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Loan Borrowers Hit With Highest Rate in 12 Years - Money Weekly
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Loan Borrowers Hit With Highest Rate in 12 Years - Money Weekly

It is that time of the week again when we look at the news headlines over the last seven days and dissect those that can affect your money. 

Welcome to yet another edition of Money Weekly.

This week, the Central Bank of Kenya’s Monetary Policy Committee (MPC) has adjusted the base lending rate upwards by 50 basis points, moving the lending rate from 12.5% to 13%. 

This is expected to impact the cost of loans, however, the CBKinsists that the measures are necessary to curb inflation and stabilise the exchange rate.

In the six months to December 2023, the government collected over Ksh26 billion from mandatory housing fund deductions amidst legal battles.

Power prices may come down, according to KenGen, due to the heavy rains that have filled up the seven dams that generate most of Kenya’s electricity. Meanwhile, KeNHA is looking to rent out road stations to provide sanitation services to road users as directed by the court in 2020.

The shilling is staging a rare recovery, which has been attributed to the inflow of money from international lenders. 

Farmers, on the other hand, have something to look up to. Avocado farmers have been advised to take advantage of the Qatar market once it opens up. Flower farmers are confident about boosting their production and cotton prices have been increased by 38% to incentivise adoption.

For this and much more. Let’s dive in.

CBK Raises Rate to 13%

Kenyans servicing variable interest commercial bank loans should prepare to pay marginally higher rates after the Central Bank of Kenya (CBK) adjusted the base lending rate upwards to 13%.

This new rate is expected to push interest rates for some borrowers - based on their risk profile - beyond 24%. Banks use the lending rate to adjust their interest rate. They also factor in the creditworthiness of the borrower and the financing objective. 

The tightening of monetary policy also increases loan risk. When banks factor the risk into their credit products, the interest rate goes much higher.  

The 50 basis point increase in the benchmark rate comes two months after the CBK announced a jumbo raise in December 2023. The jumbo raise saw the CBK increase the benchmark rate by 200 basis points, moving the lending rate from 10.5% to 12.5%. The current raise, announced on February 6, will see the rate move from 12.5% to 13%.

The MPC, while making this decision, noted the pressure on the exchange rate and the inflationary pressure. The Shilling’s exchange rate was noted to be making a comeback against the Dollar, but inflation was still on the loose. These measures are expected to put inflation on a downward path towards 5.0% and also address the exchange rate pressure.

Inflation has been on the rise in the first month of 2024, with the overall inflation increasing from 6.6% in December 2023 to 6.9%. 

After the announcement of the rate increase, the Central Bank of Kenya's Governor, Dr. Kamau Thugge, clarified some issues related to the MPC’s directive. Here are some of the clarifications.

  • Reserve position strengthening: The CBK’s foreign exchange reserves improved from $6.5 billion (Ksh1.04 trillion) in December 2023 to $7.1 billion (Sh1.14 trillion) in February 2024. This increase is due to inflows from the loans offered by the International Monetary Fund (IMF) and the Trade Development Bank (TDB).
  • Currency Volatility: The CBK will intervene if there is excessive volatility in the market. Governor Thugge holds that the current exchange rate has exceeded equilibrium, so the CBK could put in measures to support the exchange rate moving forward. The current actions — raising the CBR by 50 basis points and the inflows from external loans — are expected to strengthen the exchange rate.
  • Tightening Monetary Policy: The MPC will tighten monetary policy if the inflationary pressures and the pressures on the exchange rate do not subside. The MPC is expected to meet again in April. 
  • CBK’s Priorities: Currently, the CBK’s priority is to stabilise the exchange rate and curb inflation. Although that might have an impact on domestic loans, Governor Thugge says that is not a glaring concern at the moment.
  • Non-Performing Loans: Although non-performing loans (NPLs) are quite significant, there has been a decline over the last three months, from 15.3% to 14.8%. The CBK will, however, continue to keep an eye on them.
  • State of the Kenyan Shilling: The shilling has been stabilising over the last few days. The current measures are meant to keep it stable over the foreseeable future. The governor’s view is that the shilling overshoot is not in line with the macroeconomic fundamentals.

Govt Raised Ksh26.8bn From Housing Levy 

The State Department for Housing and Urban Development collected Ksh26.8 billion in the six months ending December 2023. The target is to collect Ksh63.2 billion by June 2024. 

The amount has been collected from the 1.5% housing levy, which was declared unconstitutional by the High Court in November 2023 and stopped by the Court of Appeal in January. 

Housing Scheme Favours the Rich

The Parliamentary Budget Office (PBO) has raised concerns that the affordable housing project favours high-income earners, defeating its primary aim.

Under the current allocation, 77% of Kenyans earning less than Ksh149,000 have only been allocated 60% of the funds. The other 23% earning above Ksh149,000 has been allocated 36% of the funds.

Payment of School Fees Via eCitizen

The High Court has temporarily halted the government’s directive for parents to pay school fees via the eCitizen platform. The directive that was set to begin implementation with national schools was issued on January 31. The court has suspended the directive pending further directions on February 13.

KenGen: Power Prices May Come Down

KenGen reports increased generation of cheaper hydropower on filled-up dams. Managing Director Peter Njenga states Seven Forks Scheme dams are at their highest levels in recent times. 

There is a significant increase in hydropower output expected to lead to lower electricity bills for consumers. Furthermore, KenGen assures no flooding risk and implements a robust water management program.

This is as the Ministry of Energy announced a reduction in the cost of a unit of electricity starting February 8, 2024. The cost of a unit of electricity in Kenya was reduced by Ksh3.44 with prepaid users experiencing immediate changes. Changes will be reflected in the February power bill for postpaid customers. 

Kenya’s Electricity Demand Could Overtake Generation

By 2027, it is anticipated that Kenya's energy consumption will surpass generation capacity. The International Energy Agency (IEA) forecasts 5.7% demand growth between 2024 and 2026.

Currently, the generation capacity is estimated at 12,652 GWh, with demand reaching 10,008 GWh in 2022. A slowdown in infrastructure spending could make it more difficult to boost generation. During the first part of December 2023, spending on projects in the energy sector decreased dramatically.

KeNHA to Rent Out Highway Stations to Private Developers

The Kenya National Highways Authority (KeNHA) has proposed renting out roadside stations along highways for road users’ convenience. This is in response to a 2020 court decision directing them to provide sanitation facilities along highways.

These stations will offer restrooms, accommodation, parking, restaurants, and other services. Already established stations will be expected to comply within two years. The charges for the stations include a Ksh20,000 application fee and a Ksh100,000 annual operating licence.

Roads Spending Drops to Record Low

There was a significant decline in expenditure on road development in the six months ending December 2023. The expenditure is down 57.66% compared to a similar period the year before. 

Energy-related projects like power transmission lines and electricity-generating facilities have also been impacted, with expenditure in the review period similarly touching the lowest levels in the review period.

Bank Dollar Rates Easing

Commercial bank dollar rates have notably eased, with five lenders selling for no more than Ksh164.50 for the currency as of Friday, February 2. Confidence in the forex market has risen due to recent inflows from multilateral lenders and high foreign investor interest in infrastructure bonds.

The shilling has rallied against the US dollar, marking a notable rise from Sh161.35 on January 22 to Sh160.57 by the end of trading on Thursday, February 1. The fall in bank dollar rates is attributed to the equilibrium between demand and supply.

This comes after Kenya received a loan from the Trade Development Bank to the tune of $210 million on February 1. The loan has increased Kenya’s forex reserves by $117 million (Ksh18.79 billion) to $7,134 million (Ksh1.15 trillion). This is equivalent to about 3.81 months of import cover, just a little shy of the statutory requirement of four months.

Fuel Prices Could Go Lower

Fuel prices in Kenya might decrease for the third consecutive month due to low global crude prices, pending the Energy and Petroleum Regulatory Authority's review. The drop in crude prices has been observed in landed cargoes at the Port of Mombasa, influenced by low global crude prices and reduced attacks on vessels plying the Arab nations.

Attacks on vessels in the Red Sea have impacted global maritime trade, causing shipping companies to divert vessels, but the impact on fuel supplies is yet to be fully realised. Global crude prices have slightly decreased, with Brent prices hitting a low in January, suggesting a potential drop in pump prices for consumers in Kenya.

In the January-February cycle, super petrol decreased by Ksh5, diesel by Ksh5, and kerosene by Ksh4.82 per litre, reflecting the second consecutive drop in prices.

Farmers Asked to Eye Qatar Avocado Market

Farmers in Kenya are urged to exploit the avocado market in Qatar to alleviate pressure from oversaturated Dubai. The Kenyan government closed the 2023/2024 fiscal year avocado season in November to prevent exporting immature fruits, aiming to safeguard the export market reputation.

Qatar exhibits significant avocado demand, especially among its young population and tourists, sourcing from countries like Uganda, Peru, South Africa, America, Mexico, Lebanon, and increasingly Kenya. 

Kenya is a leading avocado producer in Africa and exports to various destinations, including the Netherlands, UAE, China, France, Spain, Turkey, the EU, and the USA, exporting up to 20,000 metric tonnes annually.

Untapped Flower Production Potential 

The Kenya Flower Council (KFC) suggests that the country could double flower production with full government support. Unlike other agricultural sectors receiving subsidies, horticulture farmers haven't benefited, hampering sector growth.

Major gaps in the sector include failure to remit VAT refunds worth billions and a lack of incentives for farmers. The government's cap on VAT refunds at Ksh10 million per month, despite owing farmers over Ksh13 billion, obstructs sector growth.

Despite challenges like cold weather from ongoing rains, farmers express confidence in exporting more flowers ahead of Valentine's Day. Flower exports from Kenya are ongoing, with weekly shipments reaching 3,400 tonnes, and expected to rise to 4,000 tonnes.

Milk Deliveries Hit 29-Month High

Milk delivery to processing firms peaked at 75.68 million litres in December 2023, the highest in 29 months, attributed to increased production from favourable rains. The full-year milk consumption in 2023 also hit a record high of 810.76 million litres, a 7.33% increase from 2022.

Additionally, milk prices remained stable throughout the year, supported by ample fodder availability from heavy rains, with January 2023 seeing a 0.6% increase in average price per litre compared to January 2022.

Govt Increases Cotton Prices

The government has increased cotton purchase prices by 38% to attract more farmers back to cotton farming. It has allocated Ksh60 million to support farmers to expand farmed acreage from 40,000 to 103,000, with a goal of reaching 340,000 in the next three years.

Prices have been adjusted from Ksh65 to Ksh72 per kilogram to ensure farmers break even and access necessary inputs, with plans to partner with counties to boost production.

Furthermore, the government has procured 60 metric tons of cotton seeds from Togo for seed multiplication to address seed shortages.

NSE Incubator Ibuka 5 Years On

The Nairobi Securities Exchange (NSE) incubator programme, Ibuka, has struggled to produce successful outcomes. The Ibuka programme aims to prepare companies for capital raising and investor readiness through various NSE Plc capital market options.

Only one firm, Homeboyz Entertainment Limited, has graduated from Ibuka. Some enlisted firms faced challenges. Tuskys supermarket chain was liquidated, and Vaell was placed under administration.

Other Ibuka members include Unity Homes, Ashleys Kenya Limited, RFH Healthcare, AA Kenya, Mookh Africa, and Safaricom Investment Cooperative.

Some of the hindrances that led to limited graduations include the macroeconomic environment with foreign portfolio outflows and high returns on government securities, affecting investor interest.

Weak Shilling Raises Nairobi House Prices

The price of houses in Nairobi and surrounding satellite towns surged in the last quarter of 2023. A weaker currency reduces the entry barrier for foreigners, which boosted demand and caused house prices to rise by 4.1%. This is the highest rise in house prices in seven years. 

All Nairobi suburbs saw an increase in buying prices, with Ridgeways leading at 4.9%. Satellite towns too saw an increase in rent prices, with Athi River leading at 7.5%, followed by Kitengela and Ongata Rongai at 5.6% each. Kilimani and Runda led suburbs in rental price growth at 3.7% and 3.3%, respectively.

Land prices also saw an increase in prices. Ngong saw the highest land price appreciation at 21.4%, followed by Thika at 17.8% and Syokimau at 15.8%. Mlolongo, Kitengela, and Athi River also experienced significant price increases ranging from 10.5% to 10.9%.

Read More: List of Nairobi Satellite Towns With Highest Growth in Land Prices

Other News in a Snapshot

KRA Loses Ksh2 Billion Tax Claim

The Kenya Revenue Authority (KRA) filed a Sh2 billion tax claim against Kenya Ports Authority (KPA) for the purchase of cargo handling equipment between 2018 and 2022, but the Tax Appeals Tribunal denied the claim. Withholding tax, fines, and interest totaling Ksh1,993,582,700 were demanded by KRA from KPA for contracts involving tugboats and cranes that were provided by an overseas contractor. 

The panel did, however, accept KPA's contention that they were not charged withholding tax because they were provided items rather than services. The equipment was exempt from Kenyan income tax as it was made elsewhere. KRA's arguments were refuted by the verdict, which was presided over by Justice Erick Nyongesa Wafula and declared that equipment contracts were exempt from withholding tax.

Toyota to set up vehicle manufacturing plant in Kenya

President William Ruto signed a deal with Japanese car maker Toyota while in Tokyo. The deal is aimed at boosting Kenya’s industrial sector and strengthening Kenya-Japan ties. 

Distillers fury

Local distillers are unhappy with the decision to lift the ban on molasses exports, which has been in place since February last year, citing ongoing shortage issues. 

The acting director of the Sugar Directorate, Jude Chesire, announced the lifting of the suspension for 45 days from February 6, 2024, subject to review. She emphasised that priority for molasses use should be given to local distillers and farmers for local consumption.

Airbnb’s New Charge

Airbnb guests opting to pay using a different currency than the host's will face an additional 2% charge starting April 1, 2024. Existing users must agree to the new terms by March 28, 2024, or delete their accounts. New users will automatically be subject to the updated policy.

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Stephen Kimani aka KIMSpeaks is a thought leader, speaker, and writer. He is also the Founder of Living the DREAM. He is passionate about learning and teaching ideas that empower people to improve the quality of their lives. You can connect with Kimani on LinkedIn.

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