September 14, 2018 / 9:35 AM / 2 months ago

UPDATE 3-IMF says Kenya's external position is strong as standby deal expires

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By Duncan Miriri

NAIROBI, Sept 14 (Reuters) - The International Monetary Fund considers that Kenya’s external position is strong, its representative in Nairobi said on Friday, adding that the Fund would continue to support its reform efforts even though a stand-by loan deal has expired.

Kenya had secured a six-month extension in March of the $989.8 million arrangement. However, the IMF set conditions for a further extension, including the repeal of a cap on commercial lending interest rates which was imposed in 2016, a move that parliament rejected in a finance bill last month.

President Uhuru Kenyatta sent the bill back to parliament on Thursday night, but what happens next regarding the rate cap is not yet clear.

IMF representative Jan Mikkelsen confirmed what the government said on Thursday: that the deal was over.

“The second review of the IMF-supported program has not been completed, and the program will expire today,” he told Reuters. “It should be stressed that Kenya’s external position remains strong and foreign exchange reserves are at a very comfortable level.”

Foreign exchange reserves stood at $8.56 billion at the end of last week, equivalent to 5.71 months’ worth of Kenyan imports, central bank data showed. The bank is required by law to hold reserves worth a minimum of four months of import cover.

The central bank expected the current account deficit to shrink to 5.4 percent of gross domestic product at the end of this year, from 5.8 percent in June, Governor Patrick Njoroge said in July.

Kenyan officials have played down the significance of the expiry of the deal, which was agreed in 2016 to help cushion the economy in case of unforeseen external shocks that could upset the balance of payments. No funds were ever drawn down.

However, Finance Minister Henry Rotich said on Thursday that talks with the Washington-based fund would now focus on the next type of facility Kenya could secure.

“The IMF will continue to support Kenya’s reform efforts through policy advice and capacity development,” Mikkelsen said, without giving more details.

Kamau Thugge, the principal secretary at the finance ministry, had said on Thursday that the expiry would not hurt the economy.

Rotich tried to repeal the rate cap in his June budget, but parliament voted to keep the upper limit while getting rid of a minimum deposit rate it had previously imposed.

The cap was aimed at helping small traders borrow at affordable rates, but has had the opposite effect, with banks saying they cannot price risk to small and medium enterprises (SMEs) properly while the cap is in place.

As a result, lending to the private sector fell from 9.3 percent in 2016 to 2.4 percent last year.

Kenyatta is due to address the nation on Friday, after rejecting the finance bill which also sought to postpone a widely unpopular tax on fuel. (Reporting by Duncan Miriri Writing by Ingrid Melander Editing by George Obulutsa and David Stamp)

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