How State move to save economy chocked credit to private sector

 

The government’s move to spend billions of shillings and institute other measures to cushion the economy against adverse effects of the Covid-19 pandemic last year may have had good results, but they failed to address critical issues affecting businesses in the country.

As the pandemic sucked the life out of thousands of businesses by stifling cash flows, measures to inject financial health into businesses from the State and financial services institutions missed or were delayed, forcing thousands of firms to fold doors.

Different players in the economy now argue that measures to see that the cost of credit was reduced and credit to the private sector either sustained or increased missed, led to great suffering for businesses in the country.

Last week, Pubs, Entertainment and Restaurants Association of Kenya (Perak) reported that more than 30 percent (16,000) of the association’s businesses that were in operation before Covid-19 hit have since closed down completely.

A report by the parliamentary Budget and Appropriations Committee (BAC) also indicates that the Central Bank of Kenya’s (CBK) monetary policy decision instructing banks to reduce their cash reserves and CBK rate when Covid-19 knocked on Kenya’s doors failed to achieve the intention of reducing the cost of borrowing.

Monetary policy

“With regards to monetary policy, the committee observes that measures adopted by the CBK during the pandemic such as the reduction in cash reserve requirement from 5.25 to 4.25 and reduction of the CBK rate from 8.25 percent to 7 percent did not meet their objective of lowering the cost of borrowing for private sector,” the committee noted in a report released last week.

The team said the cost of borrowing in Kenya remained high, as players in the banking sector noted a steep reduction in private sector credit over the period. The committee observed that last year, the weighted average lending rate remained at around 12 per cent.

Equity chief executive officer (CEO) James Mwangi notes that there has been a serious credit fall challenge in the country over the past year, with credit to the private sector having fallen from 40 percent of the GDP to 27 percent currently.

Mr Mwangi says many businesses in the private sector, especially the Small and Medium-sized Enterprises (SMEs) depleted their working capitals in the pandemic period, leaving them with serious cash flow problems and in need of credit.

And as the government sets out on an ambitious plan to get the economy back to a growth of 7 per cent this year, the Equity CEO warns that maybe impossible, without focusing on recovering credit to the private sector first.

“To return the GDP to where it was and to achieve the projected six per cent growth this year, we have to return private sector credit back to 40 per cent,” Dr Mwangi said.

Last week, the bank signed a Sh16.5 billion loan facility with the European Investment Bank (EIB), aiming to lend the money to Small and Medium-sized Enterprises (SMEs), which have been starved of loans by banks for fear that they may not be able to pay back. The financial institutions’ misgivings to lend to mainly informal businesses on the basis of their high credit risk is what drove the fall of private sector credit, and players agree that implementation of the Credit Guarantee Scheme for the sector will be the solution.

Financial services

CBK has been claiming to have supported financial services institutions in the country to withstand the Covid-19 shocks through the measures it introduced March last year when the pandemic struck by ensuring their liquidity was at accepted levels, but parliament still feels that the measures failed to address the high cost of borrowing.

Instead, BAC says more measures would have been placed on cushioning SMEs and enabling them access credit at low cost.

“Going forward, other policy measures addressing borrowing costs such as the proposed operationalisation of the Credit Guarantee Scheme for MSMEs may help address the cost of borrowing for small businesses,” the committee stated.  BY DAILY NATION