CBK sets growth at 6pc amid interest rate law concerns - The East African

CBK sets growth at 6pc amid interest rate law concerns

Monday January 29 2018

A busy section of the Nairobi central business

A busy section of the Nairobi central business district. Central Bank says the interest rate cap is holding back economic growth. FILE PHOTO | NATION 

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Kenya’s economy is forecast to grow from around five per cent in 2017 to 6.2 per cent this year. However, Central Bank Governor says the interest rate cap is holding it back.

The projected growth for 2018 is 0.7 per cent higher than the World Bank’s forecast of 5.5 per cent, but is within the Treasury’s estimate of above six per cent.

At a press briefing after the Monetary Policy Committee meeting last week, Central Bank of Kenya Governor Patrick Njoroge said the country’s economic growth would be boosted by positive fiscal policy, review of interest rate cap law (which will strengthen the banking sector), commencement of direct flights to the US and ease of doing business.

The CBK wants a repeal of the law capping interest rates, which it says is having a negative effect on the economy. According to Dr Njoroge, the controls have resulted in a credit crunch as banks ration credit, slowing down the economy.

“The interest rate caps have been acting as a brake to the economy.... This is something we need to deal with so as to support rather than inhibit economic dynamism,” said Dr Njoroge.

Shrinking credit

However, Treasury Permanent Secretary Dr Kamau Thugge said when the cap was effected in September 2016, credit to the private sector was already shrinking.

“The private sector credit cannot be fully explained by the caps, it was at four per cent when the rate cap law came into effect,” said Dr Thugge during a recent public forum in Nairobi on the proposals for the 2018-2019 financial year.

He added that the slowdown in credit growth was not unique to Kenya as it was also happening in Uganda and Tanzania that have not adopted a cap on interest rates. 

The interest rate cap was set at four percentage points above the central bank’s benchmark rate, to limit the cost of borrowing from commercial banks.

Lenders have been accused of engaging in blackmail and economic sabotage to force through amendments to the law.

It is expected that tourism and export business will be boosted by the direct flights to the US, while a decrease in transport costs of exports through the use of the standard gauge railway will also boost growth.

However, a higher oil import bill is expected due to rising international oil prices.

Oil prices

According to the World Bank, oil prices are forecast to rise to $56 a barrel in 2018 from $53 last year, as a result of steadily-growing demand, agreed production cuts among oil exporters and stabilising US Shale oil production.

Central Bank said the food import bill is expected to almost double to 2.9 per cent up from 1.5 per cent last year.

The country will however import less chemicals, manufactured food and machinery this financial year.

Financing projects

Dr Njoroge also asked the government to consider other options of funding projects apart from debt, saying even though he sees the current public debt level as sustainable, it could become difficult to depend on borrowing in future to finance huge infrastructural projects.

“At this point we do not see our public debt level as being unsustainable. That is not the concern today. A lot of the borrowing was for infrastructure investment of which we see a large deficit,” said Dr Njoroge.

He added: “The issue is that the room for borrowing to finance such projects is narrowing. We need alternative financing for these projects.”
He asked the government to substitute borrowing to finance infrastructure projects with public private partnership in order to cut the growing public debt. 

Latest CBK data indicates the government’s internal debt stood at Ksh2.22 trillion ($21.7 billion) in November last year, while external debt stood at Ksh2.31 trillion ($22.2 billion) in September.

Base lending rate

While retaining the base lending rate at 10 per cent, the Monetary Policy Committee said there was room for an accommodative monetary policy in the near term.

Price growth in Kenya slowed to 4.5 per cent in December, the weakest advance since May 2013. This came as food inflation slowed after drought eased.

The MPC noted “that inflation expectations are well anchored within the government target range” of 2.5 per cent to 7.5 per cent.