Kamau Thugge, governor of the Central Bank of Kenya (CBK) speaks to Global Finance about renewed investor interest and re-engineering the economy.
Global Finance: What is the economic outlook for Kenya in the next 12 months, and what would you say are the main risks?
Kamau Thugge: The Kenyan economy registered strong growth of 5.6% in 2023 compared with a revised growth rate of 4.9% in 2022. The impressive performance was driven by a robust rebound in the agriculture sector after two years of consecutive droughts in 2021 and 2022. The services sector also remained resilient, supported by growth in tourism, real estate, and financial and ICT services.
In the first quarter of this year, the economy has continued to project resilience, expanding by 5% compared with 5.5% in a similar quarter of last year. Agriculture and the service sector continue to anchor growth. However, the performance of other key sectors, like manufacturing and construction, has remained subdued. That said, the Kenyan government is implementing measures to boost economic activity, which should translate to growth of 5.4% in 2024 and 5.5% in 2025.
Though growth remains strong, we are alert to risks, the main of which is the global environment. Interest rates in advanced economies are expected to remain higher-for-even-longer due to the persistence of inflation above target, increased policy uncertainty following changes of government in some major economies, trade tensions and continued geopolitical tensions.
GF: Kenya has been praised for avoiding a default on the $2 billion eurobond. How critical was this for the country?
Thugge: Concerns over the ability of the country to refinance the eurobond was a source of uncertainty in the foreign exchange market, and partly contributed to the sharp depreciation of the shilling from 2023 to early 2024. The external debt refinancing following the liability management operation and subsequent repayment of the remainder of the eurobond in June completely changed investor sentiment. This, coupled with monetary policy actions, led to resumption of net forex inflows into the Kenyan economy. The change in sentiment and improved foreign investor confidence immediately impacted the shilling, which is currently 17% stronger against the US dollar relative to the level at the beginning of the year.
GF: Kenya has managed to stabilize its currency while inflation remains within targets. Has the country weathered the storm?
Thugge: The CBK’s monetary policy measures, coupled with the reforms to strengthen the monetary policy framework and improve operations of the foreign exchange market, have had the desired impact in restoring macroeconomic stability. The measures have addressed the pressures in the exchange rate, lowered inflation and ensured that inflation expectations are well anchored.
The stability of the shilling reflects the impact of the tightening of monetary policy by raising the central bank rate cumulatively by [575] basis points since May 2022, thereby narrowing the interest rate differentials between advanced economies and Kenya. The tightening of monetary policy has also minimized portfolio outflows and supported exchange-rate stability. Other factors that have impacted the shilling include improved sentiment following the successful refinancing and eventual repayment of the eurobond; increase in offshore investments, especially in the domestic bond market; and inflows from exports and diaspora remittances.
The measures we have taken have also impacted inflation, which has eased from a peak of 9.6% in October 2022 to 4.3% in July this year. Though inflation expectations are fairly well anchored, CBK remains alert to attendant risks and stands ready to take further actions to support its price stability objective, given the evolving global and domestic economic environments.
GF: How stable is the banking sector, and is CBK concerned over rising non-performing loans?
Thugge: Kenya’s banking sector remains sound and stable. The sector’s total capital adequacy ratio stood at 18.6% in December 2023—above the minimum ratio of 14.5%. The liquidity ratio, at around 51%, remains well above the statutory minimum level of 20%. Total net assets registered a notable increase of 16.7%, from $51 billion in December 2022 to $60 billion in December 2023. Customer deposits increased by 18%, from $38.6 billion in December 2022 to $45.6 billion in December 2023. The sector continues to expand its footprint domestically and in the Eastern African region and beyond. The growth of Kenyan banks has leveraged on adoption of emerging innovations and technology. While the ratio of gross non-performing loans [NPLs] to gross loans stood at 16.1% in April 2024 compared with 15.5% in February, banks have continued to make adequate provisions.
