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Treasury seen as biggest winner in rate capping

The National Treasury building
The National Treasury building in Nairobi. FILE PHOTO | NMG 

Analysts from Renaissance Capital say the government is the biggest winner in the retention of rate cap on interest rates since it guarantees National Treasury access to cheap domestic borrowing to meet the budgetary obligations.

Global chief economist for Renaissance Capital Charles Robertson said Wednesday that in the face of budget funding pressures, the government is now more concerned about access to cheap money to fund budget than seeing credit to private sector recover.

“In these tough times, it is more advantageous to government to get cheap borrowing today than to see private sector credit growth,” said Mr Robertson.

“With rate cap staying in place, banks will just lend more to government and its cost of borrowing will remain low.

If rate cap comes off, Renaissance expects banks to reduce or stop lending to government and focus on private sector lending, driving up cost of borrowing for government within six months.

According to Mr Robertson, more credit growth to private sector will mean more money flows into people’s pockets with a likelihood of them spending more on imports.

“Then current account deficit may widen and currency comes under pressure. This is not what government wants right now,” said Mr Robertson during the opening of fourth annual East Africa Investor Conference in Nairobi on Wednesday.

In the absence of the International Monetary Fund credit facility that expired recently, Renaissance Capital warns that despite Kenya not having drawn from the facility for a number of years and with close to six months import cover, the economy could still suffer confidence crisis.

“At a time of turbulence and market fear, investors usually want to see an insurance in the market such as the IMF facility. Markets such as Turkey, Pakistan and Zambia have been upset for lack of IMF support,” said Mr Robertson.

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