Cash Flow Constraints Slows Kenya’s Private Sector Activity

Kenya’s private sector activity grew at a slower pace in October after accelerating for five straight months, owing to cash flow constraints among firms.

The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) survey for manufacturing and services eased to 53.2 from 54.1 in September. Any reading above 50 indicates growth.

Companies say the government is taking years to settle bills for goods and services supplied to it, mainly due to widespread corruption. The cash flow challenges were being compounded by a cap on commercial lending rates that has curbed credit growth, said Jibran Qureishi, regional economist for East Africa at Stanbic.

Commercial banks Tuesday appeared to be exploiting loopholes in the rates cap law to continue charging interest above the stipulated 14 per cent, even as they push for it to be repealed.

The law introduced on September 14, 2016 stopped banks from charging exorbitant interest rates by capping lending rates to four percentage points above the Central Bank Rate (CBR).

The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent.

However, some banks are using the gaps in the Banking (Amendment) Act, 2016 to levy higher interest rates.

The Kenyan central bank’s Monetary Policy Committee said last month that it will hold its next rate-setting meeting on November 25, the banking regulator has said.

CBK held its last benchmark lending rate at 9.0 per cent, saying inflation expectations were within the target range and the economy was operating close to its potential

Monetary policy consists of decisions and actions taken by the Central Bank to ensure that the supply of money in the economy is consistent with growth and price objectives set by the government. The objective of monetary policy is to maintain price stability in the economy. Price stability refers to maintenance of a low and stable inflation.

The Central Bank’s monetary policy decisions are made to maintain a low and stable inflation rate over time, which is an indication of price stability.

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