Kenya's Central Bank Retains Key Rate at 7 Percent

Kenya’s monetary policy committee retained the key lending rate at 7 percent during yesterday’s meeting. The team said that mitigation measures deployed since March have been having the desired outcome. The Monetary policy committee (MPC) said that leading indicators for the Kenyan economy for the second quarter suggest the impact of COVID19 on the economy was most pronounced in April, with evidence of recovery in May.

CBK rate announcement comes at a time when the global economic outlook for 2020 has deteriorated and remained highly uncertain. There is an expectation of a sharp contraction in advanced economies GDP following severe disruptions to trade and supply chains coupled with collapse in global travel.

Across the domestic front, the economy was hardest hit in April due to the restriction on movement and the dusk to dawn curfew. However, there was evidence of recovery in May evident in improved agricultural output and exports. Overall inflation remained within target range supported by improving food supply, lower international oil prices, the impact of reduced VAT, and muted demand pressures.

In addition, the MPC said that the Kenyan banking scene is stable with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) stood at 13.0 percent in May compared to 13.1 percent in April.

Rebound in Exports

The MPC observed significant rebound in exports in May and so far in June, compared to the dismal performance in April. In the period January to May 2020, the volume of tea exports increased by 23.5 percent with total exports improving by 4.1 percent in the same period.

Horticulture exports have picked up to almost normal levels owing to easing of restrictions and recovering demand in key destination markets. Consequently, receipts from tea and horticulture increased 15.2 percent and 22.7 percent, respectively, in May 2020 compared to May 2019.

CBK noted a recovery in remittances in May to KSh27.369 billion (USD258.2 million) from KSh22.069 billion (USD208.2 million) recorded in April. In addition, FX reserves currently stand at Ksh976.323 billion (USD9210.6 million) translating to 5.53 months of import cover. This provides adequate buffer against short term shocks in the foreign exchange market.

COVID19 mitigation measures

The MPC noted that the repayment period of personal/household loans amounting to Ksh199.1 billion (25 percent of the gross loans to this sector) had been extended by the end of May. The move is in line with CBK’s directive on March 18 to provide relief to borrowers.

For other sectors, a total of Ksh480.6 billion has been restructured mainly to trade (23.7%), real estate (20.6%), tourism (12.5%), transport and communication (11.2%), and manufacturing (10%). Total loans that have been restructured are worth Ksh679.6 billion and accounted for 23.4 percent of the total banking sector loan book of Ksh2.9 trillion.

In March, the lowering of the Cash Reserve Ratio (CRR) saw the release of Ksh35.2 billion to the banking sector out of which Ksh30.8 billion has been disbursed to support lending. Lending has gone to tourism, transport and communication, real estate, trade, and manufacturing.

The CBK team welcomed the extension of emergency measures introduced in March. MPC said the changes in mobile money transactions had a positive impact and facilitated official and personal transfers to vulnerable households. CBK also lauded the COVID19 economic stimulus announced by the Treasury CS during the Budget 2020/21. The program targets to support key sectors such as agriculture and food security, tourism, manufacturing, education, health, information and communication, and MSMEs.

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