The Central Bank of Kenya has warned that the continued regulation of commercial lending rates is strangling the economy projected to grow to 6.2 per cent this year.
Addressing a post Monetary Policy Committee media briefing yesterday, governor Patrick Njoroge said banks continued cut on lending to small enterprises deemed too risky has tightened cash flow to key economic drivers.
"While we talk of buoyant economy, the impact is not felt downstream. I dare say people don’t eat GDP. It is because the cap on commercial interest rates is strangling the economy," Njoroge said.
He regretted that the proposal to remove the rate cap introduced in September 2016 was shot down in the Finance Act 2018 but CBK will not tire in its pursuit to scrap the law.
"We cannot give up. We will pick the issue with relevant policy makers and illustrate to them effects of capping interest rates," Njoroge said.
Even so, the banking regulator expressed optimism on the country’s economy which is expected to grow 5.7 per cent in the second quarter of 2018.
It projects a 6.1 per cent growth in the second quarter of 2018 on the back of good agricultural output.
"We continue to project relatively strong economic outcome for 2018, projecting an overall growth of 6.2 per cent. Investor sentiments continue to be strong though little dampened by jitters brought about by VAT on petroleum products," CBK said.
CBK said that lending to the private sector rose to 4.3 per cent in the last 12 months due to high borrowing by the manufacturing, building and construction, trade areas and manufactured items.
Nonetheless, the regulator predicts tougher economic times for households, with inflation expected to hit five per cent margins.
Although it expects food prices to continue dropping, spillover effects of VAT on petroleum products and increase in international oil prices will drive up inflation.
"Overall inflation is expected to rise in near term but it is expected to remain within the target range of 7.5 per cent due to lower food prices reflecting favourable weather," Njoroge said.
The CBK foreign exchange reserve, which is currently at Sh8.5 billion or 5.6 months of import cover continue to provide adequate cover and a buffer against short term shock even in absence of IMF facility that expired mid this month.
Njoroge ruled out possibility of applying for a new IMF precautionary facility in near future, stating that low imports and high diaspora remittance are providing enough forex cover for the stable shilling.