CBK Calls for Review of Banking Act Terms it “Brake to the Economy”

The Central Bank of Kenya (CBK) has renewed calls for the review of the Banking (Amendment) Act, 2016 which has resulted in banks rationing private sector credit.

Dr.Patrick Njoroge, Governor CBK says “The interest rate caps have been acting as a brake to the economy. I don’t know if any of you have ever driven around with your brake still on. Eventually, something breaks.”

“The economy is being held back by this. And that is another set of issues we will bring to the fore and deal with so as to support, rather than inhibit economic dynamism in the economy,” he added during a media briefing post the Monetary Policy Committee meeting that left the policy rate unchanged at 10.00 per cent in its first meeting of the year maintaining its 17-month neutral policy stance.

However, analysts claim besides the private sector credit expanding by 2.40 percent as at December 2017, from a low of 1.35 per cent during the year.

“However, the unknown impact of the new accounting framework, IFRS 9, and potential crowding out effects from increased government (domestic) debt appetite could possibly hamper private sector credit and limit economic growth prospects,” says Stephanie W. Kimani, Research Economist, Commercial Bank of Africa Limited.

“Private sector consumption contributes about 77.00 per cent to GDP (2016) and is thus critical to the economic growth outlook. Private sector spending is highly driven by private sector credit and thus the correlation cannot be taken for granted,” she adds.

On the other hand, the CBK is bullish for an economic rebound and projects a 6.20 per cent real GDP growth in 2018.

“On baseline – without any policy action – we are projecting growth of 2018 in the order of 6.2 per cent, but this is a baseline. It does not include significant positive factors that could be expected in 2018,” said Dr. Njoroge.

“We have a favourable outlook, but yes with risks. But the risks that can be managed. A confluence of positive factors both external and domestic. With positive supportive policies going forward in 2018, we will have a ‘perfect storm’, he added.

Kimani caution that “The Central bank’s optimistic GDP growth forecast of 6.20 percent in 2018, compared to the projected growth of 4.80 per cent in 2017, would require support from improved private sector expenditure in order to boost economic activity.”

CBK further urged the government to look for alternative means of borrowing such as Public-Private Partnerships (PPPs) to tame its debt.

Dr. Njoroge said that although Kenya’s public debt is sustainable at 50 percent of Gross Domestic Product, going forward, the debt financing margin is narrowing and this could be problematic if the country continues to use debt as the only option of financing mega projects.

“Projects also need to be well assessed, the costs and benefits to the country. We need proper project appraisals. PPP models result in faster project completions and reduced delays on infrastructure projects by including time-to-completion as a measure of performance and therefore of profit,” he said.

According to the African Economic Outlook for 2018 by the African Development Bank (AfDB), projects that Kenya’s economy will expand by 5.6 per cent in 2018 and 6.2 per cent in 2019. 

However, the institution has warned Kenya on the rising levels of debt.

“Continued high public consumption expenditure keeps the budget deficit at close to 10 per cent of GDP, while the expected maturity of public debt could lead to debt distress.”

Read: Kenya Sets FY2017/18 Budget Deficit to 6.0pc Starting July 

Further, the 2018 Draft Budget Policy Statement has lowered total revenue in current FY17/18 to KES 1.64Tn (19.6% of GDP) from KES 1.70Tn (20.6% of GDP).

Recurrent expenditure has been revised upwards to Ksh 1.4Tn from Ksh 1.35Tn in the initial budget.

On the other hand, development expenditure has been lowered to KES 607.14Bn from KES 640.30Bn. Fiscal deficit in the revised budget estimates has decreased to 7.2 per cent of GDP (from 8.90% in FY16/17).

“Which in our view is largely boosted by ambitious nominal GDP growth projection (KES 8.68Tn in the fiscal year) as financial gap has also been revised higher (from KES 535.45Bn to KES 620.80Bn),” according to Genghis Capital Analysts.

Net foreign financing has increased to KES 323.22Bn (from KES 255.95Bn) mainly due to KES 50Bn upward revision in commercial financing whilst net domestic financing has increased slightly to KES 293.77Bn from KES 275.69Bn.