The International Monetary Fund (IMF) has cautioned Kenya against a larger interest rate cut, despite falling inflation and a stable shilling, warning that easing monetary policy risks price stability and losing the ability to attract external investment flows.
This stance clashes with recent statements by the Treasury and the Central Bank of Kenya (CBK), which have advocated for lower rates to stimulate economic growth and curb rising non-performing loans in the banking sector.
The IMF argues that the differential between Kenya's real policy rate and the US nominal rate remains narrower than pre-Covid-19 levels, and that rate cuts could lead to a sharp rise in the cost of living once economic activity rebounds.
Treasury Cabinet Secretary John Mbadi and CBK governor Kamau Thugge have both suggested that there is scope for further easing of monetary policy, citing slowing economic growth and declining private sector credit growth.
However, the IMF maintains that the tight monetary policy stance remains appropriate given the risks to price stability and external sustainability, even as headline inflation has fallen to a 17-year low and the shilling has gained against the dollar.
The International Monetary Fund has also raised concerns over commercial banks in Kenya borrowing from the Central Bank of Kenya's (CBK) emergency discount window to fund purchases of government securities, exploiting an arbitrage opportunity created by the lower interest rate on the discount window compared to the yields on treasuries.
The discount window, intended as a lender of last resort for temporary liquidity, has been used by some banks to fund short-term investment activities.
Reforms to monetary policy operations allowed banks to access the window at a lower cost while interest rates on T-bills and bonds soared.
In November, the 91-day T-bill yielded 15.32% versus a 14.5% discount window rate. The CBK scrutinizes banks using the facility more than twice a week and takes supervisory action.
The lowering of the discount window rate aimed to improve interbank market functioning and monetary policy transmission.
Banks have cumulatively tapped Sh81 billion from the discount window and Sh4 trillion from reverse repo agreements with the CBK in the past year.
The CBK is yet to comment on the issue, while the Kenya Bankers Association deferred to the central bank.
In Related News, The International Monetary Fund has expressed concerns about Kenya's government-to-government (G2G) oil import scheme, warning of potential adverse effects on the country's debt position.
The program, initially valued at Sh210 billion, has experienced reduced import volumes due to declining fuel demand in domestic and re-export markets.
Uganda's decision to reroute its fuel imports through Tanzania has also made the situation worse, as Kenya has now cut down its monthly diesel and petrol cargo imports from eight to six.
This occurred after Kenya National Oil Company discovered that Uganda's new import system was lengthy and not cost-efficient.
Kenya's current debt stands at $82 billion, with over half of government revenue allocated to debt servicing. The G2G scheme, launched in March 2023 with Saudi Aramco, Abu Dhabi National Oil Company, and Emirates National Oil Company, was designed to address dollar shortages and stabilize fuel supply through six-month credit arrangements backed by Kenyan bank letters of credit.