The International Monetary Fund (IMF) now says Kenya’s interest rates capping law in unsustainable in the long term.
“Kenya’s economy has continued to perform well. Real GDP growth increased in 2016, inflation remains within the target range, and the current account deficit has narrowed. The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth. They also complicate monetary policy and adversely affect banking sector profitability, especially for small banks,” Tao Zhang, Deputy Managing Director and Acting Chair, said.
He added that although the adverse effects of the controls are manageable in the near term, if maintained, they could potentially pose a risk to financial stability.
|”Therefore, it is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector,” he added.
He made the remarks following the IMF Executive Board’s conclusion of the first review of Kenya’s performance under the programme supported by the Stand-By Arrangement (SBA) and an Arrangement under the Standby Credit Facility (SCF) on Wednesday.
The 24-month SBA/SCF with a combined total access of about US$1.5 billion was approved by the IMF’s Executive Board on March 14, 2016.
However, the IMF says Kenyan authorities have indicated that they will continue to treat both arrangements as precautionary, and do not intend to draw on the SBA and SCF arrangements unless exogenous shocks lead to an actual balance of payments need.
Following the review, the Bretton Woods institution said the envisaged fiscal consolidation that targets a 3.7 percent of GDP deficit by 2018/19 is critical to maintain a low risk of debt distress while preserving fiscal space for development priorities.
“Continued public financial management reforms, aimed at upgrading the efficiency of public spending and expenditure control, are key to strengthening fiscal policies and institutions,” it added.
“Establishing a formal interest rate corridor remains a priority for strengthening the monetary policy framework. While adoption of such a corridor has been delayed given the uncertainties created by interest rate controls, it will be important to conduct liquidity operations to realign interbank rates to the policy rate as economic conditions permit,” it added.
“The authorities are taking actions to strengthen financial stability and to enforce reporting requirements. These include steps to implement the action plan on banking regulation and supervision to enhance capacity to monitor credit and liquidity risks and limit insider lending,” said the Executive Board.
“Continued improvements in macroeconomic statistics and acceleration of governance reforms will be essential to reinforcing efficiency, transparency, and accountability.”
The IMF’s recommendation is, however, likely to be resisted by MPs who have for long accused lending institutions of failing to reduce the cost of credit in like with the Central Bank of Kenya rate.
The Banking (Amendment) Act 2016, which was sponsored by Kiambu MP Jude Njomo (see cover photo), obligates banks to charge a maximum of four percentage points above the CBR, which currently stands at 10 per cent.
On the other hand, the minimum interest on fixed-term deposits was fixed at 70 percent of the CBR, further eating into profit margins of the lenders.
President Uhuru Kenyatta, who signed the Bill into law against the advice on National Treasury and CBK mandarins, said the government would closely monitor its effects even as he accused banks of forcing his hand by declining to respond to market trends.