News and Analysis
November 22, 2024
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.
The National Treasury is revealing that the country is facing a liquidity crisis that is affecting cash flow across government including delaying the disburs9ement of the NG-CDF that MPs have been waiting for over five months. CS Njuguna Ndung’u says this is also affecting the payment of salaries.
Meanwhile, while the country's inflation rate seems to have tapered off, at least in terms of absolute figures, the effects are hardly being felt by the everyday consumer. This comes as the Central Bank of Kenya (CBK) raises the base lending rate to 12.5%, which will see some borrowers’ loan interest rise to 28%.
To address the tough economic conditions attributable to the Finance Act 2023, Parliament is looking to ease some of the taxes earlier imposed to allow for a more favourable business environment. This is as the banking industry experiences a 4.9% profit dip due to increased loan defaults.
Employment outlook still looks grim as more employers opt to reduce their workforce due to reduced demand and poor cash flow. This is as it was revealed that Kenya only produces at a 25% capacity in agriculture. The government, in efforts to increase productivity, is working on improving cotton farming.
Let’s dive in.
Treasury Cabinet Secretary Njuguna Ndung'u on Wednesday, December 6, revealed that the government was facing serious liquidity challenges while appearing before the National Assembly’s Finance and National Planning Committee.
During the session where he had been invited to shed light on the government's delay in releasing the National Government Constituency Development Fund (NG-CDF) funds to the constituencies, the CS revealed the gravity of the financial challenges faced by Kenya Kwanza administration.
“In one year, Kenya has gone into two extremes; there was severe drought, and now there is El Niño. In both cases, we have reallocated supplementary, recurrent and even development budgets to save lives.
“We are having a liquidity problem and that is why we cannot come to the rescue as fast as we should but we are working to ensure that before Christmas we will have taken some steps towards addressing the CDF issue,” CS Njuguna said.
Members of Parliament this week had expressed their frustration over the delayed disbursement of NG-CDF funds, staging a walkout and threatening to paralyse House activities.
Ndung'u, while appearing before the committee, appealed for patience citing a liquidity problem exacerbated by natural calamities, such as drought and flooding, along with debt obligations.
“It is a liquidity issue, which is short term.”
He noted a substantial increase in debt by Ksh145 billion, threatening to raise the deficit from 4.4% to 5.3%, an unacceptable scenario for the government - according to the CS.
“At the same time, because those extremes also create a recession we are not getting adequate tax revenue. So, in a sense we are even struggling just to be in the same position. By the way, I can tell you, we are even struggling with salaries. We are clearing salaries with arrears,” said the Treasury CS.
The news indicates potential delays in the disbursement of salaries for government employees especially during the festive season when expenditure is high.
MPs now want the Treasury to put on hold other government programmes, including the fertiliser subsidy programme, to prioritise the disbursement of the NG-CDF funds which they say are critical for the back-to-school season.
The 290 constituencies, receiving approximately Ksh130 million annually, face potential delays in critical development projects, including education bursaries.
MPs warned of the consequences on schoolchildren, urging the Treasury to expedite the disbursement to prevent disruptions, especially under the new CBC curriculum.
Kenya's inflation rate eased marginally to 6.8% in November. Kenya National Bureau of Statistics (KNBS) data indicate a marginal drop from October's 6.9%, attributed to lower food prices due to favourable weather.
Retail prices of kale, maize grain, cabbages, and sifted maize flour decreased both year-on-year and month-on-month. The price of a 2kg bag of sifted maize flour declined by 6.5%.
Nevertheless, food inflation rose by 0.4% from October to November, lower than the 1.3% observed in the previous month. The prices of tomatoes, oranges, and wheat flour increased by 17.7%, 3.8%, and 3.3%, respectively.
Key contributors to the inflation rate included transportation (13.6%), housing, water, electricity, gas, and other fuels (8.5%), and food and non-alcoholic beverages (7.6%).
Kenyan Members of Parliament are advocating for tax system reforms, proposing mandatory impact assessments for new taxes. The National Assembly Finance Committee, led by Kuria Kimani, recommends changes in various tax categories and an efficient funding structure to settle tax refunds promptly.
Key recommendations include mandatory impact assessments for new taxes, a cap on personal income subject to taxation, a reversal of the 16% VAT on fuel imposed five months ago, reforms in various tax bands, and exempting local manufacturers from new levies for up to five years.
These reforms follow the loss of over 70,000 jobs in the past year attributable to the Finance Act 2023.
Read More in Detail: MPs Want 16% Fuel VAT Reversed, Taxable Personal Income Capped
The Central Bank of Kenya (CBK), in a bid to control the free fall of the Shilling against the US Dollar and curb inflation, has raised the base lending rate (CBR) by two percentage points. The Central Bank Rate now stands at 12.5 %, the highest rate in 11 years.
This means that the banks are likely to adjust their average loan interest rates from the current 19.1% to 21.1%, with some borrowers facing interest rates as high as 28% due to the risk-based loan pricing formulas that the CBK approved earlier this year for different lenders.
This move may limit access to credit for businesses and increase the risk of defaults as borrowers struggle with higher living costs and taxes.
The Monetary Policy Committee (MPC) emphasised that this decision is essential to set inflation downward towards the 5.0% target.
Additionally, The shilling's depreciation against major currencies like the US Dollar and Euro, which constitute 87.6% of Kenya's external debts, led to a Ksh809 billion addition to the public debt stock in the 12 months from July 2022.
A weak Kenyan shilling contributed to an additional monthly cost of Ksh65 billion to the taxpayer in the year to June 2023, accounting for over two-thirds of the Ksh1.2 trillion increase in the public debt stock.
In another development this week, the CBK is expected to provide a report on its audit of digital lenders and the steps taken to address predatory lending over a year after the previously unregulated lenders were brought under the ambit of the CBK.
This comes after the Senate Finance Committee questioned the apex bank’s progress in regulating the industry. Only 32 Digital Credit Providers (DCPs) have been licensed by the CBK out of over 400 applications.
Read More: Interest on Bank Loans to Hit 28% as CBK Raises Base Rate
The tough economic times the country has been experiencing in the past year have had a trickle-down effect on the banking industry, with the sector experiencing a 4.9% decrease in pretax profit for the nine months ending September. The decline is due to rising loan defaults.
Non-performing loans (NPL) increased to Ksh615.54 billion (15%) in September, soaring close to the 15.4% NPL ratio that was last experienced 16 years ago in June 2007.
This has prompted listed Kenyan banks including Equity Group, KCB Group, and StanChart, to increase provisions for bad loans by 46%, reaching Ksh69 billion from Ksh47.25 billion previously.
The country's economic challenges, including rising interest rates and high living costs, contributed to this trend, which contrasts with the same period last year when the sector's gross earnings grew by 28.5%.
This comes even as the Central Bank of Kenya (CBK) is raising fines for banks that breach regulations, with a new penalty of Ksh20 million ($181,000) for the loss of customer deposits, up from Ksh1 million ($9,000). The change comes in response to increased customer complaints about fund disappearances from customer accounts.
Kenya only realises 25% of its agricultural potential according to a recent study by the Food and Land Use Coalition (FOLU). The gross underperformance of the agricultural industry was attributed to the depletion of micro and macronutrients in the soil and soil acidity. Approximately 63% of arable land in Kenya suffers from soil acidity, and less than 10% of farmers have taken appropriate measures to curb the acidity.
This FOLU report comes as the government increases the price of cotton by 25% from Ksh52 to Ksh65 per kilo. The price change is immediate. The government also hopes to increase cotton production from 40,000 acres this year to 100,000 acres next year.
The goal for the government is to increase cotton production to 400,000 acres in three years. The price increase for cotton is part of a government strategic plan to boost local production and employment through the textile industry.
Conversely, tea growers have faced reduced earnings of as little as Ksh19 per kilo due to a decrease in prices at the Mombasa auction. The decline was attributed to persistent poor market conditions, which the World Bank projects will decline further next year.
Additionally, the proposed Production Professionals and Technicians Bill seeks to regulate the training, registration, and licensing of veterinarians, researchers, and nutritionists, among others. The Bill proposes a fine of Ksh500,000 for anyone providing animal production services without proper registration. Licensed practitioners must apply to the board for approval, pay a retention fee, and adhere to professional standards.
The Purchasing Managers’ Index (PMI) for November 2023 by Stanbic Bank Kenya paints a picture of a struggling economy. Businesses faced near-record falls in output, new orders, and employment. Hence, firms have continued shedding jobs for the third consecutive month.
Inflationary pressures have persisted due to currency depreciation, higher taxes, and increased fuel charges, affecting all key economic sectors, including agriculture, manufacturing, construction, wholesale and retail, services, and mining. All these sectors registered job cuts in November. The construction sector, a key job creator, suffered the most severe drop in output.
Moreover, Business expectations for the coming year are subdued, with just 17% of companies confident of growth. The Federation of Kenyan Employers (FKE) estimates 192 job losses daily, with 40% of employers considering staff reductions to cope with rising operational costs.
In some uplifting news, the Kenya Mortgage Refinance Company (KMRC) plans to facilitate home loans for informal sector households through its Risk Sharing Facility (RSF). The RSF, in its final development stages, aims to guarantee part of the loans provided to homeowners in the informal sector, comprising over 80% of Kenya's total workforce. KMRC anticipates the RSF will boost homeownership by reducing credit risk for lower-income borrowers.
Kenya plans to establish a “Karibu desk” next year, whose main aim will be to address investor concerns and support local start-ups and businesses. The initiative by the Ministry of Trade, Investments and Industry says the desk will serve as a ‘listening ear’ for local investors.
It is expected to provide collaborations, trade linkages and financial solutions. The "Karibu desk" is part of Kenya's strategy to grow its economy and promote international trade.
At the same time, the Ministry is running a project dubbed Kenya Industry and Entrepreneurship Project (KIEP), which aims to support 250+ Small and Medium Enterprises (SMEs) to foster private sector growth and employment generation.
The World Bank backs the KIEP project, and the State Department for Industry is set to receive Ksh7.6 billion ($50 million), which is targeted to enhance innovation, technology adoption, productivity, and international competitiveness.
The fund will be a performance-based grant funding, and 23 successful SMEs have already been identified.
This is as the National Assembly’s Finance and National Planning Committee aims to regulate and tax the growing digital currency sector. Through the endorsed Capital Markets (Amendment) Bill, 2023, the legislature proposes to add digital currencies to the definition of securities, taxation of crypto exchanges and wallets, and the payment of capital gains to the Kenya Revenue Authority (KRA) when selling or using digital currencies.
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