The Central Bank of Kenya (CBK) will meet today to deliberate over adjustments to its interest rate. Faced with the dire economic fallout of COVID-19 and an estimated 1% contraction in 2020, the CBK is expected to marginally ease its 7% benchmark.
Although good weather conditions and falling global oil prices could rejuvenate the Kenyan economy in the medium-term—with a projected rebound of 6.1% in 2021—falling export demand, tight credit conditions and rampant youth unemployment threaten to derail domestic recovery. Liquidity-boosting measures, such as the reduction of value-added tax (VAT) from 16% to 14%, have strangled revenue growth, amplified the fiscal deficit and exacerbated the nation’s external financing needs.
To address revenue deterioration, the government recently announced a 2020-21 budget predicated on expenditure consolidation that prioritises the “Big Four”: food security, affordable housing, healthcare access and manufacturing. Given that Kenya’s current fiscal deficit amounts to 8.3% of its GDP, there is headroom to pursue a more accommodating monetary stimulus today. With inflation inching down to 5.5% last month and the cash reserve ratio lowered to 4.25%, additional easing could inject more than $330 million into commercial banks, providing much needed credit to Kenya’s flagging private sector.
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