Kamau Thugge: CBK boss responds to concerns about interest rates getting out of control

Central Bank of Kenya (CBK) Governor Kamau Thugge held his third post Monetary Policy Committee (MPC) news conference on Wednesday to explain the decision by the rate setting organ to hold the Central Bank Rate at 10.5 percent.

Dr Thugge who is also the MPC chairman noted inflationary pressures were well contained and that the impact of June’s tightening when the rate was raised from 9.5 percent to 10.5 percent was still having its effect on the economy.

Below is an extract of the Governor’s response to questions posed during the post-MPC briefing.

Is the CBK concerned that the interest rates will get out of control as T-bill and lending rates remain elevated on the economy?

Of course, we are concerned about high interest rates, however, it’s important to point out that credit to the private sector through August did increase to 12.6 percent. In terms of some of the measures that the government has announced including reductions in expenditures and additional revenue prospects, we believe these actions will stem the increase in interest rates on Treasury bills.

We are also working closely with our development partners and expect an inflow of resources in the next two months which would ease the pressure on domestic borrowing. We look to ensure that interest rates don’t get out of control but believe the measures put in place will stem the increase in interest rates.

Has Kenya cancelled the plan to repurchase a portion of the $2 billion Eurobond and are current global credit market conditions favourable for refinancing the Eurobond?

Currently, credit market conditions are not favourable for refinancing and, therefore, we have been engaging our lead managers and advisers on how to address the 2024 Eurobond. We have looked at several options and are talking to our multilateral partners to see how much in additional resources they can provide to us.

We are building our war chest, so to say, and we do expect that between now and June, we will progressively reduce the liability of the Eurobond so that by the end of June, if necessary, we will be able to use our international reserves. There is absolutely no doubt as to whether the government will be able to meet the maturity.

How many banks have gotten the nod for risk-based pricing and what could explain the long wait for some of the approvals?

We have agreed with over 30 banks on risk-based pricing and we will continue engaging with the other banks so we can complete this process as quickly as possible.

What can explain the recent drain in forex reserves?

The decline partly reflects debt service payments. Having said that, the level of reserves is about $6.7 billion or 3.7 months of import cover. We have a flexible exchange rate system and we believe the level of international reserves is adequate to deal with any short-term shocks.

What is the cause of rising non-performing loans and is CBK worried about sticky NPLs in some banks?

NPLs are an issue of concern and we are keeping a close eye on them. Banks are provisioning for it and we are engaged with banks with high non-performing loans to make sure they are making the right and enough provisions and that they have a plan on how to address the NPLs.

Is the depreciation of the shilling a factor in the sharp fall in imports this year?

The simple answer is Yes. Normally, the depreciation of the currency works in incentivising exports and also to make imports more expensive so as to slow them down and reduce the demand of the forex exchange rate, easing pressure on the exchange rate.

The reduction in the import of equipment and machinery partly reflects the fact that the government has finished some of its projects and is thereby not importing as much machinery as before. Additionally, there have been measures put in place to incentivise local production.

With capital flows positive, diaspora remittances and exports are robust and imports have declined, why is the Kenya shilling still depreciating?

After the 2008/2009 global financial crisis, the US and other advanced economies eased monetary policy considerably and that continued during the Covid-19 crisis.

The expansion in money supply subsequently led to inflationary pressures and the reaction was to raise interest rates sharply and quickly. The result was all currencies globally depreciated and it’s not just the Kenyan shilling.

In recent months, however, imports have fallen while exports and other receipts leading to inflows have improved.

Going forward, together with actions taken on the fiscal side, we should be able to see less pressure on the exchange rate.

That improvement added to expected inflows from our multilateral development partners, we expect a slowdown in the depreciation of the exchange rate and we should see this in the next one month or so.

From your assessment, when can we expect stability in Kenya’s foreign exchange?

The CBK operates a flexible exchange rate system, that means that the value of the shilling is determined by market forces of supply and demand. When there is excessive volatility, we will go into the market but just to slow that volatility but not aim for a particular exchange rate. 

In terms of stabilising the market, we have seen the demand for foreign exchange from imports decline while receipts from remittances and travel are doing quite well.

We have seen a slowdown in the increase of US interest rates and in our case, we did raise our interest rates sharply in June and so the difference in rates has been closed, slowing down the portfolio outflows.

Additionally, the financing expected from our development partners, all of this should combine and bring stability to the forex exchange market.

Are you concerned about our debt-carrying capacity amid rising interest rates?

We are certainly concerned but measures taken by the government in the last few days and months should contain the increase in interest rates and bring about liquidity in the system at least for the national government and lower pressures on interest rates.

We also do expect some disbursements from our regional development partners such as the African Development Bank and the Trade and Development Bank in the next one to one and a half month, that again will ease pressure on not only interest rates but also the exchange rate.

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