After months of insisting that the rate cap law signed in August 2016 was here to stay, Kenya has caved to pressure from International Monetary Fund (IMF) to change course.
According to the Financial Times, Henry Rotich, the country’s Finance Minister has said he will “halve the government’s budget deficit by June 2021 and repeal or reform an 18-month-old cap on bank lending rates.”
This comes a day after IMF’s visit to the country where the team met parliament’s budget and appropriation committee. The IMF warned that the country’s rising debt level is heading to a point whereby it won’t be sustainable anymore and the government’s appetite for new loans needs to be put in check. The IMF mission also asked the MPs to repeal the rate cap law as one of the conditions in order to extend a $1.5 Billion (Sh150Bn) precautionary facility that expires in March 2018.
“We don’t need the IMF resources at the moment but we need a precautionary or insurance arrangement. So we’d definitely like to continue with the same facility.” Mr Rotich was quoted by the Financial Times. “We will come up with a package of reforms that will help us get out of the current [interest rate cap] arrangement so we can extend credit to the private sector”
The next few weeks are very critical. If the government starts the process of implementing the IMF reforms, then stock market investors will be convinced that the economy is back on track and banking stocks are likely to soar to the high levels seen before the rate cap law was signed into law. However, if the government won’t take steps to implement the reforms, then the IMF money is not forthcoming and the consequences will be disastrous.