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Demonetization, high public debt, tough austerity- concerns as MPC meets

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The phasing out of the One Thousand Shilling note at the end of this month, escalating of public debts and austerity measures by National Treasury are the key concerns as the Monetary Policy Committee, the top policy organ of the Central Bank of Kenya (CBK) meets this Monday on 23rd September 2019.

The MPC is meeting this Monday amid concerns over looming maize shortages as well as shortage of other foodstuffs due to famine.

“At the macroeconomic level, investment levels have been on a decline due to effects of interest rates cap and a slump in the real estate sector. Kenya’s exports have also suffered with its closest competitor Uganda- which is the country’s main export market buying less,” said John Kirimi, an independent investment banker. He adds that Pakistan, Sudan and Iran-which are some of Kenya’s key export markets-, have their own economic problems and therefore not buying much of Kenya’s tea or coffee and flowers. “While such businesses as Mpesa is doing well, the ordinary person on the street has less cash in the pocket,” said Kirimi. 

Meanwhile, the Kenya Shilling continued to hold against the US$ ahead of the MPC meeting. On Thursday, commercial banks quoted the shilling at 103.75/95 per dollar, the same as Wednesday’s close.

“The local unit has remained relatively strong and stable. Early in the week, it posted gains on the greenback due to reduced dollar demand mainly from oil importers. Liquidity has also been a bit tight in the local money market, thus maintaining the exchange rate stability,” said Gerald Muriuki, an analyst at Investment firm Genghis Capital. Experts maintain that the Shilling is showing signs of stability ahead of the MPC meeting. In its last meeting in July, the MPC said the fore market has remained relatively stable, supported by the narrowing of the current account deficit.

This trend is attributed to strong growth in diaspora remittances, the resilient performance of exports particularly horticulture, higher receipts from tourism and transport services and slower growth in imports of food and SGR-related equipment. CBK states that the current account deficit is expected to narrow to 4.5 per cent of GDP in 2019 from 5.0 per cent in 2018.

The foreign exchange reserves continue to provide adequate cover and a buffer against short-term shocks in the foreign exchange market. But experts say that with a looming maize shortage due to poor harvests in the country’s breadbasket, the country’s economic growth could be affected. “If the present fundamentals do not change suddenly, I foresee inflation going up in the third quarter. Food prices are not likely to come down as was no rain in the third quarter. Due to geopolitical problems in Iran, Libya and Venezuela, fuel prices may go up and increase transport costs, “said Kirimi.

In its last meeting in July, the MPC said the fore market remained relatively stable, supported by the narrowing of the current account deficit.

Related; How M-Pesa Can Power Demonetization



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