Orals East Africa>Will US rate cuts give Kenya an edge in IMF talks At the hut of the story

Written by Oral East Africa

The World has turned to the United States for the much-awaited Federal Reserve bank rate cut decision seen as a signal that is likely to end two years of Higher For Longer’ interest rates.

The decline of interest rates in the US will finally allow Fed Chair Jerome Powell to cut interest rates with analysts predicting a cut from the 5.25-5.5% range that has been in place for the last 14 months.

Lower interest rates mean Kenya can finally think about returning to the commercial markets as the country approaches the end of the International Monetary Fund programme next year.

The IMF has withheld funding to Kenya over a delayed seventh review after street protests forced the government to withdraw a finance bill with tax proposals from the Fund. Another tax law enacted last year was also thrown out by the country’s courts.

Fact-Finding Mission

Sources say the seventh review may be delayed and even combined with the eighth review in December with the government expected to demonstrate progress with a new ‘Tax Amendments Act’ that will bring back the rejected tax proposals.

The government is also pushing for a way to get the Supreme Court to keep some aspects of the Finance Act 2023 and not throw it out wholesomely.

Recently IMF announced its officials were conducting a ‘Fact Finding Mission’ in Kenya, a first, in which the Fund claims it is seeking broad consensus over the tax measures.

April end of the programme

But Kenya has until April next year when the IMF programme comes to an end in which the country has the option of seeking an extension, a new deal or another facility.

The country could also return to the commercial if lending rates come down

This expected reduction in the cost of borrowing by the US central bank will be the main shaper of the economic forecast over the next couple of months.

Here in Kenya, it will reaffirm the Central Bank of Kenya’s decision to lower the Central Bank Rate (CBR) to 12.75 percent last month.

Central Bank Governor Dr Kamau Thugge higher interest rates ranked as one of the main threats to global growth along with geopolitical escalation and leadership changes in leading economies.

Main threat

“The main risks to the global growth outlook relate to further escalation of geopolitical tensions, interest rates remaining higher-for-even-longer in advanced economies, and policy uncertainty attributed to changes of government in some major economies,” Dr Thugge said.

Higher interest rates has been the main reason Kenya and most emerging countries are in a cash crunch. The high cost of money has meant countries like Kenya are paying almost twice as much for dollar loans which is simply unaffordable.

But with a huge number of Sub-Saharan countries having jumped on the Eurobond bandwagon, the need to avoid default has meant these countries turn to the International Monetary Fund for support

This support has come with tough structural adjustment programmes that have resulted in open confrontations between governments unable to keep administrations running and businesses unable to keep shops open at high levels of extractive taxation.

Countries like Kenya are also finding themselves with disgruntled civil service hit by salary delays, unmet collective bargaining agreements and threats of layoff in privatization bids and austerity measures.

While the rate cuts will not bring immediate reprieve, it will give Kenya the only card when authorities meet to negotiate with the IMF.