Kenya will not sign a Sh150 billion International Monetary Fund (IMF) insurance loan intended to cushion the shilling from external economic shocks as long as it is tied to stringent conditions such as the removal of bank interest rates cap, an adviser to President Uhuru Kenyatta has said.
Mbui Wagacha, an economist and adviser in the executive office of the presidency, termed the IMF’s recommendations on Kenya’s economic policies as being out of touch with local reality.
Dr Wagacha’s statement appears to back the Central Bank of Kenya’s (CBK) position on the matter, sending out yet another signal of cooling relations between Nairobi and the IMF.
Kenya in mid-March negotiated a six-month renewal of the insurance loan, which expires mid next month.
The insurance facility is important in cushioning the shilling from weakening whenever the CBK’s foreign currency reserves are depleted.
“I agree with the central bank that we actually don’t need the IMF standby facility, especially when it comes with conditions that we remove the rate cap or increase taxes,” said Dr Wagacha in an interview.
Kenya’s foreign exchange reserves held at the CBK currently stand at about six months of import cover, well above the recommended minimum of four months.
An IMF delegation that visited the country about two weeks ago left without making public its discussions with Treasury and CBK officials.
The Washington DC-based lender has repeatedly called for scrapping of controls on the cost of bank loans, insisting they were stifling economic growth by denying small businesses access to funding.
Proponents of the interest rates cap, however, say the two-year-old regulation will boost economic growth in the long term by making cheap bank loans available to businesses and households.
The CBK governor, Patrick Njoroge, recently said that Kenya does not need the IMF loan, stating that the country has enough foreign currency reserves to pay its imports bills.
Treasury Secretary Henry Rotich had proposed in his June Budget speech a repeal of the interest rates law.
The CBK’s independent policy arm, the Monetary Policy Committee (MPC), recently cut the Central Bank Rate to 9.0 per cent from 9.5 per cent – marking the second consecutive rate reduction in as many months.
The action effectively cut the maximum cost of bank loans to 13 per cent, which is four percentage points above the CBR as per the law.
Before the recent cuts the MPC had maintained the policy rate at 10 per cent from the time the law on interest rates was passed in September 2016.
Remain in place
Kiambu Town MP Jude Njomo, who proposed the enactment of the interest rates law, said in a separate interview that a majority of MPs are still of the opinion that the caps should remain in place.
“We have not held any formal meeting to discuss the issue. But I have talked to many MPs and they are of the opinion that the proposal to remove the caps will not see the light of day,” said Mr Njomo.
Besides repeal of the rates cap law, the IMF wants taxes raised and a restraint on growth in public spending to ensure a lower fiscal deficit.
Dr Wagacha said commercial banks are likely to increase lending rates as soon as the rate caps are removed.
“Commercial banks aren’t likely to change their behaviour because we have done away with the rate cap; they will immediately increase lending rates and defeat the intended purpose of increasing credit to the private sector,” said Dr Wagacha.
Bankers have argued that the rate cap has restricted their ability to price credit on the basis of risk posed by different customers.
The lenders have engaged legislators on the proposed change in the restrictions on rates, proposing alternative measures to promote competitiveness in the industry.
Chief executive of the Kenya Bankers Association Habil Olaka said in an interview there have been moves to promote transparency in pricing of banking products that will help customers in making informed decisions.
Some banks previously posted the prices of their products on a portal, but this was not a legal requirement.
The CBK has proposed to make the publishing of the product prices on a portal a legal requirement. Mr Olaka says it is an alternative measure to deal with the opacity identified as among the reasons that made MPs prefer to control cost of loans through the law.
“The impact [of rate cap] is not as was envisaged when the law was put in place; there are other measures which can be put in place rather than capping. … The argument was that initially that pricing was not transparent, thus creating opacity.
"As a measure to deal with that the CBK has, for example, proposed that the publication of pricing data be compulsory for all banks,” said Mr Olaka.