Borrowers avoid new loans over high interest rates
IMF’s Domenico Fanizza (right) with the Fund’s resident representative Ragnar Gudmundsson during a press briefing at Serena Hotel, Nairobi, on September 25, 2012. Photo/DIANA NGILA
What you need to know:
Rate of uptake of new loans has plummeted from December’s pace of 31 per cent, as a steep increase in the CBK’s policy rate doubled the average cost of loans.
The monetary policy tightening was implemented to curb inflation by checking growth in money supply that was not backed by real production.
High interest rates have nearly stagnated the growth of lending by banks, pointing to hard times ahead for the lenders who are likely to record a sharp drop in interest income.
International Monetary Fund (IMF) resident representative Ragnar Gudmundsson has said the rate of uptake of new loans has plummeted from December’s pace of 31 per cent, as a steep increase in the Central Bank of Kenya’s policy rate doubled the average cost of loans.
“Credit growth has slowed down due to the tight monetary policy. It now stands at 13 per cent,” said Mr Gudmundsson at a press briefing on Tuesday evening.
The value of loans lent by Kenyan banks has stagnated at Sh1.2 trillion for nearly one year, reflecting a slowdown in the sector.
The monetary policy tightening was implemented to curb inflation by checking growth in money supply that was not backed by real production.
The IMF mission, led by Domenico Fanizza, visited Nairobi from September 12 to 25 to carry out the fourth review under a three-year extended credit facility (ECF) approved in January 2011.
It recommended that CBK eases interest rates gradually and maintains room for action in the event of economic shocks.
The Monetary Policy Committee (MPC) of CBK has recently lowered the policy rate to 13 per cent from 18 per cent in two successive cuts.
The IMF felt that reduction of the Central Bank Rate (CBR), the policy tool, should be such that it takes cognisance of the risks posed by food and international oil prices.
“The extent of changes in the policy rate should be gradual because there are risks to the macroeconomic outlook. We have seen international prices of maize and wheat rise. Oil prices could rise since there is a possibility of instability in the Middle East,” said Mr Fanizza.
Good implementation
The mission concluded that Kenya implemented the programme well and would recommend to the IMF board the release of another Sh9.2 billion ($110 million) to bring the total so far given to the country under ECF to Sh38.6 billion ($460 million).
In January last year Kenya sought Sh63.8 billion ($760 million) under the ECF programme.
“CBK’s monetary policy stance aims at cementing low inflation expectations while exploiting the scope for further gradual easing. In a context of high international food prices, particular attention will need to be paid to emerging inflationary risks,” said a statement released by the Bretton Woods institution after the mission.
Mr Fanizza’s statement came in the wake of analysts’ warning that the pace of reduction of the CBR should be slower going forward to avoid having to go back to the same problems experienced at the height of the fall of the Kenya shilling last year.
Two weeks ago, Standard Chartered head of Africa research Razia Khan said the MPC should ease the policy rate such that it is not below eight per cent by January next year.
Other analysts have noted the importance of easing the interest rate, so far, in the light of slow economic growth in the first quarter and possibly in the second quarter of this year.
“We see the lower rate as also intended to spur growth in the economy, which grew by only 3.5 per cent year-on-year in the first quarter of 2012. It is likely that the second quarter saw a dismal performance especially with credit growth falling behind target,” said Standard Investment Bank in a recent note to investors.
The IMF mission said the economy was likely to grow by five per cent or above this year on the back of regional trade, pick up in investment flows, domestic demand for goods and services, higher agricultural output, as well as control of inflation to single digit levels.
The economy is expected to also grow by a similar proportion in the coming year, as long as the General Election is peaceful and credible.
“Looking ahead, economic prospects for 2012 and 2013 remain favourable. In particular, continued regional integration, further trade diversification to new markets, and a pick-up in investment flows will allow Gross Domestic Product (GDP) growth to exceed five per cent in both years amid improved private sector confidence,” said Mr Fanizza in a statement following the review.
