Economic Recovery in 2021 Faces New Risks

As the world continues to recover from the COVID-19 pandemic, Kenya’s economy has bounced back with demand for bank credit increasing alongside economic growth. However, the sector remains cautious due to emerging risks.

Global Interest Rate Increases and Foreign Exchange Volatility

One of the key concerns is the rapid increase in interest rates globally, which has led to a surge in borrowing costs and limited access to international capital markets. This has resulted in a sharp depreciation of local currency exchange rates and intense volatility in foreign exchange markets.

Inflation Concerns and Food-Energy Price Increases

The East African Community (EAC) region, which includes Kenya, is also grappling with high food and energy prices, causing inflation concerns and volatility in foreign exchange markets across the regional economies. These price increases have had a negative impact on many households, especially the most vulnerable groups.

Central Banks’ Policy Dilemma

Central banks in the EAC region are facing a policy dilemma between pursuing accommodative monetary policies to support economic recovery or tightening to stem inflation. The banking sector remains stable and resilient, but faces elevated credit risks due to increased non-performing loans (NPLs) ratios in some countries.

Kenyan Economy’s Recovery and Credit Risks

The Kenyan economy itself recovered from a contraction of 0.3 percent in 2020 to register growth in 2021. However, the first half of 2022 saw an increase in NPLs ratios for banks in Rwanda, Uganda, Kenya, Burundi, and South Sudan, while Tanzania’s NPLs ratio declined.

Concentration Risk Concerns

The sector is also facing concerns about rising concentration risk due to banks holding most of their assets in government securities and lending to a few sectors of the economy. Enhanced supervisory standards and policy measures are necessary to mitigate these risks and maintain financial sector stability.

Cybercrime Concerns Emerge

Geopolitical tensions are also fueling concerns about cybercrime, which requires incorporation into financial stability analysis to help regulators and supervisors assess risk exposure appropriately. Enhancing information-sharing and incident reporting frameworks and building cybersecurity capacity in emerging market economies is crucial to ensuring infrastructure resilience.

Conclusion

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While the Kenyan economy has recovered from the pandemic, it faces new risks that require careful policy management to ensure sustained economic growth and financial stability. Policymakers must balance competing priorities to avoid procyclicality and maintain a stable banking sector, while also supporting vulnerable groups and mitigating the impact of high prices on essential commodities.

Key Takeaways

• Demand for bank credit has recovered alongside economic growth, but loan growth is sluggish in some countries.
• The banking sector remains profitable and holds sufficient liquidity and capital buffers.
• Increased holding of government securities by banks raises concerns about sovereign-bank nexus risks.
• Cybercrime concerns require incorporation into financial stability analysis to ensure infrastructure resilience.
• Policymakers must balance competing priorities to avoid procyclicality and maintain a stable banking sector.