Economist predicts stable interest rates

August 6, 2008
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, NAIROBI, August 6 – A leading economist with the Standard Chartered Bank on Wednesday predicted that the country’s financial market might be able to hold interest rates steady in the foreseeable future.

Razia Khan, the bank’s Regional Economist for Africa told a customer breakfast briefing that this was as a result of the Central Bank of Kenya’s (CBK) reluctance to address the short term inflation driven by supply constraints with monetary policy measures.

CBK, she noted, had given indications that the high fuel and oil prices were a one-off shock, which do not require monetary tightening. 

“Given the reassurances from the CBK, Kenya is unlikely to see any significant interest rates tightening any time soon,” she said.

Khan however observed that for the country to drive long term economic growth, the government must put in place measures that guarantee low and stable rates of inflation in the future.

“If people are experiencing higher inflation in their consumption basket they are going to have less left for their discretionary spending, and this sort of growth rate of consumption that has driven economic growth in recent years might be at risk from the higher inflation,” she added.

However, Khan said it was commendable that the inflation rates had come down from 31.5 in May to 26.5 in July and expressed confidence that the rates would go lower.

She attributed the lowering trend in the inflation rates to some of the measures, such as removal of VAT on bread and rice that were undertaken in the budget, and which have a beneficial impact on food inflation in the near term.

But she said there is still uncertainty over the underlying rate of inflation, which has been rising in recent months. Underlying inflation provides the true pressures that an economy is facing.

Khan also said that although the economy has shown signs of recovery in all sectors, despite the slump that was experienced in the first quarter of the 2008, investor confidence was pivotal for a positive outlook.

She added that the advancement of credit to key sectors of the economy such as manufacturing and agriculture was the ultimate determinant of growth in 2008 through to 2010. 

The economist argued that the lack of credit facilities for these sectors was not necessarily due to the reluctance by financial institutions to lend, but because borrowers had scaled back the extent of their commitment, as part of the uncertainty about which direction the economy would take in the medium term.

She added that once the investors got over the uncertainty, there would be a demand for loans that would be reflected in credit growth figures.

Citing electricity consumption, which has increased by four percent, she said this was an indicator of which direction the country’s GDP would take.

Khan added that the economic development of neighbouring countries provided an impetus for the growth of Kenya’s economy this year.

“The resurgence in areas such as Southern Sudan and Eastern DRC has created a huge amount of demand for imports from the region and Kenya as the manufacturing base has been very well placed to meet this demand,” she explained.

At the same function, Khan also called on African countries to increase the intra-regional trade as a way of helping the continent to break away from marginalisation in global trade.

This, she noted, had the potential to grow the region’s economies at an even faster rate.

But for such growth to be realised, she stated that there was a need to have trade liberalisation that addresses the changes in tariff structures and improvement in the overall business climate.

Khan commended efforts by African governments to seriously and urgently address the poor state of the infrastructure, saying that this would further spur growth and development.

African growth, she explained, had been able to survive the global slump as it had been able to improve its fiscal policy, lower its budget deficit, borrow less as well as manage to keep inflation at a single digit. 

“Africa should be able to take the global downturn in its stride,” she advised.

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