IMF sees loans to Kenya’s private sector declining
The International Monetary Fund (IMF) sees loans to Kenya’s private sector declining to a single digit growth this year signaling a dim view of economic activity as the country struggles with weak demand and crowding out effect of the debt paying government.
The Fund indicated that credit to the private sector is expected to plunge from 12.5 percent to 9.5 percent. This signal banks will be more willing to lend to the government than to private businesses and individuals.
Private sector suffering
The IMF Board, which yesterday gave Kenya access to $415.4 million programme loans and additional support as well as new credit line of $551.4 million under the 20-month Resilience and Sustainability Facility (RSF) noted credit will bounce back in just a year before surpassing last year’s credit growth in 2025.
Kenya’s private business is suffering from years of low credit due to the interest rate regime. Businesses were recovering recording double digit growth last year, when a new set of threats have emerged.
The latest Stanbic Bank Kenya Purchasing Managers’ Index (PMI) shows businesses are struggling. PMI dropped for the fifth month running to 47.8 points compared to 49.4 in May.
Firms widely reported a lack of purchasing power in the economy due to high inflation and cash shortages. This means the current environment where interest rates are rising and new tax measures are coming live, demand will sink further. The net effect will be cutting business sales and increasing default rates and company failures.
Even as businesses struggle with the tough economic environment, the government is pushing them off the credit table, taking up huge section of resources from banks to meet debt payments.
Kenya’s bloated administration, huge debt payments are pushing authorities to borrow heavily in domestic market. At the moment, dollar loans are too expensive in the global markets.
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Banks buying govt securities
The country’s fiscal deficit of Kes718 billion (4.4 per cent of GDP) will be financed heavily from domestic borrowing. President William Ruto is seeking Kes586.5 billion from domestic market and Kesh131.5 billion in external borrowing.
Such aggressive borrowing has seen bond rates rise to almost 17 percent. The average interest rates for 91-day instrument have gone up to 12.1 percent from 9.44 percent in January. This means banks will mostly put their money in government securities.
Lending to the Kenyan government and buying hard currency for investment purposes is already providing the best returns to investors in the first half of this year. Earnings from government paper are beating income from property and shares listed at the Nairobi Securities Exchange.
Kenya’s history with the IMF shows stemming runaway inflation always hits the local economy in the short run.
A 1999 study by the IMF showed that Kenya’s inflation in the long run was determined more by exchange rates, the foreign price levels and terms of trade rather than money supply. The other cause, shortage of maize every two to three years when Kenya experiences droughts.
Following the Fund’s advise like during the 1990s, Kenyan authorities are raising interest rates fast to attract international capital. What’s more, policymakers are allowing the currency to unravel, causing soaring inflation and a recession.
Investments are all shifting to government ignoring the economy and domestic demand is thinning out. Economic experts are attributing this to higher tax regime and stagnant wages.
Like in the 90’s foreigners and exporters are likely to be the beneficiaries on the currency fall. The wealthy class, whose current holdings of dollars crossed Kes1.05 trillion for the first time in March, will benefit, too.
