By James Anyanzwa
Kenya is on course to renewing its $1.5 billion standby credit facility with the International Monetary Fund after signing a deal with selected banks to release close to Ksh1 trillion ($10 billion) in loans to the private sector despite the prevailing rate caps.

This comes after parliament rejected the National Treasury’s attempts to repeal the interest rate caps, leaving the government exposed in its renewed negotiations with the IMF for a facility that is designed to cushion the economy against external shocks and raise its credibility in the eyes of international lenders.

The EastAfrican has learnt that the National Treasury has made a renewed commitment to free credit to the private sector, now with rate caps in place, and to reduce the fiscal deficit to as low as five per cent in the next fiscal year (2019/2020) from 7.2 per cent in the last fiscal year (2017/2018) as part of the new conditions to return to the IMF programme, which expired in September 2018.

The EastAfrican has further learnt that the government’s progress in promoting financial inclusion also helped it win back the confidence of the IMF to restore the country to the latter’s two-year precautionary facility programme.

A government official privy to the negotiations told The EastAfrican that the agreement, which was signed last week between the Central Bank and top five banks to start lending to micro-, small- and medium-sized enterprises was in compliance with the IMF’s new conditions.

The five commercial banks–KCB, NIC Group, Commercial Bank of Africa, Diamond Trust Bank and Co-operative Bank–and the Central Bank, last week launched the pilot phase of a mobile loan product targeting MSMEs.

The five banks have set aside close to Ksh1 trillion ($10 billion) to lend to the MSMEs.

Under this programme MSMEs will receive unsecured loans ranging from Ksh30,000 ($300) up to Ksh250,000 ($2,500) with repayment profiles of one to 12 months, at an interest of nine per cent per annum compared with the current controlled rate of 13 per cent, considering that the Central Bank Rate is now fixed at nine per cent.

“Small and mid-size enterprises are the lifeblood of any economy, but many have struggled to secure the necessary financing to continue operations in the current economic climate,” said CBK governor Patrick Njoroge.

“IMF has always been against the rate caps because banks have not been lending to the MSMEs and have always concentrated on lending to the government and other corporates, when they consider less risky,” the source said.

“We have now talked to the banks to start lending to the MSMEs and with banks agreeing to lend to the private sector, IMF has problems with the rate caps,” added the source.

Inclusion

According to the source, the government’s significant progress in attracting the majority of its adult population into the formal financial system also played a big part in softening the hardline stance of the IMF.

Barely two weeks ago, Kenya’s National Treasury Cabinet Secretary Henry Rotich told Reuters in London that Kenya expects to finalise a deal with the IMF on a new standby credit facility in two months and that the fund was not insisting on the removal of interest rate caps as a precondition for a new deal.

“We are looking at a similar arrangement to what we had before. We have everything on the table and I would estimate that it won’t take us more than two months,” he said.