Expensive loans loom as IMF pushes for interest rates hike

The International Monetary Fund (IMF) has urged low-income countries to tighten monetary policies and increase lending rates to save local currencies from depreciation and associated inflation pressures.

It argues that as central banks of advanced economies tighten policy and interest rates rise, emerging markets and developing economies could face a further withdrawal of capital and currency depreciation.

“Central banks will need to adjust their monetary stances even more aggressively should medium-or long-term inflation expectations start drifting from central bank targets or core inflation remains persistently elevated,” IMF said in the April Global Financial Stability report highlighting financial fragility risks.

IMF projects that 60 per cent of low-income countries, among them Kenya, are either at high risk of debt distress or already experiencing it.

This latest advisory by the Bretton Woods institution is expected to hit hard Kenya at a time when households are grappling with slashed salaries, weakening the shilling, and pressure to service massive public debt and finance the budget deficit.

However, Churchill Ogutu, an economist at IC Group said the recommendation might not work in all low-income countries including Kenya because when the Central Bank of Kenya (CBK) starts to tackle inflation it might have a negative impact on growth. “It is a double-edged sword in as much as it is a broad proposal,” he added. Commercial banks have been pushing for an increment of CBK lending rates beyond the current 7 per cent which would have made loans more expensive amid increased borrowing.

The latest data from CBK shows that interest rates on fixed deposit accounts rose to 6.61 per cent in February, highlighting increased fund demand by commercial banks to meet lending activities.

Weakening shilling

Ogutu, however, argues that Kenya might be forced to address the weakening shilling by prudent increase of the CBK rates as America continues to tighten its monetary policies in favour of the dollar.

Kenya shilling has depreciated by about 5.3 per cent against the dollar, from Sh109.55 in January 2021 to Sh115.7 recorded yesterday, partly attributable to increased dollar demand from the volatile oil and energy sector. “We expect the shilling to remain under pressure in 2022 as a result of rising global crude oil prices on the back of supply constraints and geopolitical pressures at a time when demand is picking up with the easing of Covid-19 restriction,” Cytonn Investment notes.

Sustained artificial fuel shortage that lasted for weeks and global pressures on the energy value chain has rallied consumer prices to historic high levels as oil majors toyed with consumers over petroleum subsidy compensation.

IMF has been influential in shaping Kenya’s economic policies due mainly to its massive lending to the country which amounted to Sh1.23 trillion as of December 2021, forcing the implementation of painful economic conditions across various sectors.

Among a raft of tough reforms, Kenya is expected to implement include the removal of tax reliefs and exemptions, hiring freeze in the public sector, restructuring of loss-making State corporations, and debt servicing. Unlike previous budgets where the government introduced extensive relief measures to address the dire food security, the 2022/23 budget somehow steered away from this despite the high cost of basic commodities that are eating up a bigger share of household budgets.

Aggressive taxation

National Treasury Cabinet Secretary  Ukur Yatani introduced aggressive taxation as part of plans by the government to raise 50.4 billion in new taxes to fund the Sh3.3 trillion 2022/23 budget which is expected to fan inflation currently standing at 5.6 per cent.

These include 16 per cent Value Added Tax (VAT) on flour, 10 per cent duty on imported cereals, increasing VAT on jewellery to 15 per cent levy, and 15 per cent excise tax on fees charged for the advertisement of betting, gaming, and alcohol-related activities.