Patrick Njoroge: CBK governor on move to downgrade economic outlook

Central Bank of Kenya Governor Dr Patrick Njoroge. ILLUSTRATION | JOSEPH BARASA | NMG

Central Bank of Kenya Governor Patrick Njoroge held his post-Monetary Policy Committee press conference on Thursday, briefing journalists on the bank’s decision to lift the benchmark lending rate by 75 basis points this week.

The decision has signalled the banking industry to raise the cost of loans.

Dr Njoroge spoke on various issues, including his decision to downgrade Kenya's economic outlook, and the latest monetary policy decisions and regulations, ahead of his exit.

What is the 2023 economic outlook?

From our perspective, the economy is expected to remain resilient in 2023. Since our last meeting, we have looked carefully at agriculture in light of the weather conditions that prevailed in January, February and the first half of March.

We have consequently scaled down agriculture growth, which has brought down our projection for overall growth in 2023 to 5.8 percent. Activities in other sectors have remained strong.

What is the CBK outlook on inflation?

We had projected that the headline inflation number would be back in the target zone by the first quarter of this year [2023]. Clearly, it’s not there.

The question is what went wrong and whether we got our projections wrong. Food inflation has been driving inflation and within that we have vegetable prices rising from January going to February.

The main drivers for food inflation have, however, remained the prices of wheat, maize, milk and edible oils. We would expect that the vegetables and all those quick-growing products will come to the market fairly quickly with the rains beginning.

What is the measure of prospects this year from the Monetary Policy Committee's standpoint?

From our CEO Survey, optimism about business activity and economic growth prospects has fallen precipitously and we haven’t seen anything like this since this survey began.

CEOs have ascribed this to inflation, the weakening shilling, the prolonged drought, the cost of credit and the shortage of raw materials.

It is important, however, to note that this survey was done before the start of the rains and the protests we have seen in our capital and major towns.

The market perceptions survey shows the same outcomes. The fall of the optimism is despite improvements in external conditions and global prices.

One would expect that this will lead to delays in investment decisions, poor operations of markets and declining consumer confidence.

It is against this backdrop that the MPC decided to firm up inflation expectations by raising the benchmark rate.

CBK's official foreign currency reserves have continued to dip. What are your expectations in terms of revitalising the cover to meet the statutory threshold?

We have had a period where we have not been receiving significant inflows from the government, which is the way we accumulate our reserves.

We expect these inflows will be coming in with the government sorting what needed sorting. We are expecting about $200 million on very short order.

We are expecting World Bank disbursement, something in the order of $1 billion sometime by the end of April, and IMF money as soon as they have done their review by the end of June.

The amount will be scaled up after the IMF changed its drawing policy temporarily for one year and other considerations.

What is your view on the weakening exchange rate?

Looking at our exchange rate against other African currencies, we are pretty much in the middle of the pack even as people raise questions on the depreciation of the shilling. The facts are here, let’s have less hype and more data.

The CBK has recently initiated reforms to reopen the interbank foreign exchange market. What is the progress so far?

What happened is that volumes in the interbank market fell significantly as banks saw more pressure from their own clients, which forced transactions to happen outside the market and dried the interbank market.

The point for us has been to reactivate the interbank market and in addition, we issued a code to strengthen and provide long-term sustainability on the FX market and offer the pricing framework.

We are pleased that banks have welcomed it and it is currently a work in progress. We have seen a normalisation of the volatility in the last two weeks.

The journey has started and you already can see a positive outcome in terms of reactivation.

We are on a journey; we need to move forward. The code and the work done with the various market makers have been positive.

The river is coming back to its course and that will continue to reinforce itself, we are not at the end of it, this is a journey which we have to appreciate.

What is the status of the banking sector amidst shocks in the domestic and external environment?

The sector remains stable and resilient. There is liquidity and capital. The non-performing loan ratio has however increased to 14 percent in February and one can say that this is because of the economic difficulties that some of these borrowers are having in their own sectors as indicated in our MPC surveys.

We expect banks will work with borrowers to ensure that the borrowers remain current on their repayments. The NPL ratio will fall as the situation normalizes.

What are your reflections on your tenure as it comes to a close and should we expect you to take leave before the termination date in mid-June?

(The Public Service Commission on Thursday advertised the position of CBK Governor and Deputy Governor ahead of the exit of Dr Njoroge and Deputy Sheila M’Mbijjewe).

My tenure is still going on. Maybe these questions apply but after my tenure has ended.

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