Kenya Faces Dim Prospects for Growth

Kenya’s prospects for better economic growth appear dim as they are bound to be overshadowed by a credit squeeze, ballooning public debt and rising oil prices, a top economist has warned.

Already, 2017 was a tough year when the country’s GDP plummeted to 4.5% from 5.8% in 2016, due to severe drought and a prolonged electioneering period. This has further dimmed any hopes for growth this year.

Standard Chartered Bank chief economist for Africa and Middle East, Razia Khan, contends that Kenya should expect a modest economic recovery this year of 4.6% and 5.4% in 2019, owing to factors that make it difficult for the government to undertake any tangible fiscal consolidation.

In particular, the inability of the Central Bank of Kenya to stimulate credit growth to the private sector through the central bank rate is having a negative impact on the economy as commercial institutions opt for safe lending options mainly in government securities, AllAfrica reported.

Last week, CBK retained its benchmark lending rate at 10% in a market where private sector credit growth has sunk to 2.4% of GDP from a high of 25% before the introduction of the interest rates capping regulation in 2016. The interest rate cap on loans is set at four percentage points above the base rate.

“Kenya has lost its growth dynamism by an interest rate cap structure that doesn’t ultimately serve its economic needs,” said Khan while presenting Standard Chartered Economic Outlook for Kenya.

She added that Kenya needs to abolish the regulation to avoid the current situation whereby the government has crowded the private sector out of the credit market as banks opt for risk-averse lending.

“The regulation has led to risk aversion and the tightening of lending standards as banks look for alternatives in government securities which are safe options,” said Khan.

As Kenya continues to grapple with the impact of interest rates capping on the economy, other East Africa Community member states are at a crossroads on whether to follow in its footsteps or let market forces dictate the rates.

While Tanzania is torn between introducing the law, Uganda and Rwanda have ruled out capping interest rates.