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25 October, 2015

Executive Summary:

  • Fixed Income: Interest rates maintain an upward trend, and the 1-year amortized bond comes in at a yield of 22.9%, in line with our recommendation in the Cytonn Weekly #41 of between 22.5% and 23.0%;
  • Equities: NASI, NSE 20 and NSE 25 gained 1.9%, 1.3% and 2.2%, respectively, during the week. The Insurance Regulatory Authority released the Q2?2015 Industry report indicating a 15.3% growth in net premiums;
  • Private Equity: Financial services sector continues to attract PE investors in Kenya;
  • Real Estate: Stanlib becomes the first company to issue a Real Estate Investment Trust (REIT), and making Kenya the 4th country in Africa to have REITs;
  • Focus of the Week: We focus on the current high interest rates in Kenya, how we got to where we are and what could have been done to avoid the current situation;

Company Updates:

  • Britam withdrew all the 5 civil suits filed against Cytonn and it directors. We have always held that these were malicious suits devoid of any merits and were only meant to frustrate the establishment of a competitor, given that 5 of Cytonn?s key managers are former Britam employees who broke off to establish a competing business. Britam withdraws suit against Cytonn.
  • Cytonn Investments CEO, Edwin H. Dande was recognized by Choiseul of France as "among young African Leaders, 40 yrs and below, who will play a major role in the continent's economic development in the future": Edwin H. Dande recognition in Choiseul of France.
  • Maurice Oduor, our Investment Manager, discussed the impact of high interest rates on the economy and the recent decision by Uchumi to begin disposal of land assets, on KTN Television: Maurice on KTN
  • Shiv Arora, our Head of Private Equity Real Estate, discussed the impact of high interest rates on consumers and the strategy for Uchumi going forward, on CNBC Africa: Shiv Arora on CNBC.
  • Our diaspora road show continues, and there is a clear opportunity for the country to attract significant foreign investment resources by developing investment products that are relevant to the diaspora and effecting diaspora friendly policies. The diaspora interest in a trusted investment platform is also very strong. Cytonn Diaspora Roadshow Schedule.
  • This week we strengthen the management team with several key hires
    • Robert Mwebi joined the real estate team as a project manager. Robert has extensive experience in project management, recently with Southern Engineering
    • Winfred Ndung?u joined the team as Business Administrator to support the rapid growth of the business. Winfred is an experienced business administrator and marketing professional with extensive experience, most recently with Britam
    • Boniface Wachira, CPA, joined the team as Finance Manager to support the rapid growth of the business in terms of financial accounting and reporting. Boniface is an experienced finance professional, most recently with Acorn Group
  • We continue to beef up capacity, with ongoing hiring for Project Managers: Career opportunities.

Fixed Income

Treasury bill auctions were oversubscribed for the fourth straight week, with overall subscription rising to 336.0%, compared to 258.6% the previous week. The Central Bank of Kenya (CBK) took Kshs 33.5 bn this week compared to Kshs 12 bn offered, a clear indication that the government needs cash. The high subscription rates can be attributed to (i) investors locking in attractive yields in short-term government instruments, (ii) foreign investment flowing into the local debt markets as the returns are attractive, on a risk-adjusted basis. In the wake of comments by the CBK Governor, Dr. Patrick Njoroge, that the CBK will look to drive down interest rates in the near future, investors? preference was skewed towards the 364-day T-bill, which received the highest subscription rate of 516.0%, compared to 369.9% and 121.9% for the 91-day and 182-day, respectively. There was minimal increases in yields to 22.5%, 22.3% and 22.4%, from 22.1%, 21.8% and 21.8% for the 91-day, 182-day and 364-day papers, respectively. The minimal increases in yields, compared to just a few weeks ago where yields increased by over 300 basis points on a week to week basis indicates that the rate environment is slowly stabilizing.

The money market was relatively liquid in the week with the commercial banks? clearing account recording KSh 25.97 bn surplus from the 5.25% average Cash Reserve ratio. Due to the liquidity skewedness towards some banks, the interbank rate rose slightly to 13.8%, from 13.5% the previous week.

The shilling appreciated 0.9% against the dollar during the week, closing at 102.1 against the dollar, from 103.1 the previous week. We expect the shilling to continue strengthening in the short-term due to:

  1. The tight monetary policy stance by the CBK, combined with aggressive mop-up activities,
  2. Increased amounts of foreign inflows into government securities as foreign investors look for appealing yields available in the Kenyan market, made even more attractive with the reduced shilling volatility, and,
  3. Improvement in the foreign exchange reserves holding to 4.1 months of import cover compared to 3.9 months which was the lowest level reached
  4. The delayed rate hike by the Fed in the US, pushing investors to seek for attractive alternatives investments in emerging markets.

As highlighted in our Cytonn Report #41, the Government issued a 1-year amortized bond, with a weighted tenor of 9-months (273 days), to raise Kshs 20 bn for budgetary support. The bond received a 157.3% performance, and the yield was 22.9%, which was in line with our expectation of between 22.5% and 23.0%, which is the highest yielding treasury instrument. The Government further confirmed its preference for short-term borrowing by postponing the issuance of the Kshs 5 bn, 5-year infrastructure retail bond to avoid distorting the yield curve. The retail bond, named M-Akiba, was to be the first Government bond offered exclusively via mobile phone. As we highlighted on CNBC Africa (Cytonn Investments CNBC), in our view, this postponement was necessary and the effort may not have been too successful because:

  1. With a minimum subscription amount of Kshs. 3,000, the offering is targeted at retail investors, however the government has not taken enough steps to educate the public on the offering,
  2. The small denomination of the bond will make it illiquid in the secondary market and most retail investors will have to hold the bond to maturity or they may end up losing money if they want to transact before maturity, and;
  3. It is not prudent for the government to issue a 5-year bond in the current interest rate environment, as investors will demand higher premiums to compensate them for the duration of the bond.

As highlighted in our Cytonn Weekly #40, that Family Bank is set to issue its corporate bond of Kshs 10 bn, however the offering might be ill timed given the current interest rate environment and a market that is soured on the banking sector. In response to this, the bank reduced the size of their offering to Kshs 2 bn. The bond is being offered at a yield of 16.4% compared to 15.4% of a similar 5-year government bond, a risk premium of only 100 bps. In this environment, shrewd investors would demand at least a 300 bps premium to the government bond. However, we note that even the 15.4% 5 yr bond pricing base could also be distorted since there has been no recent trade on this and the government is reluctant to issue a 5-yr bond given pricing uncertainty. On a risk-adjusted basis and given both the interest rate and banking sector environment, the bank may struggle raising the funds.

We have a seen a number of downgrades to the Kenyan economy due to the harsh economic environment. The IMF and World Bank, reduced their forecasts to 6.0% and 5.4%, respectively from the close to 7% rate at the beginning of the year. S&P also downgraded their credit outlook for Kenya from stable to negative, maintaining the credit rating at B+. Cytonn?s GDP forecast for 2015 is at between 4.7% - 4.9%, is below both IMF and World Bank, as a result of the poor-operating environment and the increased debt burden by the government. Despite this challenging macroeconomic environment, inflation rates, which have remained relatively low for the better part of the year, are expected to inch upwards but to remain within the CBK?s target. We expect inflation for the month of October to continue with the recent upward trend to 6.0% - 6.2%, from last month?s 5.97%, owing to increased prices in non-food and non-fuel items. Despite all the above Kenya is still a good long-term investment destination since major actions are being undertaken to stabilise the economy, and most recently we have seen the currency strengthen and the CBK governor come up strongly indicating that they shall help reduce the interest rates.

The Government?s borrowing programme for the current fiscal year, targeted at Kshs. 219 bn, has been stepped up, having borrowed Kshs 52 bn for the current fiscal year. Given that the Government has resorted to funding the budget through short-term borrowings, which mature within the current fiscal year, we expect the aggressive borrowing to continue, as pressure remains to re-finance their obligations but we think that the rates should be capping at the current levels given the high levels of subscriptions witnessed recently. We maintain our view that investors should be biased towards short-term fixed income instruments, given the uncertainty in the interest rate environment.


During the week the market was on a positive trend with NSE 20, NASI and NSE 25 gaining 1.3%, 1.9% and 2.2%, respectively, on the back of gains in Britam, EABL and Safaricom which gained 11.3%, 6.7% and 2.8%, respectively. Foreign investor?s participation remained high during the week at 82.6%, about the same level of 82.4% the previous week with the foreign investors being net buyers. Since the February peak, NASI and NSE 20 have been down 21.4%, and 28.1%, firmly in correction territory, and down 14.3% and 22.7% on an YTD basis, respectively.

Britam and Acorn settled their civil suits; Cytonn was also party to the suits but the suits against Cytonn and / or its directors were withdrawn since Cytonn has no interest in the matter. The settlement resulted in Britam getting the majority of the Kshs. 5 billion of real estate development. It is notable that while the developments were initiated by Britam?s Asset Management division, BAAM, together with Acorn, for the benefit of BAAM clients, the real estate developments will now go to Britam shareholders. Consequently, while the settlement is positive for Britam shareholders, it effectively short changes BAAM clients by denying them access to real estate returns. This calls into question the regulatory ability to protect the interest of the investing public given that the deals against the investing public to the benefit of shareholders have been done in plain view of the regulator. We cannot achieve the aspiration of Nairobi as a regional financial services centre without a strong culture of protecting the interests of the investing public.

The Insurance Regulatory Authority released the Q2?2015 Industry Report, which indicated that the industry?s net premiums grew by 15.3% to Kshs. 88.4 bn in Q2?2015, from Kshs. 76.6 bn in Q2?2014. Life Insurance recorded higher growth than General Insurance at 15.7% and 14.6%, respectively, however the industry is driven by the general insurance business, which accounted for 66.4% of the entire premiums. Reinsurers recorded a 30.4% growth in premiums from Kshs. 7.1 bn in Q2?2014 to Kshs. 9.3 bn in Q2?2015, with general insurance business ceding most premiums contributing to 87.0% of the total premiums. Insurance claims grew by 16.4% from Kshs. 33.6 bn in Q2?2014 to Kshs. 39.2 bn in Q2?2015, with general business having most claims at 62.3%, compared to life business at 37.7%. The total industry assets grew by 16.1% from Kshs. 392.2 bn in Q2?2014 to Kshs. 455.5 as at Q2?2015. Kenya?s insurance industry has high growth prospects due to (i) potential high premium growth rate since the market is too concentrated, (ii) an increasing asset base, and (iii) a low penetration rate standing at 2.9% of GDP. However, the growth in claims outpacing growth in premiums is worrying, and could be an indicator that premium growth is being driven by business of questionable quality. We are currently analysing listed insurance companies and shall be releasing our comprehensive insurance report on the 2nd of November 2015.

Jubilee Insurance Holdings has announced its partnership with Congolese Insurance Company ?Société Nationale des Assurance? (?SONAS?), to offer medical and life cover products, pending approval on their request to set up shop in the Central African Nation. This comes in the wake of DRC having amended their insurance law which now allows the entry of foreign insurance companies. Under the new law, foreign insurance companies are required to have a minimum capital base of USD 10 mn (about Kshs. 1 bn) to operate in the country. The new Insurance Code represents a revolution in the sector, which has in the past been affected by the disparity of laws, which subsequently locked out the participation of both foreign and local companies to venture and compete successfully in the country, through the monopoly granted to SONAS. Over the years, there has been a lack of competition in the insurance industry in the country since SONAS was the only company offering insurance therefore subjecting the public to expensive insurance products. By introducing this new policy: (i) It puts an end to the monopoly granted to SONAS, (ii) liberalizes the sector, and (iii) establishes an insurance regulatory authority in DR Congo whose entry into force will be in March 2016. These are positive changes for the insurance market, especially policy holders given increased competition and better regulation.

TransCentury, a Kenyan investment firm, has announced plans to raise funds through a cash call from its shareholders for the purpose of (i) paying off its Kshs. 5.9 bn convertible bond due in March 2016 and (ii) to support its construction and energy business after the Board announced a new growth strategy. The bondholders had been given up until late September to exercise their conversion rights but due to the low share price it is highly unlikely that they considered this avenue. The conversion price as per the bond guidelines is at Kshs. 49.6 per share, so it would be cheaper to buy the stock at the current price of Kshs. 14.0. The company initially borrowed Kshs. 5.9 bn (USD 60 mn) in 2011 and so far close to Kshs. 410.0 mn (USD 4.0 mn) has been converted. With the likelihood that the bondholders did not convert the debt, it is no surprise that TransCentury is looking to their shareholders for more capital.

Next week sees the commencement of Q3?2015 earnings releases for the banking sector in Kenya. With the challenging operating environment, characterised by high interest rates, which saw banks revise upwards the interest rates on loans, we expect slow earnings growth compared to Q3?2015, as a result of:

  1. High costs of funding given the spike in interest rates in the market, with the 91-day Treasury bill at 20.6% as at the end of September;
  2. Lower loan uptake given the expensive costs of financing loans. This was driven by actions by the Central Bank, which raised the Central Bank?s base lending rate by 300 bps in the quarter;
  3. A shrinking net interest margin for banks given the time lag between re-pricing of loans and adjustments on the cost of funding, which is immediate once a bank takes on expensive deposit;
  4. Banks that have portfolios with Mark-to-Market government securities will report huge unrealized losses as a result of the high interest rate environment.

Though the current interest rate environment is expected to result to higher Non-performing Loans (NPL?s), we expect the impact to be minimal as banks extend the duration of the loan, rather than increase monthly payments, in order to protect borrowers and maintain the quality of their loan book.

We estimate that Equity Bank will report earnings per share of Kshs. 3.53, a 16.5% increment from last year.

We remain neutral with a bias to negative on equities given the significantly lower earnings growth prospects for this year. The market is now purely a stock pickers? market, with few pockets of value.

All prices in Kshs unless stated




Price as at 16/10/15

Price as at 23/10/15

w/w Change

Target Price

Dividend Yield

Upside/ (Downside)












Standard Chartered































































Housing Finance


















CfC Stanbic









National Bank








*Target Price as per Cytonn Analyst estimates
**Upside / (Downside) is adjusted for Dividend Yield
Accumulate ? Buying should be restrained and timed to happen when there are momentary dips in stock prices.
Lighten ? Investor to consider selling, timed to happen when there are price rallies
Data: Cytonn Investments


Note that this past week we were buyers of both KCB and Equity Bank for our investment portfolios and we suggest investors look to buying banking stocks for long-term.

Private Equity

Catalyst Principal Partners have increased their shareholding in Jamii Bora Bank to 11%. Catalyst Principal Partners first invested in Jamii Bora in 2014 when it acquired an undisclosed stake for an undisclosed amount. Catalyst Fund 1 is a USD125 million Eastern Africa focused private equity fund that invests in emerging and mid-sized companies with strong growth and profitability prospects, and strong alignment with experienced management teams. The fund focuses on the following sectors (i) consumer goods and retail, (ii) financial and business services, (iii) industrials, manufacturing and value-add processing, (iv) technology & telecommunications, and (v) healthcare & education services. The East Africa financial services industry has continued to remain attractive to private equity players. International Finance Corporation and CDC Group plc recently invested USD 24 million to acquire a 5% holding in Tanzania?s CRDB Bank, valuing the bank at USD 480 million and a PBV multiple of 2.3x.

We reiterate our bullish stance on PE as an asset class, particularly in financial services, driven by:

  1. The abundance of global capital looking for opportunities in Africa;
  2. Attractive valuations in private markets compared to public markets, and;
  3. Better economic growth in Sub Saharan Africa as compared to global markets.

Real Estate

The Nairobi Securities Exchange became the 4th African bourse (behind South Africa, Nigeria and Ghana) to launch a Real Estate Investment Trust (REIT) market, in what coincided with the opening of the Stanlib Fahari I-REIT public offer. The Stanlib Fahari I-REIT public offer, to be issued at a minimum subscription of Kshs 20,000 (1,000 units) and a nominal value of Kshs 20 each will close on November 12th. This offer is to an unrestricted initial public offer, hence the waiver not to be issued solely to professional investors, where the minimum issue price should be at least Kshs 5 mn. The offer will then go through an allotment process, with a subsequent listing of units on the NSE. Stanlib Fahari I-REIT is expected to target properties with attractive rental income and capital gains, giving investors exposure to a reliable and growing return profile in the long-term.

This is a very positive and historic step by both Stanlib and the regulator and if well executed, should both deepen our capital markets and give access to retail investors seeking real estate exposure.

The US has the world?s most advanced REIT market in the world. In Africa, growth in this market has been limited by the absence of enabling legislation. South Africa has traded in REITs for the last 10 years, while Ghana has had access to REITs since 1994 and Nigeria since 2007. Like any other listed security, its future value will be determined by market dynamics. REITs are expected to create liquidity, meaning unit-holders can sell their holdings or buy more.

We applaud the I-REIT offering by Stanlib for various reasons:

  1. Real estate investment in Kenya has always been out of reach from the retail individual. It has traditionally been done through one?s own development or through partnership with a developer to provide equity, which have required vast sums of money. The minimum offering of this REIT being Kshs 20,000 will allow retail investors to access the returns available in this attractive sector, including both rental income and capital appreciation, which they could not before;
  2. REIT?s are a more tax efficient method of investing in real estate, and allow investors to reap the benefits of this asset class in a more transparent manner in terms of taxation;
  3. This is a positive step towards deepening of the Capital Markets in Kenya, and diversifying the availability of assets, which one may purchase on the exchange to derive return. In addition, this comes after the Nairobi Securities Exchange introduced the NSE 25 Index, meant to serve as a base for derivatives in the market.

However, issues remain which need to be addressed:

  1. We are yet to have confirmation on which assets Stanlib will be purchasing with the REIT proceeds, and the yield expectations for each asset, in order to make an informed recommendation on participation. The expected 14% per annum total return needs to be broken down into the components of yield and capital appreciation. We would be buyers if the yield component was about 8% per annum, with the balance of return coming from expected capital appreciation;
  2. Steps need to be taken by the CMA and the issuer of the REIT, Stanlib, to ensure sufficient investor education prior to completing the offering, as the minimum investable amount of Kshs. 20,000 is a retail offering.

According to Global Cities: The 2016 Report, Nairobi has been placed on the list as one of the 5 cities to watch based on the booming retail sector in the country. The report indicates that around 1.8 million sq. ft. of modern shopping mall space has opened in 2015. Given that the mall stock initially totalled 980,000 sq. ft., this amounts to a revolution in the city?s retail experience, which matches the huge economic and demographic changes that have unfolded in Kenya. However, we would now be cautious on additional mall investments given the amount of space coming into the market.

Focus of the Week: The Interest rates environment in Kenya

Interest rates on Government securities in Kenya have been on a steep upward trend and we have also seen the high rates passed on to bank customers. In a report by Business Daily this week, some customers have had as high as 12% revision in their bank rates and some being charged high rates of up to 27%.

After covering the impacts of a high interest rates environment on the Kenyan economy, and the corresponding impact on investments in our Cytonn Weekly Report #38; this week we turn our attention to the key factors that determine the direction of interest rates in an economy, and which of these factors resulted into the high interest rates environment we presently have in Kenya, and finally we address what we need to do in terms of policy action to contain the volatile interest rates environment.

Interest rates in an economy are determined by the below factors:

  1. Monetary Policy Action: The Central banks? in most economies determine whether the economy needs either a loose or tight monetary policy depending on the economic cycle. During the period of loose monetary policy/expansionary fiscal policy, high liquidity levels and a lower interest rates environment characterize the money market. On the other hand, periods of tight monetary policy/contractionary fiscal policy are characterized by low liquidity levels in the money market, which result into a high interest rate environment.
  2. Government Borrowing: Most economies with unbalanced fiscal budget, where tax collection is not sufficient to meet expenditure targets, usually resort to either domestic or foreign borrowing to finance their budget deficits. In instances where the government is aggressively borrowing from the domestic market, and also willing to pay a premium due to the demand by the government to finance the budget, such activities result into high interest rates on government securities, which in turn affect the base lending rates.
  3. Inflation Rates: During a time of high inflation pressures, and especially demand push inflation, where inflation is caused by excess demand which is not met by supply, most policy decision makers respond by actions aimed at mopping up the excess liquidity in the market. This results in tight liquidity in the money market, and hence an increase in interest rates.
  4. Levels of Liquidity: The traditional meaning of liquidity is the amount of money in circulation. During the time of economic stability, which is characterized by clarity in the direction of most macro-economic indicators, most investors have a high appetite for risk, resulting into high liquidity in the market. On the contrary, during an economic period characterized with volatilities and uncertainty in the investment environment, very few investors are willing to take the risk and this results into low liquidity levels in the market. The resulting effect is that investors demand a higher premium for their money, which leads to high interest rates.
  5. Exchange Rates: This is the rate at which a unit of domestic currency trades against a foreign currency. For most economies this is measured against the US Dollar. During the time of weakening domestic currency, most economies, and especially net importer economies, respond by mopping up excess liquidity, which leads to tight liquidity in the money market and hence an increase in interest rates. This attracts foreign investors, which results into improved demand and strengthening of the local currency.

Interest rates environment in Kenya have witnessed volatility over the last calendar year, with a sharp increase in rates being the normal trend. This can be evidenced by the 91-day Treasury bill rising from a rate of 8.6% in December 2014, to 22.5% in last week?s auction. In tandem with this, the Central Bank lending rates have also increased by 300 basis points to stand at 11.5%. This high interest rates environment was as a result of;

  1. Aggressive Government Borrowing: According the fiscal budget for 2015/16, the Government is expected to borrow Kshs 219 bn from the local market. The Government has been lagging in terms of its borrowing locally, which was brought to the forefront during the first quarter for the fiscal year, where the total domestic borrowing was in fact a net repayment of Kshs 14.4 bn. Of keynote is that the government is carrying out mega infrastructural projects such as the Standard Gauge Railway, and concurrently also facing labour wrangle challenges, which may result into an increase in recurrent expenditures towards the civil service sectors. As a result of this and in a bid to step up its borrowing and meet its obligations towards financing the budget, the Government has been borrowing expensively from the domestic market, which has seen yields increase drastically, resulting in the 91-day T-bill rates increasing to 22.5% as at October 2015.
  2. Unrealistic Tax Revenue Estimates: The current year budget was based on aggressive GDP estimates of about 7%, yet our Cytonn estimate is a GDP growth of about 4.8% for the current year, way below the 7% treasury budget estimate that informed revenue estimates. Actual tax collections have been below target. Revenue estimations below budget coupled with aggressive spending means more borrowing, which can only increase rates
  3. Policy Disconnect: Both monetary and fiscal policy are supposed to complement each other; however, what we have seen in Kenya, and especially during this fiscal year 2015/16, is two policies have been moving in opposite directions. Monetary policy, which is the role of Central Bank of Kenya through the Monetary Policy Committee, has taken a tight stance, while the fiscal policy, which resides with the Treasury, is on an expansionary mood as they continue with significant expenditure. The disconnect between the two in public policy has resulted into high interest rates in Kenya, due to interest rate uncertainty.
  4. Liquidity Levels: the money market has been relatively illiquid as most investors tie in their funds in higher yielding assets. With the uncertainty in the interest rates environment observed in Kenya recently, and going with the meaning of liquidity highlighted above, there is low appetite for risk as few investors are willing to undertake risk. This results into these investors demanding higher premium, which leads to a high interest rates environment.
  5. Currency support: Given the expectation that interest rates were to increase in the US, investors started moving their funds to safer currency i.e. the dollar. This lead to a significant depreciation of most emerging market currencies and Kenya was not spared. To maintain Kenya as an attractive investment destination, the central bank increased the CBR by 300 basis points to 11.5%, and also a series of mop up activities to reduce the supply of Kenya Shilling in the money market. Though these policy actions have managed to stabilize the shilling, which is currently trading at Kshs 102.2 against the dollar, and as highlighted above in the fixed income section, the Kenya Shilling remains fundamentally weak. The Government?s appetite for foreign denominated borrowing could further worsen the fundamental status of the shilling.

Of key to note is that despite the above factors contributing to high interest rates environment in Kenya, inflation rates have remained relatively low, within the CBK?s target of 2.5% - 7.5%, standing at 5.9% as for the month of September 2015.

So, looking at the above, inflation is not the issue since it is within target, monetary policy / CBK is not the issue since the core mandate of price stability is under control; the key issues are fiscal policy, which points to treasury and economic management of public finances by the executive.

Consequently, a number of key policy issues need to be addressed in order to contain the current interest rates environment:

  1. Harmonization of Fiscal and Monetary Policy: There is a disconnect between monetary policy, which is the mandate of CBK, and fiscal policy, which is the mandate of the Treasury. MPC on one hand is championing for price and interest rate stability, whereas from the auction results, it is evident that the Treasury has a significant appetite for expensive funds and is pursuing an expansionary fiscal policy, which is highly dependent on borrowing. This has placed the Central Bank with the delicate balancing act of maintaining price stability and supporting favorable conditions for economic growth, while at the same time acting as the agent of Treasury to collect funds by issuing government securities. These policies need complement each other and should always be in harmony. Significant disconnect between monetary and fiscal policy creates interest rates uncertainty and investors will demand a premium for the uncertainty.
  2. Contain Government Expenditure: With the new devolved system of governance, there needs to be a check on the government spending, both at the county and Central government level. The current aggression in borrowing by the government is aimed at financing its operations at both levels of government. It would be important to limit expenditure to the core activity of the government and reduce wasteful spending.
  3. Contain Corruption: We need to reduce corruption levels at both levels of government to reduce on cash leakage, which ends up being too expensive because out flows based on corruption have no corresponding productive returns.
  4. Moderate Infrastructural Project: The government is currently carrying out mega infrastructural projects such as the SGR and LAPSSET project, which are very expensive. Though these projects come with advantages such as opening up the transport corridors for easier movement of goods thus facilitating trade, the financing factor modalities of such mega projects need to be relooked at. The projects can be spaced out and at the same time look for cheaper ways of financing them other than higher reliance on debt.
  5. Revenue Collection: The government is reported to have missed revenue target for the first quarter of fiscal year 2015/16. In order to reduce the negative impact of high borrowing from the local market, the government needs to enhance revenue collections to reduce over reliance on domestic and foreign borrowing to finance the budget. One of the ways to do this is through the expansion of the tax net to include the informal sector as well.

To address the country's rate challenges, we need to be candid about the key issues. A comprehensive and objective analysis points to a need to enhance executive management of public finances before the rate environment causes irreparable damage to our economy.

Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.