Tag Archives: Kenya

Can Africa win Trump over?

By Rafiq Raji, PhD

In mid-May, at the Africa Finance Corporation’s 10th year anniversary infrastructure summit (“AFC Live 2017”) held in Abuja, I asked Jay Ireland, the president and chief executive of GE Africa – the subsidiary of the American industrial giant on the continent – about his thoughts on whether Donald Trump, the American president, would be good or bad for Africa. Specifically, I wanted to know if President Trump would be worth the trouble of winning over. As Mr Trump does not know much about Africa, if the little mention the continent got during his election campaign is anything to go by, engaging with him early on might spring pleasant surprises, some pundits argue. Despite such assurances, I remained a little sceptical. So the opportunity to ask Mr Ireland, who incidentally is also the chair of former President Barack Obama’s Advisory Council on Doing Business in Africa and co-chair of the US Africa Business Centre, which leads the American business community’s engagement activities on the continent, was huge. In a sign of the times and the peculiar style of the current American president, Mr Ireland demurred, humorously wondering if his answer might not become the “subject of a tweet.” More importantly, he said a strong case was being made to the Trump administration to continue ongoing initiatives. I was particulary interested in the “Power Africa” programme initiated during the Obama administration; especially since even during Mr Obama’s tenure, it was floundering, talk less that of Mr Trump. The African Growth and Opportunity Act (AGOA), is not as vulnerable to a Trump rethink, albeit the administration could still exercise certain prerogatives over the choice of beneficiary countries and so on. My interpretation of Mr Ireland’s comments are as follows: Should Africa indeed not be a priority for Mr Trump, ongoing African initiatives may simply continue under the aegis of able and experienced technocrats at the American State department. And in the event Mr Trump suddenly develops a keen interest on African issues, proactive engagement with the administration like his and the business people he represents may be hugely differential. It has also been argued that African heads of state should do likewise.

Focus on first-order issues
In light of the recent exit from the Paris climate accord by Mr Trump, however, some are now beginning to think whether there is a need to even try. I would not be too quick to give up. True, with African countries already beginning to see the negative effects of climate change via droughts and so on, the recent American action is a setback. And of course, African countries initially had their own reservations about the accord. Not a few wondered why they should have to be environment-friendly at the expense of their development; especially as currently developed countries were not similarly cautious. But with research showing a nexus between climate change and increasing incidents of conflict in a number of African countries, there is a growing consensus about the need to be more caring of the Earth we live in. Still, to do this, African countries would require financial and technological support. To this end, the Paris agreement makes substantial provisions. With the American exit, however, also goes its financial commitments. It is also evidence that a Trump presidency would (at least for now) have second-order negative effects for Africa when the issues relate to broader international and multilateral arrangements that Mr Trump is averse to. So it is on the more specific African initiatives that African leaders should hope to influence him on.

Show respect
At the recent G7 summit in Italy, it was all too clear Mr Trump was not enjoying himself. He was particularly irritated by Emmanuel Macron’s (the French president) “macho-diplomacy”: Mr Macron’s overly firm and lingering handshake with Mr Trump at their very first meeting since the former’s inauguration was well-reported. As if determined to rattle the American president or put him to size, Mr Macron also made sure to refer to the incident afterwards as deliberate. That and another, where Mr Macron seem to be moving towards Mr Trump to shake hands, as the G7 leaders and invited guests did their traditional group-walk in front of the press, but at almost the last minute swerved to shake that of Angela Merkel, the German chancellor, must have been a little unnerving for a man known for his fragile ego. Thus, it is very likely that unpleasant experience was at least a secondary motivation for his action on the Paris accord. In his speech announcing the decision, Mr Trump was almost certainly taking aim at Mr Macron when he said: “I was elected to represent the citizens of Pittsburgh, not Paris.” (The Washington Post did a very insightful article on the dynamics leading to Mr Trump’s decision.) At the G7 summit it turns out, one of few instances where Mr Trump seemed to be enjoying himself was when he ran into some of the African delegates: Yemi Osinbajo (Nigeria), Alpha Conde (Guinea), Uhuru Kenyatta (Kenya), Hailemariam Desalegn (Ethiopia) and Akinwumi Adesina (African Development Bank). With deft handling, Mr Trump could become an ally.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/can-africa-win-trump/

African central banks decide on rates

By Rafiq Raji, PhD

This week, the US Federal Reserve and Bank of Japan (BoJ) meet to decide interest rates. Both would be announcing their decisions on 21 September. I don’t expect any surprises from the former. In fact, I would be hugely surprised if the Fed does anything this year. Market participants are a little anxious about the BoJ though, as it tests the limits of negative interest rates and could increase the pace of its stimulus programme. African central banks, in Ghana (19 September), Nigeria (20 September), Kenya (20 September) and South Africa (22 September), would also be announcing their decisions during the week. Between them, their economies represent about 60 percent of sub-Saharan Africa GDP. The Bank of Zambia could also announce its long-awaited decision this week – see earlier 9 August 2016 column (“Zambians and their central bank decide“) for my views. Understandably, they are mostly in hold mode. Not Kenya though. If the east African country’s central bank desires to cut rates, it has room to do so now. Kenyan growth should be almost 6 percent this year. And its inflation outlook is quite encouraging. The others, not so much. Nigeria is in recession – and growth would probably contract for the year, amid high and rising inflation. Ghana is still trying to curb longrunning double-digits inflation, albeit growth is a little decent; about 4 percent this year is my reckoning. For South Africa, currently in a tightening cycle as the inflation outlook remains relatively bleak, growth remains sobering; probably zero percent this year, albeit authorities plan to revise their forecasts upward. The South African Reserve Bank may not find it apropos to raise rates at this meeting. But the outlook suggests it may need to before year-end. At least, that is my thinking at the moment. Ahead of the monetary policy decisions, my firm, Macroafricaintel, published its Q4-2016 outlook reports. Below are some of the thoughts.

Kenya – Room for another rate cut
After having to pause policy easing hitherto on resurgent but likely temporary upward inflationary risks, the Central Bank of Kenya (CBK) could, if it wanted to, cut rates by 100 basis points to 9.5 percent, as early as its monetary policy committee (MPC) meeting this week – last time was in May, when the CBK cut rates by 100 basis points to 10.5 percent. I actually think it could ease policy further by another 100 basis points to 8.5 percent before year-end, when inflation could have eased to about 5 percent. Concerns about fuel price increases, which rose in mid-July amid resurgent insecurity, have since subsided or diminished. There is risk however of potential electricity tariff hikes, as geothermal power plants shut down for maintenance have created a supply gap of about 200MW and imports – that from Uganda (more than 90 percent of imports) up 32 percent in the year to July for instance – of diesel-fired and hydro-powered alternatives to fill it are relatively expensive. Chances are the electricity sector regulator would not entertain any new price hike requests this year; especially since the disruptions are not likely to be secular. Never mind that electioneering is already in high gear. Otherwise, the inflation outlook looks good. The Shilling has been relatively stable and should remain so. My view discountenances the downgrade of the currency by Fitch Ratings in mid-July. Why? The US$1.5 billion IMF precautionary facilities have proved quite effective buffers thus far. No reason why they shouldn’t continue to be.

South Africa – 25bps rate hike likely in November, continued pause in September
After barely coming within range in July at 6 percent, inflation would likely accelerate enough to breach the South African Reserve Bank’s (SARB) 6 percent upper bound target from August to March 2017. I anticipate a justifiable 25 basis point tightening to 7.25 percent at the November MPC meeting, the likely peak of the cycle. Thereafter, it is probable the SARB may see room to start easing rates from Q2 2017. My revised inflation forecasts see the headline averaging above 7 percent for the five months to year-end, from 6.8 percent in August to about 8 percent in December. Drought-induced food price increases are expected to continue, as the prospects for improved rains have diminished significantly. Some rand volatility is also expected towards year-end as expectations gyrate over a potential ratings downgrade to junk status by at least one of the global rating agencies, SPGlobalRatings especially. Political uncertainty would perhaps continue to hover over all considerations in any case. Above-inflation wage deals also weigh on the outlook. In September, auto workers agreed an 8-10 percent wage increase over 3 years with employers. Other labour unions are expected to take a cue from this. In the past, the SARB expressed significant worries about how these wage deals could be differential to its rate-setting decisions.

Ghana – Policy easing probably next year
My inflation forecasts suggest the headline may be about 14.1 percent by December, the 2016 trough of a downward trend since June – level then was 18.4 percent – albeit there is likely a slight pick-up in September, to 17.6 percent in my view. The most recent inflation data showed a slight year-on-year acceleration to 16.9 percent in August from 16.7 percent a month earlier. But the monthly pace was negative, -0.6 percent, after an almost 2 percent average run in the year to July. Ordinarily, this would motivate some serious consideration of a potential easing of policy. Bank of Ghana (BoG) governor, Abdul-Nashiru Issahaku, who in my view is decidedly dovish, would jump at the slightest opportunity in any case. Elections in December, a few months away, requires that the BoG exercise the utmost prudence, however. Thus, I think keeping rates as they are for the remainder of the year would be most appropriate. As I see the inflation rate in the high single digits in Q1 2017 and lower for the remainder of that year, averaging at about 7 percent in 2017 from about 17 percent in 2016, an aggressive easing of policy then might be justfied. My current view is that the policy rate (26 percent going into this week’s meeting) could be cut by 300 basis points in each quarter next year, with the end-2017 level still significantly positive in real terms against my inflation forecast of about 6 percent for December 2017.

Nigeria – CBN tightening pause likely for remainder of the year
Inflation has accelerated since the last monetary policy committee (MPC) meeting of the Central Bank of Nigeria (CBN). The annual headline rose to 17.6 percent in August. My forecasts put it higher in coming months, probably ending the year at 18 percent. A weaker naira, food price increases, higher fuel prices, intermittent power shortages are just a few of the factors that I expect would buoy prices up. Manufacturers have already indicated more of their inputs’ continued price increases would now be passed on to consumers more quickly. Foreign-sourced inputs continue to be expensive because foreign exchange remains relatively scarce and dearer. Supply of local alternatives have not kept pace with increased demand. The prices for staples have also gone up, bread for instance, hiked by 20 percent in mid-August. After raising the monetary policy rate (MPR) by 200 basis points to 14 percent in May (after a 100 basis points spike to 12 percent in March), amid backlash from influential members of President Muhammadu Buhari’s administration, there are strong signs the CBN would be reluctant to raise rates further. There have even been threats of cutting interest rates via legislation. A likely economic emergency stabilization bill to be tabled before the legislature this month, I fear, may be used to do just that. The CBN governor, Godwin Emefiele, probably had this at the back of his mind, when he recently signalled all tools within the reach of the CBN, would be used to stimulate the economy. I interpret this to mean the apex bank would resort to more unconventional monetary easing. For instance, plans are afoot to boost the capital base of the government-supported Bank of Agriculture. The Bank of Industry could also get a boost – I suggest this in any case. The Nigerian Export-Import Bank (NEXIM) is another government-backed institution that could use some help. My view remains unchanged: the CBN should focus on its primary mandate of price stability. And it should tighten policy as necessary. But then there is now a need for it to balance that mandate with needed political pragmatism. The CBN needs to be able to set interest rates in the first place. That type of pragmatism, it must also extend to not making the mistake of overstretching itself: the CBN’s capacity to stimulate the economy is overrated. And it should not be easily forgotten that it tried to do just that without much success in the recent past. Banks, the health of which remains concerning (about 15 percent or more of total loans outstanding is either bad or non-performing), are currently undergoing a thorough examination by the CBN. Little things like these – tweaking regulations to ease flows, directing capital to neglected sectors, providing incentives to manufacturers, cleaning up banks and so on – could be more far-reaching and effective than undermining whatever monetary policy credibility it currently has.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/african-central-banks-decide-on-rates/

What is Japan’s African game?

By Rafiq Raji, PhD

The 6th Tokyo International Conference on African Development Summit (TICADVI), held on 27-28 August in Nairobi, Kenya, has come and gone. But what did it achieve? Some US$30 billion in aid and investments over the next three years were promised, half of what China pledged late last year at its similarly themed get-together, the Forum on China-Africa Cooperation (FOCAC); also its sixth meeting then. Some 73 memoranda of understanding were also signed, a lot of which were related to infrastructure, power generation especially. Others were in the health, education and expectedly, oil and gas sectors. A friend who attended the summit was particularly excited about some of the products on display at the exhibition along the sidelines of the event, like pay-as-you-go solar power, supplements for maize porridge, and so on.

Like China, Japan is involved in quite a few infrastructure projects in various African countries, albeit to a lesser degree. And Japanese companies already do quite a great deal of business in most of these. Chinese companies increasingly so as well. In sum though, China’s engagement with the continent is more intense and widespread. The Japanese make up for this in other ways. Japanese brands evoke feelings of quality, brilliance and efficiency. From electronics to cars, they are quite ubiquitous across the continent. Despite China’s growing closeness, similar sentiments are barely associated with its brands, if at all. Chinese goods are still considered inferior. Surprisingly, their cheapness barely appeals commensurately. Even so, China’s experience and relatively ample resources may be more germane to African needs. No matter. Both are willing. Sand in the wheels? Both are staunch rivals, albeit they feign some level of maturity in front of their African ‘friends’ – an official Chinese delegation attended TICADVI.

They all want the same thing
When there are numerous suitors for a potential bride, it is often ironic that blessings do not always follow. The one being sought after might overestimate her value, dither, or hope for better opportunities that may never come. Africa is one of many frontiers of interest to these world powers. So for Japan and China, longstanding rivals, whose volatile relationship is writ large by a territorial dispute over eight islands in the East China Sea, Africa provides a vast field for them to spar. Even so, they both really want the same thing: influence. Like China, Japan is also interested in the continent’s mineral resources. Resource-poor Japan seeks fuel for its energy needs, as its nuclear-dominated system have been mostly shut down since the 2011 Fukushima mishap. Both are also counting on African countries to pursue varied agendas at the United Nations and other multilateral institutions. Like the Europeans and Americans before them, Japan and China are also building military bases on the continent. Simply put, they are pursuing their own interests. Knowing this could be a blessing for African countries, whose negotiating positions are enhanced as a result. The temptation to pitch one against the other should be resisted, however. Instead, African countries should articulate what their development needs are and then go with the partner that best ensures their fulfilment. Japan is not offering as much money as China is. But it has one advantage over the latter. It is more technologically advanced. Its projects are executed with the highest standards and are delivered on time. And they last. China, on the other hand, knows only too well how steep the road to development can be. It is likely a better teacher on how to traverse that road than Japan could ever be at the moment. There need not be a dilemma in any case. Both can help.

Accept only the help that liberates you
As the Japanese prime minister, Shinzo Abe, was engaged in his charm offensive – the TICAD conference was being held on African soil for the first time – Chinese officials were quick to deride his efforts. It was almost the same way the Americans were all too quick to point out how the Chinese then newfound interest in Africa was going to be similarly or more exploitative. Truth is, these supposed development partners go into these relationships often because they already see more advantages for themselves. Or at least, they see the costs and benefits as evenly balanced – not in the African case: whether the partner is China, Japan, America or Europe, the advantages are tilted towards the other side. And the toast is always the same: we want to help. That is all very well. What African countries need the most, in addition to infrastructure, is technology and skills transfer. In doing this though, the situation can no longer be as it is currently, whereby these so-called partners set up businesses on the continent, bring their own staff, integrate little and barely mask their disdain. The scorecards cannot continue to be about how many billions of dollars our partners’ supposed benevolence allowed for each time. Thankfully, more energy at these summits is now being devoted towards changing this lopsided paradigm.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/what-is-japans-african-game/ 

You are hereby directed to cut interest rates. Really?

By Rafiq Raji, PhD

Unrepentant beggars?
Nigerian authorities are set to launch a US$1 billion Eurobond, could be by late September or October though. Just last week, the country’s vice president, Yemi Osinbajo, announced capital spending of over US$300 million, to be deployed as early as this week. The plan: spend, irrespective of the source, until the economy recovers. Good news is; the government would probably get the funds it needs. But at what price? Foreign financiers and multilateral institutions have been impressed by the authorities’ adoption of a treasury single account (TSA) and the free-floating of the naira (such as it is). Market participants, initially sceptical, have begun to come around. Even so, there are still worries. Would the reforms be sustained? These concerns are not unfounded. Last week, Nasir El-Rufai – an influential member of the inner circle of Nigeria’s president, Muhammadu Buhari, and governor of a state bordering the capital territory – hinted that the central bank’s independence may be attacked yet again. This time, it could be ‘directed’ to cut interest rates. So to speak. His desire is for a law to be enacted giving the executive branch the legal power to do so. Mr El-Rufai’s comments coincide with recent action by Kenyan lawmakers, who passed a law capping interest rates. Regardless, talk like this riles foreign investors. Not that it surprises them anymore. And since African sovereigns are increasingly reliant on foreign capital, unwise though that is, external investors’ views matter. Add to that: they are now not shy of punishing erring ones; Ghana lately.

Populist policies often fail
In late July, the Kenyan parliament passed a revised banking law that included a cap on interest rates, effectively setting the maximum price for a commercial loan by fiat. Banks would be required to cap interest rates at 4 percentage points above the Central Bank of Kenya’s (CBK) benchmark rate, currently 10.5 percent. At no more than 14.5 percent, banks would still make a decent profit. Smart people that they are, the bankers didn’t put up a fight. And really, why should they? You want to set the price for another person’s money? “We go see now,” to use a popular passive-aggressive Nigerian expression of defiance. They signed a memorandum of understanding with the CBK, pledging to cut interest rates. The lawmakers are not fooled. They have threatened to approve the law if the country’s president, Uhuru Kenyatta, witholds his assent. It is probably just political grandstanding: Mr Kenyatta’s handwriting is all over the law. It is a key campaign promise of his, one he would be all too eager to show-off to voters ahead of a likely keenly contested presidential election in 2017. I’ll be frank. The policy would probably fail. In Kenya. In Nigeria. And anywhere else. True, bankers are some of the meanest people you can find. Even so, the way to get them to reduce interest rates is not to force them but to create the type of environment that makes them want to.

Leave them with little choice, tap into their greed
Block the means for banks to deploy as much funds as they currently do to government securities. True, the government needs to borrow money. But it has to make a choice, strike a balance at least. It could make the cost to banks for not lending to small and medium-sized enterprises (SMEs) very high. For instance, the Central Bank of Nigeria (CBN) could boost the capital and capacity of the Bank of Industry (BoI) by increasing its stake; to the point where if any viable SME needed a loan, it could get one. When lending to businesses – SMEs especially – becomes the only viable way for commercial banks to make money, and BoI (just one of quite a few government-backed banks: the Nigerian Export-Import Bank is another) proves to be a strong player in the field, they are going to try having the field to themselves, and rates may gradually fall; albeit likely over a long-term horizon. In any case, some of that already happens, competition that is, on the liabilities side. When bankers are looking for deposits, you would be amazed at the concessions relationship managers and salespeople are willing to offer. What needs to be done is for that type of competition to happen on the asset (lending) side.

The CBN is probably now the wiser. Last week or so, it barred banks and other financial institutions from accessing its discount lending window on the same days they settle treasury bills and other government securities, that is in addition to an earlier directive denying dealers access to the interbank market on auction days to trade foreign exchange. That is a good first step. It shouldn’t stop there. It should apply similar creativity towards encouraging them to lend to the real economy. That first, before worrying about cheaper loans.

Even so, that is, if banks eventually do that which is wished, it may not necessarily lead to a fall in interest rates. Bank loans have to be priced above the inflation rate to be profitable. So yes, the inflation rate would continue to be a floor irrespective of the monetary policy rate (MPR). To ensure policy credibility, the CBN has little choice but to take this into account. Despite this, there is quite a bit that the CBN could still do: discouraging cartel behaviour for instance – banks could decide informally on a floor up and above that which would be considered reasonable. A vigilant CBN could check that. Cheaper loans may still be a pipe dream regardless: the structural issues, if not fixed, will continue to be in the way. Costs from those expensive back-up generators and information technology servers (to mention a few) have to be recouped somewhere. That last bit is not greed. It is simply common sense.

Also published in my BusinessDay Nigeria back-page newspaper column (Tuesdays). See link viz. http://businessdayonline.com/you-are-hereby-directed-to-cut-interest-rates-really/

SARB & CBK may hold rates

By Rafiq Raji, PhD

Divergent South African and Kenyan central banks to both hold fire

Lower, but still high inflation expectations, allow room for SARB tightening pause
The South African Reserve Bank (SARB) holds it monetary policy committee (MPC) meeting this week (19-21 July). It is likely to keep its repo rate unchanged at 7 percent. Not that it is about to give up its tightening stance. Far from it. However, inflation has eased somewhat – monthly pace was 0.2 percent in May from almost 1 percent on average since January. The most recent headline – to be released on 20 July – before it announces its decision, may border on the upper-end of its target range (3-6 percent): my June inflation forecast is 6 percent. I reckon the headline would be below 6 percent in July and just about 6 percent or lower in August. From September onwards, the SARB’s target would probably be breached, with inflation likely ending the year at above 7 percent. Above-inflation wage expectations – as mineworkers’ union demands in ongoing negotiations suggest – are certainly concerning for the SARB. And the rand, though now below the 15.0 psychological level to the US dollar, remains extremely sensitive to increasingly negative global headlines. Then there are those potentially troubling local elections in August. Food imports may also not be adequate – due to potential short supply abroad – to fill expected drought-induced domestic production shortfalls, white maize in particular. So food prices may rise still. All these suggest inflation expectations would remain high. In public commentary, SARB officials have been very hawkish, albeit they have allowed room for the possibility that inflation may have begun to steady. As there is yet a sustained trend to suggest that this is the case, they are understandably cautious. Even so, committee members have another opportunity to not make a rate move. At the last meeting, it wasn’t so clear cut. Notwithstanding, the committee would likely adopt a similarly hawkish tone. Still, MPC members would no doubt be encouraged by recent manufacturing and retail sales data, both of which surprised to the upside. Manufacturing production expanded by 4 percent year-on-year in May, from 3.1 percent in April. In spite of being highly indebted, consumers did not hold back on spending. Retail sales expanded by 4.5 percent year-on-year in May, from 1.6 percent a month earlier. Mining remains problematic: production contracted by 4.4 percent in May, though slower than an upwardly revised contraction of 7.7 percent in April. Troubles in the mining sector would probably remain, as commodity prices remain lower for longer and disproportionate wage demands continue to weigh on performance.

There is suggestion that the economy might have begun to turn the corner. Not so fast, if the IMF’s July 2016 country report is anything to go by – released prior to recent positive data. I am sceptical as well. The IMF sees the economy growing by 0.1 percent in 2016, a half-percent cut from its earlier forecast. I think it would be slower; a 0.2 percent contraction is my reckoning. There is some justification for this. Structural imbalances – infrastructure bottlenecks, skill mismatches, governance concerns, and policy uncertainty are some the IMF identifies – would take time to rectify. External factors – China’s slowdown and rebalancing, continued weak commodity prices and still likely tighter global financial conditions – also weigh. There is also worry that finance minister Pravin Gordhan may not get the political support he needs to implement cogent reforms. To his credit, he has made some progress. Avoiding a credit ratings downgrade to junk status in June was no small feat. But now the ruling African National Congress (ANC) party needs to win elections, especially as polls suggest it might lose key strongholds, in the capital city, Pretoria, no less. Populism by the ruling party is almost inevitable. An antsy ANC would be little swayed by Mr Gordhan’s call for restraint. More worrying is that there seem to be no new ideas about how to spur growth. And it is not unreasonable to be sceptical about this being addressed in the period to December when the most hawkish of the rating agencies, SPGlobal Ratings, next assesses the creditworthiness of the country.

The SARB would certainly seize any opportunity it gets to not be the reason growth flounders more than necessary. But it would loathe discovering later that inflation got out of control because of the slightest accommodation it allowed; and hurting its credibility consequently. Still, if it ever desired allowing even the tiniest room for growth, a window has opened at this meeting. Quite naturally, there is overwhelming consensus that it would hold rates. My expectation is that at the only other MPC meeting this quarter, in September that is, it would need to tighten rates further, on likely continued rand volatility, renewed US Fed rate hike expectations, and likely above 7 percent inflation by year-end. Brexit would also feature prominently amongst its considerations. It remains my view that while there are risks in this regard, they have been somewhat overblown. And now it is increasingly clear that the European Union would itself not be immune from Brexit risks. Then there is the bizarrely intermittent political incident that makes things go awry every now and again.

Resurgent upside inflation risks to prompt CBK easing pause
Fuel prices rose in mid-July. Security concerns have re-emerged. Already – in early July – the American government has issued a travel warning. There are also concerns about the health of Kenyan banks, judging from the recent disproportionate non-performing loans’ (NPLs) provisions made by some of the country’s biggest banks. The supervisory capacity of the Central Bank of Kenya (CBK) has been questioned. There is also worry about Kenya’s increasing foreign debt profile, albeit this remains less than half of total public debt. Such concerns motivated the downgrade of the shilling by Fitch Ratings in mid-July. Even so, inflation would probably remain below the upper-end of the CBK’s target range (2.5-7.5 percent) for the remainder of the year. Still, resurgent upside inflation risks – even if potentially one-off, like the road maintenance levy-induced July fuel price hike – are sufficient motivations for a pause in the CBK’s easing stance when its MPC meets on 25 July. The higher than expected annual June inflation headline of 5.8 percent, almost 1 percent higher than that a month earlier, is certainly instructive. Nonetheless, the 100 basis point rate cut to 10.5 percent at the meeting in May, means keeping the benchmark rate unchanged this time, would be both accommodative and balanced. And in regard of another power tariff hike in the near future, considering the most recent hike request by KenGen, the power utility provider, was cut quite significantly by the regulator, there are indications there might not be a need for one. In early July, KenGen announced it would discontinue its costly emergency power arrangement with Aggreko, a private provider, as the 30MW Muhoroni gas turbine to make up for it is ready. There are other risks worthy of consideration, which although not within the control of the CBK, could potentially throw its inflation forecasts off-balance. The risk of political violence is all too real. Effects are likely to be seen in intermittent food and transportation price hikes, when or if it comes about. Additionally, there has not been as much fiscal discipline as planned. President Uhuru Kenyatta has not shown the needed sobriety in this regard. Mr Kenyatta’s office and that of his deputy reportedly spent one billion shillings each on hospitality in the first three quarters of the 2015/16 fiscal year. And with control of the budget now squarely under the president’s purview, more spending overruns are likely as he campaigns harder and tries to finish infrastructure projects ahead of elections next year. There are indications that even after this, some projects may still not be completed in time for his testimonials during campaigns – already under way, by both sides actually. These considerations may not weigh significantly, if at all, on the CBK decision this month, however. And in any case, there is still time for the magnitude of the highlighted risks to become clearer or in fact diminish.

In sum, credible upside risks to the inflation outlook emanate from likely election-motivated fiscal spending overruns, potential shilling volatility – a scenario the CBK is amply prepared for – and probable intermittently volatile food and transportation prices. Even so, my inflation forecasts still put end-2016 inflation below the CBK’s upper-bound target. Nonetheless, the CBK would probably not be able to ease rates further before the end of the year. Thus, what would probably be looked forward to at this meeting is commentary on the state of Kenyan banks. Although the CBK would likely try to allay fears, it would be wise to use the opportunity to clear the air on the extent of the problem. Significant bad loan provisions by some of the country’s biggest banks are almost certainly symptomatic of a deeper malaise, one the CBK would do well to address head on.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays).