Photograph — Bloomberg

On Wednesday, April 29,2020, The Central Bank of Kenya (CBK) cut its benchmark lending rate from 7.25 percent to 7.0 percent as an effort to boost the flow of cheap loans in an economy plagued by the coronavirus pandemic.

The benchmark rate by CBK was cut from 7.25 percent in March and 8.25 percent in January 2020, to tackle the impact of COVID-19 and mitigate the adverse economic outlook. Although the Kenyan government in response to the pandemic imposed a daily curfew and restricted movements in and out of the regions most affected by the virus, this move curtailed economic activities in the country.

With 396 confirmed coronavirus cases and 17 deaths in the East African nation, its tourism and agriculture export businesses significant loss due to the national and global shutdowns aimed at curbing the virus’ spread. “In light of the continuing adverse economic outlook, the (monetary policy committee) decided to augment its accommodative monetary policy stance,” CBK said in a statement.

At its meeting in March 2020, the apex bank cut the lending rate by 100 basis points, and also lowered the cash reserve ratio for commercial banks to 4.25 percent from 5.25 percent. Thus, banks cut the cost of credit to the lowest level in 15 years following the drop in the benchmark rate. Nevertheless, CBK revealed that it was ready to take on any additional measures that would boost the economy within a month.

Following CBK’s emergency measures, loans worth 81.7 billion Kenyan shillings ($762.41 million) were restructured mainly for tourism, restaurants and hotels, real estate, building and construction, and trade. Similarly, the bank said there was a need to set up a mechanism to cushion struggling small and medium businesses during these times. In addition, the Kenyan government has announced a series of tax cuts for individuals and companies, It has also created a platform for lenders to restructure loans for individuals and firms who might fall into distress.

With the Kenyan economy weakened by the effects of COVID-19, the primary benefit of low-interest rates is it’s stimulative effect on economic activities. By reducing interest rates, businesses can function and gather enough funds to spend on capital products. Another major benefit of a lending rate cut to a declining economy battling with the novel coronavirus is that it increases the money supply wherein people are able to purchase goods to serve their basic needs.

Meanwhile, Finance Minister Ukur Yatani on Tuesday, April 29 stated that the 2020 economic growth would decline to 2.5 percent but may fall to 1.8 percent due to the coronavirus outbreak. Before the COVID-19 health crisis swept the globe, the Finance Ministry had forecasted growth of 6.1 percent for this year, however, both the International Monetary Fund and the World Bank have also slashed Kenya’s 2020 economic growth forecast owing to the pandemic.

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