Budget deficit could affect interest rates

May 7, 2009
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, NAIROBI, Kenya, May 7 – Market interest rates will only be pegged on the extent to which the government will borrow funds from the domestic market to bridge the financial gap in the budget, a banking sector player has said.

Kenya Commercial Bank (KCB) Group Chief Executive Officer Martin Oduor-Otieno told reporters that if the borrowing draws up too much liquidity from the market, then interest rates are likely to go up.

“It depends on the extent of the borrowing and also what else is happening in the economy. By what margin it might go up by, is anybody’s guess,” he said while answering questions from journalists on Thursday.

Last week, while tabling a supplementary budget in Parliament, Finance Minister Uhuru Kenyatta said that he has a Sh38 billion hole to fill and indicated that this money would be raised from the local market.

Some financial analysts had initially predicted that the rates would be stable going forward, bolstered by the high liquidity in the market.

In its part, the banking sector has in the last few months appealed to the Central Bank of Kenya (CBK) to reduce the cash reserve ratio so as to facilitate government borrowing in a way that does not pressure private sector credit and growth.

In December last year, the CBK cut the Reserve Ratio from six percent to five percent in a move that was expected to release at least Sh10 billion shillings into the economy.

“When we were talking about the cash ratio being lowered, liquidity in the market was very tight and therefore we were saying that if Central Bank went that route, it would release more liquidity, which would also stem the rise in interest rates,” said Mr Oduor-Otieno, who is also the Chairman of the Kenya Bankers Association.

The CEO spoke after KCB signed a partnership with Safaricom that will see the bank avail funds in electronic form to M-Pesa agents to enable them make payments and effect transfers.

“We will now act as the super-agents of Safaricom as the agents will now be able to come to any KCB branch and exchange value. They will be able to draw electronic cash and deposit it, or physical cash as the need may be. This will help them in terms of liquidity,” he explained.

Safaricom’s CEO Michael Joseph said that special handsets would be distributed to the bank and the over 9,000 agents to aid in the exchange and ensure the availability of service in the market.

“The partnership is around what we refer to as ‘Agent to Agent’ functionality on M-Pesa and is specifically designed to ensure that agents have adequate float levels to effectively service the growing number of our customers,” Mr Joseph emphasised.

Currently, agents deposit cash into the M-Pesa Holding Company bank account at the Commercial Bank of Africa and in the event that they need to convert M-Pesa into cash, they initiate a request on the system which then goes through an internal process before the money is transferred to the agent’s bank account through an Electronic Funds Transfer.

But with the partnership, the agents who are required to register their outlets with KCB personnel will now have an alternative and quicker process to access M-Pesa or cash at a fee.

The agents will be able to access the service at 145 KCB branches countrywide.

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