Kenya surrenders to IMF pressure on interest caps

Kenya surrenders to IMF pressure on interest caps
International Monetary Fund. Photo/Courtesy

Fred Aminga @faminga

Kenya has given in to pressure from International Monetary Fund in what could pave the way for reviewing interest rates capping law.

An International Monetary Fund (IMF) team which had been in the country between February 19 and March 2 said in a statement yesterday that Kenya has agreed to modify interest controls as one of the conditions for extension of a $1.5 billion (Sh150 billion) standby credit facility to September.

Another condition for extension of the facility is reduction of fiscal deficit which the Washington-based institution said had “raised public debt vulnerabilities”. “The authorities have committed to policies to achieve the programme objectives, including reducing the fiscal deficit and substantially modifying interest controls.

Discussions on the details of these policies will continue in the coming weeks,” the mission said. Kenya had requested a six-month extension of the facility that expires on March 13 to allow more time to complete the outstanding reviews.

The IMF standby loan provides financial aid to member states in need of assistance in case of domestic and external shocks that affect their economies. Since the loan caps were introduced in September 2016, pressure on the government to lift them has continued to intensify with banks turning away borrowers perceived risky.

The IMF position on interest caps comes as no surprise because local technocrats had already started warming up to the possibility of changes to capping loans interest at four percentage points above the prevailing Central Bank Rate, which currently stands at 10 per cent.

“The IMF team urged the authorities (Kenyan) to review the interest rate controls introduced in September 2016 with a view to abolishing them or substantially modifying them. The controls have contributed to slow overall credit growth to the private sector, and lower access to credit by SMEs and individuals,” the IMF team said yesterday.

“In addition, interest rate controls are undermining the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth.” Treasury and CBK have been studying the impact of capping of interest rates on the economy in what is expected to have a bearing on any correction to policies related to interest rates.

Treasury and CBK technocrats had earlier hinted that pricing models could change towards ensuring borrowers get appropriately priced loans. Kenya had asked IMF to extend the credit facility that expires this month for a further six months.

The IMF team said the request for an extension would be put to the board before the facility expires on March 13. The Sh150 billion standby facility was offered in 2017 but is only available in case of any external shocks.

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