As petroleum firms slashed pump prices, with the grain millers following suit, Central Bank of Kenya (CBK) was not to be outdone in this new wave of consumer philanthropy (a word Mr. Speaker loves to hate).

The CBK announced a 0.5% rate cut in the Central Bank Rate (CBR) coupled with a stepping down of cash ratio requirements for commercial banks from 6% to 5%. This was meant to boost liquidity (cash in circulation) and avert the prospects of rising interest rates in the wake of high inflationary pressures that previously obtained.

Not so far off the Governor’s parlor, at the Prime Minister’s office, a scheme was afoot to come up with dual maize flour prices – one for the urbanites and one for the rural folk (read: a price for the rich and a price for the poor) – and this was subsequently effected mainly in the rural areas. Perhaps the CBK can take some inspiration from this to craft a dual monetary policy for the poor and for the rich! Ironically, Kenya is a persistently dual economy given the 80/20 rule, whereby 80% of the productive resources are controlled by 20% of the populace; thus two economies operate in one... a rich man’s economy and a poor man’s economy.

In the rich man’s economy, inflation does not quite bite and when it does, he just passes it down to the consumer and if that is not enough he lays off excess workers. Somehow in the passing of time this trail of rising commodity prices and laid-off workers, finds its way into the convenient depository of the poor man’s economy. Further, the banks must compensate for the reduced interest margins in the rich man’s economy and prevailing inflation by charging higher rates in the poor man’s economy and giving him next to nothing on his deposits. Of course, the bankers will be quick to point out that the informal economy is prone to higher risks of default and thus the need to up the interest on loans but at the end of the day business is about margins.

The budding microfinance institutions are said to be an answer to the financial needs of the poor but zeroing in on their operations reveals that their interest pricing policies are, on many occasions, as ambitious as those of commercial banks. Further, productive capacities are largely dependent on ideas and know how, which are in short supply for the less educated and less exposed participants of the poor man’s economy and as a result financing may not have a multiplier effect in growing these small businesses. Herein, business activity is geared towards survival, a kiosk cum grocery shop here and a barber shop there, something to put bread on the table. Indeed, it is only a little business that trickles down from the rich man’s economy to the poor man’s economy given that most large to medium sized firm’s do not significantly engage smaller businesses – big business talks to big business. Consequently, most of the smaller enterprises never grow but merely persist with the sole purpose of providing sustenance to their owners, more so, since they do not have a direct plug in into big business they are doomed to stay frozen in the vicious hand-to-mouth cycle of the poor man’s economy.

Indeed, the dual economy is alive and kicking. It has not come about by dint of some old fashioned caste system but rather it is brought about by the existence of two economic systems operating within one; more commonly known as the formal and informal economies. The two economies operate side by side and hardly interact with the majority of Kenyans circling in the orbit of the informal economy. Many Kenyans do not still have bank accounts, although banks like Equity have alleviated the situation, and as a result their association to the formal economy is very limited. In addition, a large portion of the population’s subsistence is still based on traditional farming with limited instances of commercialization.

Now that dual pricing has found its way into commodities, the existence of the two economies is more visible than ever before. At least the Government has taken cognizance of this fact, as evidenced by the setting of two separate prices for maize flour, even though the solution advocated may not be sustainable in a free market economy. The CBK can take a cue from this, to craft separate policies for the formal and informal economy because the impact of current policies is constrained to the formal sector and may not have wide reaching effects on the informal economy. As it is, there is barely any meaningful intercourse between the two economies hence the growth of the rich man’s economy does not lead to the uplifting of the poor man’s economy with the welfare of the poor remaining stagnant if not in decline. This is why the common man is never ecstatic about positive economic growth prospects – they are rarely felt in his pocket.

Accordingly, if the CBK adheres to the current policies, it will impact 80% of the economy and a mere 20% of the population while the majority of the population is left to grapple with millennium development goals. On the other hand, the CBK’s realm of authority is dependent on its influence on money and subsequently the less the monetary activity in an economy the less the influence; so we may just have to leave the fate of the informal economy in the hands of the less than philanthropic politicians…after all they did get their electoral mandate from the struggling majority. Then again, the majority of the politicians live on the cream that is skimmed off the rich man’s economy…