Kenya's parliament approves retaining interest rate cap, against IMF wishes
* IMF wants cap scrapped or changed
* Measure aimed to help small traders
* Legislation still needs president's assent
(Adds IMF comment)
By John Ndiso and Humphrey Malalo
NAIROBI, Aug 30 (Reuters) - The Kenyan parliament voted on
Thursday to retain the cap on commercial interest rates which
the International Monetary Fund has insisted must be scrapped or
modified in return for a new standby arrangement.
In a response to emailed questions, Jan Mikkelsen, the IMF's
Resident Representative for Kenya, said they were aware of the
passing of the finance bill and were currently assessing the
implications for the IMF-supported program.
Kenyan lawmakers also voted to delay a proposed 16 percent
tax on petroleum products for two more years, citing the high
cost of living - a move that will be a blow to government
efforts to raise revenues through higher taxes.
The rate cap, introduced in September 2016, was aimed at
helping small traders access capital at affordable rates, but
has had the opposite effect, with banks saying they cannot price
risk to small and medium enterprises (SMEs) properly while the
cap is in place.
As a result, lending to the private sector fell from 9.3
percent in 2016 to 2.4 percent last year.
"Many thousands of Kenyans have been unable to access bank
lending and have turned to more expensive borrowing," said Aly
Khan Satchu, a Nairobi-based independent trader and analyst.
President Uhuru Kenyatta said in April that he recognised
the limitation of the law and hoped that the finance bill would
remove the cap that he said had ended up hurting the financial
The legislation still needs to secure presidential assent,
and it was not clear what line Kenyatta would now take.
"The president will have to crack the whip, and hard,
because notwithstanding some bravado chatter, it would not make
sense to lose the support of the IMF at a time when the markets
are so skittish and our debt-to-GDP ratio is nudging 60
percent," Satchu said.
Some bank stocks at the Nairobi Securities Exchange edged
lower on Thursday, after the bill was passed.
"It was not widely expected, people were banking on repeal
of the interest cap," said Sheema Shah, equities dealer at Apex
"It's still a buy, the current sell-off is temporary ...
mostly it's the foreign investors who are heavy on that
particular stock who are selling off."
In June, Finance Minister Henry Rotich proposed repealing
the interest rate cap, a move cheered by bankers.
But lawmakers have continued to insist they are not ready to
remove the upper limit of commercial lending rates at 4
percentage points above the central bank rate. Lawmakers did,
however, remove the minimum deposit rate of 70 percent of the
central bank rate.
The IMF has demanded the cap be repealed as a condition for
Kenya to access its balance of payments support.
Kenya secured a six-month extension for its stand-by credit
arrangement of $989.8 million from the fund in March, and is
seeking another extension when it expires in
Jibran Qureishi, an economist for East Africa at Stanbic
Bank, said the decision threw open the question of how
discussions with the IMF would now proceed.
"On the IMF, with the VAT on fuel being postponed, with most
of the tax measures not approved, this means the fiscal deficit
is likely to remain higher than projected," Qureishi said. "The
odds of the (IMF) facility being retained are quite slim, but we
have to see what will happen."
Kenya's legislature also rejected a "Robin Hood" tax of 0.05
percent on bank transfers of over 500,000 shillings ($5,000)
during Thursday's session and an employee contribution scheme
towards the national housing development fund.
The rejected tax hikes were designed to fund a range of
government development goals including universal healthcare and
(Additional reporting by George Obulutsa; Writing by Maggie
Fick; Editing by Omar Mohammed and Andrew Bolton)
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