Kenya’s central bank will start loosening its monetary policy if the government sustains efforts to cut a gaping budget deficit, the bank’s governor said on Tuesday.
The finance ministry has set a fiscal deficit of 5.9% for this fiscal year (July 2019-June 2020), which will be lower than the actual deficit of 7.6% in the 2018/19 financial year, Governor Patrick Njoroge told a news conference.
“If this continues there will be scope for monetary accommodation, so a sort of loosening of monetary policy as fiscal policy tightens,” he said.
President Uhuru Kenyatta’s government has been criticised for increasing borrowing since coming to power in 2013. Total public debt stands at 55% of GDP, up from 42% when he took over.
The envisaged rebalancing of fiscal and monetary policy would stabilise the management of the economy and give authorities room to manoeuvre in case of unforeseen shocks in the future, Njoroge said.
“Fiscal (Treasury) had its foot flat out on the accelerator and we as monetary authorities, in order for the thing not to crash, we had our foot firmly on the brake,” he said.
“The car obviously was struggling…you can’t continue like that for too long.”
Policymakers held the benchmark lending rate at 9.0% on Monday, saying inflation was well anchored within the government’s preferred band.
The oil price spike caused by an attack earlier this month on Saudi Arabia’s largest oil processing facility would have little impact on inflation, the governor said.
“It won’t have a significant impact on inflation,” he said.
The central bank still expected the economy to grow by 6% this year, Njoroge said, citing good performance in the tourism sector, a top hard currency earner and employer for Kenya.
The bank was set to review that growth forecast when the statistics office issues growth numbers for the second quarter at the end of this month, he added.
He warned, however, that there were significant risks, including the U.S.-China trade war and the ensuing softening of the global economy.
“The external sector is worsening dramatically,” he said.
“On top of that there is uncertainty about the policy response to the things that are happening in the global environment.”
On the banking sector, Njoroge said he expected recent consolidation in the sector to continue.
“We are not done yet,” he said, adding that the market-driven consolidation was working.
There has been significant deals among lenders since two mid-sized lenders were closed in 2015/16 due to liquidity problems. The most recent major transaction was the acquisition of National Bank of Kenya by KCB Group.