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Kenya’s parliament retains interest rate cap against IMF wishes

The Kenyan parliament voted on Thursday to retain the cap on commercial interest rates which the International Monetary Fund (IMF) has insisted must be scrapped or modified in return for a new standby arrangement.

Lawmakers also voted to delay a proposed 16 per cent tax on petroleum products for two more years, citing the high cost of living – a move that will be a blow to government’s efforts to raise revenues through higher taxes.

The IMF has demanded the cap be repealed as a condition for Kenya to access its balance of payments support.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 dollars from the fund in March, and is seeking another extension when it expires in mid-September.

The rate cap, introduced in September 2016, was aimed at helping small traders, access capital at affordable rates, but has had the opposite effect.

Banks say 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 per cent in 2016 to 2.4 per cent in 2017.

It was not clear what line Kenyatta would now take.

President Uhuru Kenyatta said in April that he recognised the limitation of the law and hoped that the finance bill would remove the 14. 5 per cent cap that had ended up hurting the financial sector.

Some bank stocks at the Nairobi Securities Exchange edged lower on Thursday, after the Finance Bill was passed.

“It was not widely expected, people were banking on repealing of the interest cap.

“It’s still a buy, the current sell-off is temporary…mostly its the foreign investors who are heavy on that particular stock who are selling off,” said Sheema Shah, equities dealer at Apex Africa.

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.

Jibran Qureishi, an economist for East Africa at Stanbic Bank, said the decision threw open the question of how discussion 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.

“The odds of the (IMF) facility being retained are quite slim, but we have to see what will happen,” Qureishi said.

The legislation, known as the Finance Bill 2018, still needs to secure presidential assent before its proposal can come into effect. (Reuters/NAN)

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