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Local Govt Borrowing Crowding Out Private Lending Is a Fallacy- CBK Governor

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During the Jubilee Government’s first term when the National Treasury went on an international borrowing spree by tapping into Eurobonds to finance development and non-development expenditure, the government justified the decision to acquire the expensive loans by stating the need to leave the local borrowing market for the private sector in order for players in the sector to acquire credit at favourable rates.

“The extra supply of cash will, therefore, hopefully help to bring down bank lending rates to the productive sectors of the economy,” President Uhuru Kenyatta said when Kenya secured the first Eurobond in August 2014.

Fast forward to now, Central Bank Governor Dr. Patrick Njoroge on Friday dismissed the notion that domestic borrowing by the government is crowding out the private sector stressing that banks in the country have enough liquidity to lend to all creditworthy borrowers.

Speaking during the post-Monetary Policy Committee (MPC) meeting during a virtual press conference on Friday, Dr. Njoroge stated that the government has only raised Ksh20 billion from Treasury Bills and Bonds from the beginning of 2020 from Ksh389 billion to Ksh409 billion at the moment, a figure that will close the current financial year before the country ushers in the next fiscal year next week.

“I don’t see any squeezing out of the private sector. This is the old fashioned crowding out story, I don’t think that its true. As a matter of fact, banks are highly liquid and really, they can lend but they are not lending,” said Dr Njoroge.

The CBK Governor also steered clear of veiled protests by Payment Service Providers (PSPs) over its decision to extend free mobile money transactions to the end of the year stating that CBK will not be caught up in public back on forth with the providers.

Unnamed executives had through media reports protested that CBK had extended the relief measures without consulting them dealing a heavy blow to this band of transactions that accounts for 80% of their mobile money business.

“Central Bank reviewed the emergency measures that were in place and came out with the determination. I have seen the media articles on this and all I can say is that we are not in the business of having public discourse on this,” said Dr Njoroge.

In an earlier communication, Central Bank had expressed optimism that the economy is starting to recover after a turbulent month in April but during the press conference, Dr. Njoroge was categorical that the country is not yet out of the woods adding that Small and Medium Enterprises (MSMEs) will take a long time before they recover from effects of the pandemic.

“I would not be so categorical, we have seen so many things that are still out there. We have talked endlessly about the SME sector, those entities, it is hard to say that the worst is behind them. You go down the bypass you see people who are lawyers, accountants sort of in this hustling environment selling vegetables. I don’t think the numbers, in the end, reveal the pain that individual farmers, individual SME operators are facing,” he said

“In terms of the worst we can see, it is still with us. We need to make haste and deal with those specific things. We are not yet out of the woods when it comes to COVID-19. We do not want to be bullish, I would even say foolish. Our job is to be cautious, at the end of the day it is not the GDP that matters, it is the lives of the people,” added Dr. Njoroge.

The Governor also exuded confidence regarding credit growth to the private sector despite it falling to 8.1% in May from 9% in April and 8.9% in March.

“This has come up from where it was even in the 2% range. This has been growing over the last two years. I believe credit growth is constrained in many ways mainly the economic environment we are in. In that we need need to appreciate that it is 8% in a very hostile environment for lending,” said Dr Njoroge.

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