ECONOMIC BUFFER

We need IMF standby facility,CBK says

Governor Patrick Njoroge says the kitty is required for extreme shocks

In Summary

• The previous US$1.5 billion (Sh155.7 billion) arrangement expired last September.

• The regulator has been fronting its usable foreign exchange reserves as the key buffer element for the economy.

Central Bank Governor Patrick Njoroge presents his views before the parliamentary Finance Committee during a session to review the interest rate regulations. April 12, 2018/JACK OWUOR
Central Bank Governor Patrick Njoroge presents his views before the parliamentary Finance Committee during a session to review the interest rate regulations. April 12, 2018/JACK OWUOR

The country needs the International Monetary Fund(IMF) standby credit facility despite a resilent economy and strong reserves to aborb shocks in the global market, Central Bank of Kenya said on Monday.

Governor Patrick Njoroge has said the kitty is required for “extreme cases”, where policy and reserves will not be enough to cushion the economy, with the facility expected to come into place end of this month.

This comes as the exchequer moves to foot over Sh1 trillion in debt servicing costs in the 2019/20 financial year, in the wake of low and missed revenue targets, amid a swelling debt stock currently at Sh5.420 trillion.

 

“If you are to get a shock, you go through all the buffers. You will start with policy and other immediate buffers before you dig into your reserves. In an extreme case, you go to the IMF facility,” Njoroge said at a press conference in Nairobi.

“We need it(IMF facilty) for extreme cases. The right time to buy insurance for a house is when it is ok not when it is burning,” the governor added.

The regulator has been fronting its usable foreign exchange reserves as the key buffer element for the economy, even as the country continue negotiating for the IMF facility.

The previous US$1.5 billion (Sh155.7 billion) arrangement expired last September, with the government at cross roads with the IMF over the interest rate cap.

Njoroge had in March this year said the country was in no rush to secure a new facility after the initial arrangement expired in September last year, which was feared to have also exposed the shilling to external shocks.

In its latest update, CBK says its reserves remain strong at US$9.6 billion(Sh996.9 billion)-6.0 months of import cover as at July 25.

“This meets the CBK’s statutory requirement of maintaining at least four months of import cover and the EAC region’s convergence criteria of 4.5 months of import cover,” CBK says in its latest weekly bulletin.

 

Among conditions by IMF is a repeal of the cap law, blamed for a credit crunch to the private sector and households.

CBK has however maintained that private sector credit is on a growth path having grew by 5.2 per cent in the 12 months to June, compared to 4.4 per cent in May.

According to the regulator, strong growth in credit to the private sector was observed in the following manufacturing (11.4 per cent); consumer durables (21.3 per cent) and private households (7.6 per cent).

“Private sector credit growth is expected to continue to strengthen in the remainder of 2019, partly due to the roll out of innovative, bank-initiated credit products targeting Micro Small and Medium Enterprises (MSMEs),” Njoroge said last Wednesday after the Monetary Policy Committee(MPC) retained benchmark lending rates at 9.0 per cent or the sixth time.

The CBK-backed loan facility targeting SMEs seems to be working for Kenya as it moves to convince the IMF of a vibrant credit market.

Dubbed "Stawi", the facility allows MSMEs to access unsecured loans of between Sh30,000 and Sh250,000.

This, together with the National Treasury proposal to repeal the interest rate cap (proposed in the 2019/20 budtet) are expected to help convince the IMF on the country's commitment towards a liberal credit market.

The IMF standby facility is expected to be approved by end of this month.

The country has not drawn from the emergency IMF kitty in recent years,but experts have argued that the facility remains critical in the wake of a heightened level of debt distress characterized largely by increasing debt redemption obligations.