Kenya Central Bank Expects Current-Account Gap to Stabilize

  • Deficit seen at about 5.2% of GDP vs 10.4% 18 months ago
  • Bank to continue intervening to smooth shilling volatility

Kenya’s current-account deficit will stabilize after shrinking last year as the currency strengthens, exports increase, tourism improves and remittances climb, central bank Governor Patrick Njoroge said.

The gap probably narrowed to 5.2 percent of gross domestic product in 2016 from 10.4 percent 1 1/2 years earlier, he said in an interview Thursday in Davos, Switzerland. The bank will continue to intervene to slow the shilling’s depreciation and appreciation, trying to smooth volatility.

“The current account has closed quite well and the prognosis is that it will remain at that level in the future,” Njoroge said.

Kenya’s shilling has weakened 1.4 percent against the dollar so far this year. It’s depreciated in response to the strengthening U.S. dollar amid higher rates and the expectation of faster growth there, as well as local concerns that the Kenyan current account gap could widen. Rising oil prices and imports of capital goods have led to expectations of a bigger deficit in the broadest measure of trade in goods and services.

“The U.S. dollar is the one that has been driving the general movement,” Njoroge said. “We cannot intervene against the dollar indefinitely. Not even the Bank of England can do that. It is important to understand that ‘Kenya vs the U.S. dollar’ is a non starter.”

Foreign Reserves

Kenya’s foreign-exchange reserves currently stand at $6.94 billion, according to central bank data.

“The issue is not reserves,” Njoroge said. “We don’t have the firepower of the U.S. We will continue to intervene to slow the appreciation or depreciation, whichever, as we’ve done before.”

Kenya’s growth rate in 2017 is expected to be around the same as last year, though the government’s introduction of interest-rate caps in August may curb the expansion, Njoroge said. The central bank’s forecast is for gross domestic product to increase about 6 percent this year, he said.

“Our view is that caps could slow GDP growth, but we still have to see the data and isolate this from the trend,” Njoroge said.

Kenyan President Uhuru Kenyatta in August imposed a 400 basis-point ceiling on rates to stimulate lending. Growth in loans to the private sector slowed to 4.5 percent in October, compared with 19.5 percent a year earlier, according to the latest central bank data. The measures haven’t been in place long enough to establish whether they’re working or not, Njoroge said.

‘Lending Curtailed’

“We have been monitoring and we have not got conclusive evidence,” he said. “The sense is that lending has been curtailed to some sectors that were getting loans at much higher rates. In that sense, it is still not conclusive because banks are trying to accelerate their SME lending. We need to look at the data carefully.”

Kenyatta’s decision to impose the caps fulfilled an election pledge in 2013 to reduce the cost of credit for borrowers as his party targets an acceleration in the country’s growth rate to 10 percent. The president is seeking a second term in elections scheduled for Aug. 8.

The caps are “not something that will last for ever” and Kenya “won’t abandon” free-market rates, Njoroge said.

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