Standard Chartered Bank chief economist wants interest rate caps abolished.
Kenya’s prospects for better economic growth appear dim as they are bound to be overshadowed by a credit squeeze, ballooning public debt and rising oil prices, a top economist has warned.
Already, 2017 was a tough year when the country’s GDP plummeted to 4.5 per from 5.8 per cent in 2016, due to severe drought and a prolonged electioneering period. This has further dimmed any hopes for growth this year.
Standard Chartered Bank chief economist for Africa and Middle East, Razia Khan, contends that Kenya should expect a modest economic recovery this year of 4.6 per cent and 5.4 per cent in 2019, owing to factors that make it difficult for the government to undertake any tangible fiscal consolidation.
In particular, the inability of the Central Bank of Kenya (CBK) to stimulate credit growth to the private sector through the Central Bank Rate is having a negative impact on the economy as commercial institutions opt for safe lending options mainly in government securities.
Last week, CBK retained its benchmark lending rate at 10 per cent in a market where private sector credit growth has sunk to 2.4 per cent of GDP from a high of 25 per cent before the introduction of the interest rates capping regulation in 2016.
The interest rate cap on loans is set at four percentage points above the base rate.
“Kenya has lost its growth dynamism by an interest rate cap structure that doesn’t ultimately serve its economic needs,” said Ms Khan while presenting Standard Chartered Economic Outlook for Kenya.
She added that Kenya needs to abolish the regulation to avoid the current situation whereby the government has crowded the private sector out of the credit market as banks opt for risk-averse lending.
“The regulation has led to risk aversion and the tightening of lending standards as banks look for alternatives in government securities which are safe options,” said Ms Khan.
As Kenya continues to grapple with the impact of interest rates capping on the economy, other East Africa Community member states are at a crossroads on whether to follow in its footsteps or let market forces dictate the rates.
While Tanzania is torn between introducing the law, Uganda and Rwanda have outrightly ruled capping interest rates.
The open market policy in other EAC countries is behind the high rates of credit growth to the private sector, which as at last year stood at 7.2 per cent to GDP in Tanzania and 5.9 per cent in Uganda last year.
While a credit squeeze is bound to continue stifling private sector vibrancy in Kenya, the rising public debt is another dark cloud that will hover over the economy this year.
According to Ms Khan, Kenya’s public debt is gravitating towards the 60 per cent to GDP, mark, which could compromise the country’s ability to borrow on the international market.
“As we see a tightening of global conditions, investors are likely to be more discriminating about the individual credit risk posed by different countries,” she said.
Apathy of investors
She added that Kenya could face the apathy of investors considering that the country is struggling to undertake fiscal consolidation.
Such a scenario is set to complicate Kenya’s ability to repay the $2 billion Eurobond that is set to mature in 2024. It is widely expected the country will resort to borrowing, including floating another Eurobond to settle the debt.
Last year, Kenya’s gross public debt stood at $40.4 billion, compared with $37.6 billion in 2016.
This has forced the country to spend at least a third of its annual revenue on debt financing, making it hard to fund development projects.
According to the 2017 Budget Outlook and Review Paper, a staggering $2.6 billion was spent on interest payments last year. The paper shows that public debt to GDP ratio was expected to rise to 59 per cent from a previous target of 51.8 per cent.
Crude oil prices
Another headwind that is going to hit the Kenyan economy this year is rising crude oil prices on the international market that have hit $70 per barrel.
While Standard Chartered forecasts the prices will settle at around $61 per barrel, the high prices will exert pressure on the current account deficit, estimated at 6.2 per cent of GDP currently.
CBK expects it to narrow to 5.4 per cent in the course of the year largely due to lower food imports, lower imports during the second phase of the standard gauge railway project (Nairobi-Naivasha), steady growth in tea and horticultural exports, strong diaspora remittances and continued growth in tourism earnings.
However, the expected increase in Kenya’s fuel import bill which has dropped from $2.1 billion in 2015 to $1.8 billion in 2016 could have a negative impact on the economy.