Poverty in Kenya
Poverty in Kenya research papers often look at the harm that inflation has done towards the economty of Kenya. Kenya provides an example of a non-CFA nation that has experienced chronic inflation and increases in money supply in the past two decade. In the later half of the twentieth century, the nation was characterized by chronic corruption, with an economy operated for the benefit of politically well-connected individuals. In some years, inflation ran as high as 100%.
The cause of poverty in Kenya is traced back many years. Recently, the currency was semi-pegged to the dollar until 1993, but this did not prevent the frequent devaluation of the currency by the government. The government engaged in heavy borrowing in the international market in order to bolster its domestic spending. The majority of this borrowed money went towards social programs aimed at currying favor with the people and to reduce potential social turmoil. In order to repay these loans and to continue the high level of social welfare, the government engaged in heavy deficit spending. This resulted in a significant increase in the money supply, with the government creating new money virtually at will. This fiat currency was not backed by any tangible asset, but rather by the faith and credit of the Kenyan government. As a result, external currencies such as the dollar and the pound sterling became more valued as a medium of exchange by Kenyans because of the stability of the currencies.
At the same time that the government was pursuing these fiscal policies, the specific agricultural conditions in Kenya contributed to inflationary pressures. The nation is very dependent on the maize crop as one of the primary food products consumed by the population. In many years, there was a scarcity of maize due to draught, which caused the market price of the product to rise. The people were willing to pay these higher prices, which in turn affected other aspects of the economy. The government did not institute any type of meaningful agricultural reform program or used the somewhat more controversial method of wage and price controls to relieve this internal structural inflationary pressure. This type of inflationary force based on commodity shortages is present in the majority of African nations.
Because the Kenyan government was heavily in debt and its currency relatively worthless, the government raised interest rates as high as 70% in order to attract investors to the nation’s public obligations. This use of interest rates was not intended to reduce inflation or decelerate the growth in money supply as it was in the CFA nations, but rather aimed at attracting new funding to allow the government to continue its substantial level of deficit spending. In reality, however, even Kenyans with substantial assets kept their funds abroad for fear that the excessively high inflation rate would erode their wealth. Because the international marketplace recognized the substantial weakness of the currency, this high interest rate attracted only short-term speculators. At the same time, it prevented the formation of local capital in Kenya, since the government attracted the majority of loan funds at a rate that few businesses could afford to pay. By law, the interest rates charged by banks could not exceed 20%, which operated as a disincentive for banks to loan money commercially when they could obtain a much higher rate from government obligations. In addition, this significantly contributed to inflation by introducing more currency into the Kenyan economic environment in the form of interest payments.
In 1991, the money supply grew by 24%, followed by growth of 35% in 1992 and 31% in 1993. In effect, the amount of currency in circulation in Kenya had more than doubled in only a three-year period. By the simplest perspective of supply and demand in this situation, the increased amount of Kenyan shillings available to purchase a relatively static quantity of goods and services would inevitably resulted in an oversupply of shillings and a decline in their value in the market.
In 1993, the IMF and the World Bank stepped in to break the inflationary cycle afflicting Kenya.
- It imposed a structural readjustment program, which required close supervision of government finances, the privatization of state-owned companies, and the free-float of the nation’s currency.
- The IMF demanded that the nation enact political reforms aimed at curbing corruption.
- The IMF externally imposed regime of fiscal responsibility initially resulted in a general reduction in inflation, which fell to 13% in 1994.
This decline in the inflation rate, however, was relatively short lived, with inflation again increasing after 1995.
The causes of Kenyan inflation remained much the same after the intervention of the IMF. While the structural improvements led to an increase in the efficiency of the government, the desire to use the tool of deficit spending to reward political cronies and maintain social welfare programs continued. While the government agreed in principle with the demands of the IMF to institute political reforms to end corruption, the actual reforms enacted by the nation had little effect on the ability of political insiders to control government distributions (The Big, 38). As a result of the continued fiscal irresponsibility of the Kenyan government, the Kenyan shilling began a precipitous decline in the international market. Interest rates began to creep upwards again, as the government used it as a tool to attract investors toward public debt. The money supply also accelerated dramatically, now increasing approximately 10% a year. The primary mechanism used to increase the money supply was the lowering of the cash ratio requirement for banks to approximately 14%. In effect, this meant that banks could lend amounts 86% more than they had in deposits or other assets.