- The cost of borrowing in Kenya has been going up since October last year, when it was at 10.50 per cent, before two consecutive raises.
- This means banks are likely to adjust their interest rates upwards, pushing the cost of borrowing beyond the reach of many.
- The majority of bank rates are currently above 20 per cent, amid a high default rate as banks struggle with Non-Performing Loans (NPLs).
Higher interest rates to raise the cost of borrowing in Kenya
The cost of borrowing in Kenya is set for yet another rise if banks are to factor in the latest Central Bank of Kenya increase in the base-lending rate.
The Central Bank of Kenya (CBK) has raised borrowing costs to highs last seen nearly 12 years ago, as it moves to try and contain the country’s inflation, which has started to pick.
On Tuesday, the Monetary Policy Committee, CBK’s top decision-making organ, decided to raise the Central Bank Rate (CBR) from 12.50 per cent to 13.00 per cent.
The rates have been going up since October last year, when it was at 10.50 per cent, before two consecutive raises.
This means banks are likely to adjust their interest rates upwards, pushing the cost of borrowing beyond the reach of many.
The majority of bank rates are currently above 20 per cent, amid a growing default as banks struggle with Non-Performing Loans (NPLs). The Monetary Policy Committee met on February 6, 2024, against a backdrop of an improved outlook for global growth and inflation, moderating international oil prices, and heightened geopolitical tensions, particularly in the Middle East.
It reviewed the outcomes of its previous decisions and measures implemented to mitigate the adverse economic impact and financial disruptions.
Global growth and geopolitical tensions
Global growth is estimated at 3.1 per cent in 2023 and is projected at 3.1 per cent and 3.2 per cent in 2024 and 202, respectively.
The growth outlook for 2024 has been revised upwards, reflecting stronger-than-expected growth in the United States, continued strengthening of the Chinese economy, and strong growth in several large emerging markets and developing economies.
However, the main risks to the global growth outlook relate to the continuing effects of tight monetary policy, the withdrawal of fiscal support in advanced economies, and increased uncertainties arising from the escalation of geopolitical tensions, particularly the Israel-Palestinian conflict.
Headline inflation has continued to decline across most economies due to tight monetary policy, and lower commodity prices, particularly of oil and food, the MPC chaired by the Central Bank of Kenya Governor, Kamau Thugge, noted.
In Kenya, overall inflation increased to 6.9 per cent in January 2024 from 6.6 per cent in December 2023. It remained sticky in the upper bound of the government’s target range of five per cent, with a flexible margin of 2.5 per cent on either side in the event of adverse shocks.
During the month, food inflation increased to 7.9 per cent, data by the Kenya National Bureau of Statistics indicate, from 7.7 per cent in December 2023.
This was largely reflecting higher prices of a few non-vegetable items, following reduced supply partly attributed to seasonal factors.
Fuel inflation rose to 14.3 per cent in January 2024 from 13.7 per cent in December 2023, largely due to higher electricity tariffs.
Non-food non-fuel (NFNF) inflation increased to 3.6 per cent in January 2024 from 3.4 per cent in December 2023, partly reflecting seasonal increases in education sector-related costs.
“The risks to inflation remain elevated in the near term, reflecting the impact of second-round effects of the rise in fuel inflation, and pass-through effects of exchange rate depreciation,” Thugge said.
A survey of the agriculture sector conducted ahead of the MPC meeting revealed that respondents expected inflation to increase in the next three months on account of high import costs, partly due to the depreciation of the exchange rate.
The GDP data for the third quarter of 2023 however shows continued strong performance of the Kenyan economy, with real GDP growing by 5.9 per cent compared to 4.3 per cent in a similar quarter of 2022.
This performance reflects the strong rebound in the performance of agriculture, and the resilient services sector supported by robust activity in accommodation and food services, financial and insurance, information and communication, real estate and wholesale and trade.
Leading indicators of economic activity point to continued strong performance in the fourth quarter of 2023.
As a result, real GDP growth is estimated at 5.6 per cent in 2023 from 4.8 per cent in 2022.
“The economy is expected to remain strong in 2024, supported by the resilient services sector, the improved performance in agriculture, implementation of measures to boost economic activity in priority sectors by the government, and the improved global growth outlook which is expected to benefit exports,” Thugge said.
CEOs and the Market Perceptions Surveys
The CEOs and the Market Perceptions Surveys, which were conducted ahead of the MPC meeting, revealed improved optimism about business activity and economic growth prospects for the next 12 months.
Respondents attributed the optimism to improved performance of agriculture, easing global inflation, a resilient private sector, and focus by the government on key sectors including agriculture, MSMEs, health, housing, and digital economy.
“Nonetheless, respondents expressed concerns about weakened consumer demand, weakening of the Kenya shilling, and high interest rates,” CBK has noted.
The current account deficit is estimated at 3.9 per cent of GDP in 2023, down from 5.0 per cent in 2022. It is projected at 4.0 per cent of GDP in 2024, reflecting the expected recovery in imports, resilient remittances, and expected rebound in agricultural exports.
Goods exports declined by 2.2 per cent in 2023 compared to an increase of 9.3 per cent in 2022.
“The decline in exports in 2023 was across several categories, except food, chemicals and manufactured goods exports which increased by 0.8 percent, 2.8 percent, and 11.3 percent respectively,” Thugge noted.
The increase in manufactured export receipts reflects strong regional demand.
Imports declined by 10.6 per cent in 2023 compared to a growth of 7.3 per cent in 2022, reflecting lower imports across all categories, except food and crude materials.
Tourist arrivals improved by 30.7 per cent in 2023 compared to 2022 and were 19.3 per cent higher in December 2023 compared to December 2022.
Remittances increased by four per cent to US$4.19 billion in 2023 from US$4.02 billion in 2022.
The CBK foreign exchange reserves, which currently stand at US$7.1 billion (3.8 months of import cover), continue to provide adequate cover and a buffer against any short-term shocks in the foreign exchange market, CBK noted.
The banking sector
Kenya’s banking sector remains stable and resilient, CBK has affirmed, with strong liquidity and capital adequacy ratios.
The ratio of gross non-performing loans (NPLs) to gross loans stood at 14.8 per cent in December 2023 compared to 15.3 per cent in October 2023.
Decreases in NPLs were noted in the energy and water, manufacturing, agriculture, building and construction and transport and communication sectors.
“Banks have continued to make adequate provisions for the NPLs,” Thugge said.
Growth in commercial bank lending to the private sector stood at 13.9 per cent in December 2023 compared to 13.2 per cent in November.
Strong credit growth was observed in manufacturing (20.9 per cent), transport and communication (20.8 per cent), trade (13.1 per cent), and consumer durables (9.9 per cent).
The number of loan applications and approvals remained resilient, reflecting sustained demand, particularly for working capital requirements.
The Committee noted the ongoing implementation of the FY2023/24 Government Budget, which continues to reinforce fiscal consolidation.
The MPC also noted that overall inflation “has remained sticky in the upper bound of the target range.”
The Committee further observed that all key components of inflation—fuel, food, and NFNF— had increased in January.
In addition, it noted the continued, albeit reduced, pressures on the exchange rate and therefore concluded that further action was needed to stabilise prices.
The proposed action, it said, will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the five per cent mid-point of the target range and addressing residual pressures on the exchange rate.
“The MPC therefore decided to raise the Central Bank Rate (CBR) from 12.50 percent to 13.00 percent. The MPC will closely monitor the impact of the policy measures as well as developments in the global and domestic economy and stands ready to take further action as necessary in line with its mandate,” Thugge said.