Banks lower growth forecasts on high interest rates

Commercial banks have lowered their economic growth projections due to high interest rates and fuel prices.

In a survey by the Central Bank of Kenya (CBK), the lenders said they expected a 5.55 per cent growth, down from the six per cent projected at the beginning of the year.

“The July 2015 Survey shows that banks had revised downward their expected growth due to expected increase in the cost of credit with the increase in interest rates; expected rise in fuel prices due to taxation measures which may exert pressure on manufacturing cost; and, sluggish recovery of the Eurozone economy which may affect horticultural exports and tourism,” reads the CBK report.

The 5.55 per cent projection, if realised, would still be higher than the 5.4 per cent growth recorded last year. This year’s growth is pegged on increased investor confidence due to improved security and higher foreign inflows following the recent visit by American President Barack Obama.

The bankers’ projection is however lower than the 6.5 per cent by the International Monetary Fund (IMF) and the government. The World Bank has predicted a six per cent growth.

Interest rates are expected to continue on an upward trend due to increased local borrowing by the government combined with the CBK’s efforts to support a weakening shilling.

High financing costs will force investors to shelf expansion plans. Banks are currently charging an average interest of 15.75 per cent for their loans as per CBK data. However some banks were quoting rates of 22 per cent for business loans and 24 per cent on personal loans.

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Analysts expect the interest rates to continue on an upward trend, which could further hurt the business environment.

“This is informed by the planned amount of domestic borrowing this fiscal year, higher inflation levels and the weakening currency,” said Stanlib research team.

Stanlib expects cost of goods to rise in the next three months due to a weak shilling and rising oil prices resulting in inflation surpassing the government target of 7.5 per cent.

IMF has however defended its prediction citing rising infrastructure investments, lower energy prices, and a dynamic private investment environment.

“Kenya’s economic performance has remained satisfactory despite headwinds from rising volatility in global markets and domestic security challenges,” said IMF in its latest technical review of the economy.

The government had promised an economic growth of above 10 per cent on its election in 2013.

This has seen it aggressively implement large infrastructural projects such as roads, electrification programme and airports expansion. It is banking on the construction of the Sh327 billion standard gauge railway to contribute to a 1.5 per cent GDP expansion.

The bulk of the projects are however being implemented using foreign debt whose interest burden has grown as the shilling weakened. Increased funding to counties is also expected to spur growth from the devolved units.