Jimnah Mbaru, a renowned investment banker working with Dyer and Blair provoked a discussion this month on twitter when he tweeted, “The Central Bank of Kenya should reduce the current cash ratio from 4.5% to 0%.” He argued that this measure will result into increased liquidity within banks with a reduced cost of credit. In Jimnah Mbaru’s view, banks would increase lending to private sector at lower interest rates. The investment banker is of the opinion that the existent threat of inflation with such a fiscal policy is not a concern at the moment.
I find Jimnah Mbaru’s opinion to be good for a country that is grappling with a high rate of unemployment. When the mission is to fix unemployment of both people and resources, inflation becomes of less concern. The Philips Curve in economics proves this by displaying inflation and unemployment as indirectly proportional variables when placed on the Cartesian plane. However, the educated opinion of Jimnah Mbaru received sufficient criticism from other scholars and public intellectuals in Kenya. Of top concern is whether commercial banks will utilize available cash to lend to the private sector. This question is raised in the backdrop of a trend where commercial banks in Kenya lend largely to the government of Kenya. To lend to the national government would not be inappropriate if government utilized the funds in capital resources other than repayment of external debts that have fallen due.
Dr. David Ndii in response to Jimnah Mbaru’s opinion posed a rhetoric, “a monetary stimulus over and above an 8% of GDP budget deficit or a stimulus running for close to a decade?” While Jimnah Mbaru applies theory of the Philip’s Curve in economics to solve the unemployment question, it remains a paradox how structural productivity problems, external shocks related to Covid-19, crowding out, debt overhang and political uncertainty will be solved by increasing supply of money in the economy through lowering central bank’s current ratio from 4.5% to 0%. A balance between inflation and unemployment needs to be sought where measures taken to reduce unemployment do not adversely affect inflation. The buck stops with the Central Bank Governor, Dr. Patrick Njoroge who also chairs the Monetary Policy Committee.
The writer is a Certified Accountant working with small business owners to deliver business plans that serve their management and financial needs. | firstname.lastname@example.org