Market News

Removal of rate cap depends on Uhuru, MPs — Citi


Members of the National Assembly in session. FILE PHOTO | NMG

The repeal of the interest rate cap is likely to remain difficult to resolve unless there is political will by President Uhuru Kenyatta, Citi Global Markets say in its latest report.

Citi says that for Kenya to get back into the good books of the International Monetary Fund (IMF), changes in the rate caps will have to be addressed besides austerity on spending.

The investment bankers say that the key obstacle to reviewing the popular rate cap are legislators, although there is a possibility that the President could persuade them to change their mind.

“While we think the President has been somewhat ambiguous on his views about the Banking Amendment Act, we suspect that he is the key political actor in the debate. This is especially the case as his party, the Jubilee Party, currently holds 171 of the 348 seats in Parliament.

“So if he is really keen to move back onto an IMF programme, it may well require his political intervention to achieve progress with reforming or repealing the Act,” said Citi.

However Mbui Wagacha, an economic advisor to the President, recently said that the IMF programme was not a priority, adding that the country can do without it given its strong macroeconomic fundamentals and the fact that the conditions — such as an increase in taxes and removing the rate cap —will increase the cost of living for most Kenyans.

READ: CBK spells out loan rules ahead of interest rate cap review

MPs have also shown some resistance to a repeal, with the Parliamentary Finance and Planning Committee voting to increase the interest that banks pay on savings to match the Central Bank of Kenya (CBK) base rate, while maintaining the maximum lending rate at four percentage points above the CBR. The Treasury is perceived as having been keen to pursue the IMF reform package, including a review of the rate cap, but its enthusiasm does not appear to be shared by presidential advisors and legislators.

Citi says that Kenya has the option of going ahead with rate cap changes as proposed by the IMF.

The other choice is, if economic growth moves to six per cent this year, the current account deficit falls even marginally and the current levels of high foreign exchange reserves are maintained, then there should be no hurry in extending the IMF programme after it expires next month nor even in negotiating a new one.

Kenya can wait till the second half of next year to resume negotiations with the IMF after carries out some of the reforms or has initiated them in some way, the analysts say.