Central Bank of Kenya (CBK) Governor Patrick Njoroge held a post-monetary policy committee (MPC) online press briefing on Thursday, the last before the country heads to a high-stakes election on August 9. This came a day after the MPC kept its benchmark lending rate steady at 7.5 percent.
Dr Njoroge responded to questions from journalists on various macroeconomic issues, ranging from inflation to access to credit and the availability of dollars. Excerpts:
When does the CBK see inflation starting to ease back to the target range of 2.5-7.5 percent?
I would just say in the near term. Does it mean this month or next month? It all depends on how quickly those [subsidies] measures have effect. By the way, if you are talking about this month, the price of unga (maize meal) was lowered to Sh100 per two-kilogramme pack.
[But]… when KNBS went to survey prices —which they do and which they should report tomorrow [today] — not all stores had already adjusted to the new price.
The point is only next month will we get the full benefit of the subsidy of unga because by then all the stores would have brought their prices down to that level [Sh100] and when the KNBS people then measure it, they would see the new prices and not the old prices.
It is not enough to say the price of unga should be X and bring it into your equation as it were. It takes time. That’s why we cannot be very precise on the number, whether it would be in July, August or September [that inflation will ease]. There are those dynamics that we need to monitor.
How sustainable are the subsidy programmes?
The sustainability of subsidies really depends on the fiscal space that is available. As we all know, we have significant constraints on fiscal space…because there are some other urgent needs. We talk of development needs [like] building roads, utilities and also recurrent things [like] salaries.
All those things are demands on the same tax revenues. So it is an expenditure — that is for these subsidies— which has to be balanced against other expenditures. That is why in the long run, it is not viable.
In general terms, we are clear that this is not something that will be maintained to the medium term. So there is a sunset for these subsidies.
What will happen when subsidies end?
We need to be at least ready for that. As the international prices of fuel come down, then the need for subsidies will be lesser. The point is there are other factors that are also working through which are exogenous—not driven by policymakers or ourselves—but other components. Think about the maize element.
Sure, the price of maize is now being subsidised at Sh100. But you also know that there will be importation. I am told a lot of (maize) imports are coming from Zambia. They have got appropriate approval. Once they land here, you would expect the price of those components to come down.
CBK met banks and Kenya Private Sector Alliance over easing access to dollars. But the challenge persists.
I think this is an old story. It is like two months old. Indeed, as we explained, specific importers—those that were interested in getting dollars—have been working with their banks, and understand that there were significant shocks to our economy.
Basically in that context, there was greater demand. For instance, think about the purchases of oil and the value that would be going into buying [that commodity]. It has since been resolved. As far as I know, the purchasers of dollars have been going to banks and working with the bankers.
It is true some of them were expecting to just go and get all their [dollar] supplies in one-shot and they were being told ‘no, no, we build it over time’. If it is $2 million, that’s not significant. But if you are talking of an import bill of, say, $30 million, that is significant and would need to be built over time.
Are banks experiencing a shortage of ‘Small’ (Sh100 And Sh200) notes ahead of polls [as alluded to by Interior Cabinet Secretary Fred Matiang’i on Wednesday]?
I don’t know about shortage of small notes. All I can tell you is that we supply notes as demanded by banks. For instance, in the month of July, we supplied the equivalent of 2.1 billion of 100 notes. We have a lot of stock of it.
From where we stand, when a bank demands, we provide. It is our job to make sure that for the sake of the economy, you do have constant supply as needed. It is for us to make sure that we are in touch with banks to be sure we have enough stock, which I am assuring you that we have more than enough.
What is the status of approval [applications] by banks to resume risk-based pricing model for loans?
This has been going on. To be honest, this story was overblown in the past. We have been working with the banks. More than half of the banks have already had their risk-based (pricing) models approved or signed off with us.
The others we are at different levels of completeness. But again, we know that what we need to insist on is making sure that the models are realistic, they are not just some sort of class project. We are specific about that. I think the issues that were raised before were somewhat overblown.
Average interest on Treasury bills is at a five-year high. Is this likely to slow down private sector credit growth?
To begin with, the Treasury bills rate is not anywhere near where it was … you remember the bad old days of November, December 2015? It really shot up. It went up until 20 percent [in October 2015]. That is not the case today. That market has been working very well.
As a matter of fact, we are very proud about how we have managed the securities market, FX [foreign exchange] markets and money markets. In those three markets, I am very proud about how the central bank has managed them to make sure there is order.
I don’t see this as a concern in terms of private sector credit growth. Why? Banks still have a lot of capacity to lend.
