NAIROBI, Jan. 26 (Xinhua) -- The International Monetary Fund (IMF) has called on Kenya to remove interest rate controls to help improve economic growth.
The IMF board, which completed a review of Kenya's performance, said the interest rates cap complicated monetary policy and adversely affected banking sector profitability, especially for small banks.
"Therefore, it is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector," the lender said.
IMF Deputy Managing Director Zhang Tao said Kenya's economy has continued to perform well with real GDP growth increasing in 2016.
Zhang said inflation in Kenya remains within the target range, and the current account deficit has narrowed.
"The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth," he said.
Zhang said although the adverse effects of the controls are manageable in the near term, if maintained, they could potentially pose a risk to financial stability.
Kenyan President Uhuru Kenyatta in August 2016 signed the Banking Amendment Act 2016 into law and introduced interest rate caps at four percent over Central Bank Rate (CBR) for lending, and 70 percent of CBR for deposit rates.
The law is expected to hugely cut earnings for the banks.
Under the new interest rates regime, banks are not allowed to charge on loans more than 4 percent above the Central Bank of Kenya rate, which currently stands at 10.5 percent.
Therefore, at 14.5 percent, interest charges for some commercial banks in the East African nation would lower by about half, an indication of tough times financial institutions face in coming months.
But Zhang said the envisaged fiscal consolidation that targets a 3.7 percent of GDP deficit by 2018/19 is critical to maintain a low risk of debt distress while preserving fiscal space for development priorities.
"Continued public financial management reforms, aimed at upgrading the efficiency of public spending and expenditure control, are key to strengthening fiscal policies and institutions," he said.
Zhang said establishing a formal interest rate corridor remains a priority for strengthening the monetary policy framework.
"While adoption of such a corridor has been delayed given the uncertainties created by interest rate controls, it will be important to conduct liquidity operations to realign interbank rates to the policy rate as economic conditions permit," he said.