EAC central bankers scramble to contain possible economic slump

Monday December 16 2019

East African central banks have turned to monetary easing policies by lowering interest rates and cash reserve ratios (CRR) in an attempt to boost private investments and spur economic growth.

East African central banks have turned to monetary easing policies by lowering interest rates and cash reserve ratios (CRR) in an attempt to boost private investments and spur economic growth. PHOTO | FILE | NATION MEDIA GROUP 

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East African central banks have turned to monetary easing policies by lowering interest rates and cash reserve ratios (CRR) in an attempt to boost private investments and spur economic growth.

Economists say the policy shift is in line with the current global trend where central banks are cutting rates to stimulate growth amid weakening global conditions.

“I believe it is because of the slowing economic growth locally and the concerns about the global economic slowdown attributed to factors such as trade wars. The Monetary Policy Committees (MPC) hope that the reduced rates will spur better economic growth,” Fred Omondi, a tax and legal leader at Deloitte East Africa told The EastAfrican.


Economists at the FocusEconomics say that the faster than expected deterioration in global conditions presents a huge risk to East African Community’s growth prospects.

“Externally, a faster-than-expected global economic slowdown remains a major risk to the outlook,” they said.


The World Bank expects EAC countries’ average gross domestic product growth to decline to 5.9 per cent this year from six per cent last year, largely due to the turbulent conditions in global markets with Kenya, Uganda, and Rwanda recording moderate growth rates relative to last year.

Tanzanian and Burundian economies are expected to grow faster this year than in 2018, according to the Bretton-Woods institution.

On the other hand, the National Bank of Rwanda projects EAC economies’ growth to fall to 5.3 per cent in 2019 from six per cent in 2018 before rising marginally to 5.4 per cent in 2020.

Last week, the Bank of Uganda maintained its Central Bank Rate (CBR) at nine per cent, arguing that a combination of persistent global geopolitical tensions and uncertainty around trade policies and softening domestic private sector investment spending are likely to generate headwinds to economic growth.

“In addition, public sector financing needs have risen amid limited fiscal space, raising the prospect of further pressure on the domestic borrowing costs,” said Governor Prof Emmanuel Tumusiime-Mutebile.

According to Prof Tumusiime-Mutebile, the moderation of domestic economic growth has been driven by both slowing global activity and domestic factors that have seen a slowdown in tourism receipts during the first 10 months of this year.

Last month Kenya’s Central Bank lowered its CBR by 0.5 percentage points to 8.5 per cent from nine per cent to unlock credit to the private sector after the economy slowed down during the second quarter (April-June), growing at a rate of 5.6 per cent compared 6.4 per cent growth in the same period last year.

Kenya’s economic growth was largely stifled by a slowdown in the agriculture, manufacturing and transport sectors.

Private sector credit growth declined to 6.6 per cent in the 12 months to October, compared with seven per cent in September.

The decision also came after the government abolished interest rate controls that fixed lending rates at four percentage points above the prevailing Central Bank Rate.

In Rwanda, the Monetary Policy Committee convened on August 14 and decided to maintain the benchmark lending rate at five per cent to enhance credit to the private sector.

“Rwanda’s aggregate demand in 2019 is expected to continue improving supported by the accommodative monetary policy and a fiscal stimulus,” said National Bank of Rwanda Governor John Rwangombwa.

“Downside risks could potentially come from the global economy owing to intensified US-China trade tensions and prolonged uncertainties around Brexit.”


The Bank of Tanzania in June reduced the proportion of deposits that banks are required to hold with the regulator to seven per cent, from eight per cent, effective July 1 to accelerate growth of credit to the private sector and thus stimulate economic growth.

The last time the bank lowered the statutory minimum reserve requirement was in March 2017 when the regulator cut the ratio to eight per cent from 10 per cent.

Usually Tanzania does not use CBR to regulate money supply but uses the CRR — the proportion of deposits that banks are supposed to keep with the central bank as reserves.

By lowering the CRR you increase the amount of money that banks can lend to the private sector and vice versa.

In October this year the US central bank cut interest rates for the third time in four months with a view to boosting an economy that had grown by a paltry 1.9 per cent in the third quarter of this year.

The Federal Reserve lowered the interest rates by 25 basis points to a range of 1.5 per cent to 1.75 per cent on October 30.

“Although central banks in major advanced economies have adopted accommodative monetary policy to support growth, the current uncertainties may result in increased volatility in the global financial markets,” said Kenya’s Central Bank Governor Dr Patrick Njoroge.

According to Uganda’s State of the Economy Report released in September, declining trade and heightened uncertainty have contributed to lower global growth. 



Globally, central banks are easing monetary policy to support their economies in the wake of emerging risks related to escalating US tariff actions, currency wars, retaliation by trading partners, no-deal Brexit, abrupt shifts in risk sentiment and disinflationary pressures.

Global growth is projected to be lower at 3.2 per cent for 2019 and 3.5 per cent for 2020, a 0.1 percentage point downward revision compared with April 2019 forecasts.

Commodity prices have moderated this year, so far and remain relatively volatile owing to the impact of the still-unfolding US tariff actions.

Weaker crude oil prices have been mainly driven by concerns about lower global economic growth prospects and the impact from the US-China tariff war.