Interview

Key Takeaways

Below are a few of the main takeaways from COVID-19 Africa Watch’s conversation with Dr. Patrick Njoroge, Governor of the Central Bank of Kenya (CBK).

• The CBK’s immediate pandemic mitigation measures were aimed at protecting the most vulnerable and at keeping households and businesses afloat. These included direct benefit payments to the population (facilitated and monitored through the use of digital finance), lowering some taxes temporarily, and commercial banks’ restructuring of about 57% of loans within one year of the onset of the pandemic.
• Now, longer-term measures are focused on the post-COVID-19 era. The government has put in place an “Economic Recovery Strategy” to strengthen those sectors that were hit hardest, like tourism, services, and small and medium enterprises. Low interest rates in the US and Europe may present the opportunity for governments to refinance some of their external loans, thus further bolstering fiscal sustainability.
• Given that health shocks are the single most important factor driving people back into poverty, the COVID-19 pandemic has been a setback in terms of poverty levels and progress towards achieving the UN Sustainable Development Goals.
• On the positive side, FinTech has allowed Kenya to make strides in terms of financial inclusion for its population, and the applications are spreading beyond purely financial services and the banking sector. Now that the conversation is no longer about access, there is a need to think more about use and about expanding the span of products in the FinTech ecosystem, for example, in the insurance sector.

The interview was conducted by the CBK’s Anthony Murimi, an IFC-Milken Institute Capital Market Scholar. A transcript is available below.

Transcript

Interviewer

My name is Anthony Murimi, a debt analyst with The Central Bank of Kenya and an alumnus of the IFC-Milken Institute Capital Markets Program. Today, I’m delighted to welcome The Governor of the Central Bank of Kenya, Dr. Patrick Njoroge, who will be sharing his views with us on the ramifications of the COVID-19 pandemic on the Kenyan economy and how The Central Bank of Kenya has responded to this crisis.

Dr. Patrick Njoroge is the ninth Governor of The Central Bank of Kenya and former adviser to the Deputy Managing Director of the IMF. He holds a PhD degree in Economics from Yale University, a Master of Arts degree in Economics, and a Bachelor of Arts Degree in Economics from the University of Nairobi. Thank you, Governor, for being with us today.

To my first question, we are more than one year into this ongoing pandemic. What is the story of the first year in terms of the Kenyan economy, and how has the government responded to the economic hardships so far?

Governor Dr. Patrick Njoroge

Thank you, Anthony, and it’s great to see you in this unusual role of interviewer, and I’m delighted you did the Milken IFC fellowship program, which, as I have said in other places, is probably one of the best programs in this area anywhere in the world, so I’m delighted you’re one of the alumni from that program.

In terms of your questions, yes, we are one year and maybe four months since COVID-19 landed here in Kenya, in March of 2020, and obviously, we have gone through the ravages of the disease and indeed the impact on the economy. And I think so far, over almost one year and four months, I would divide it into two areas. The first was actually the immediate actions, the emergency measures that were put in place, and this really was supposed to protect the most vulnerable to begin with and also protect the businesses and households from the declines that were projected at that point.

And one of the things we did, of course, was to provide some support to the most vulnerable members of our families. The government did launch those programs very quickly. The other thing we did from our perspective is we expanded the use of mobile, digital finance, or rather the digital transactions, and we did this in various ways. That actually became one of the saving graces during this period.

Another thing that I think is also important to mention was our commercial banks actually put in place restructuring measures for all the loans that were performing at the beginning of March, on March 2nd. They were eligible for restructuring, and so the borrowers talked to the banks, and indeed something like 57% of these loans were restructured at the end of the year, within one year.

That whole program ended in March of this year, and at that point, actually 57% of these loans had been restructured. Also, the repayments during that period were significant, and I think something like 95% of the loans had actually been repaid, were fully repaid, or performing.

But one year hence, now the focus is on the period post-COVID-19. This is the “The Economic Recovery Strategy,” which has been put in place, and I think it is really strengthening some of the sectors that were hit hardest, like tourism, the services sector and then also looking at the SME Sector, which was also hit quite hard.

We estimate the growth in 2020 was maybe half a percentage point negative or around 0% or 0.1% plus, which I think is quite remarkable compared to what we’ve seen in other economies. That said, there is a lot of work to be done, and also there’s a lot of hardships, sad stories of families, households going through significant turmoil because of the loss of income, people have lost jobs, et cetera. So there’s all that in the background, but in terms of what has happened, I think we are relatively comfortable with the outcomes.

Interviewer

In connection to this, what strain has the situation played on fiscal and monetary policies?

Governor Dr. Patrick Njoroge

I think on monetary policy, we took an accommodative stance at the beginning. It was important; monetary policy generally is quick moving, so we were able to move quickly, put in place a much more accommodative stance, lowered our interest rate, the indicative interest rate, and that has remained there. We also lowered the cash required ratio (CRR) by one percentage point, and this released a lot of liquidity.

At the beginning, the big issue was to make sure that there wasn’t any freeze out in the financial plumbing–meaning that there is ample liquidity, and that is how we managed to ensure that there was liquidity in the system. Today there has been ample liquidity, so that was something that we didn’t have to struggle with, having dealt with it upfront.

On the fiscal side, as I explained earlier, there were measures that were put in place. First on revenue, but it wasn’t so much revenue but taxes. There were some tax rates that were lowered, VAT was lowered, corporate income tax at the top was lowered for a period of time, and all these measures were actually reversed at the end of December last year. There were also other things, other smaller taxes that were lowered but also reversed.

I think most of the action was on the expenditure side. So, putting out a lot of spending in the COVID-hit sectors, I talked about tourism, but I think a lot of it was to the social space, families basically. And here is where I think we need to make the point that we in Kenya are very lucky because of the payment structure that we have in place. Instead of sending checks (as they do in the US and other places) or sending cash to recipients of these social benefits, virtually everything was sent on the digital platform, directly to the most vulnerable. In terms of the cost of the transaction and in terms of immediacy, you could monitor and see that actually the money is being spent.

So, I think in that sense, it helped improve the effectiveness of these fiscal measures. At the end of the day, I think our digital competence was the silver lining during this COVID period.

Interviewer

In your assessment, how well prepared and resilient is the typical Kenyan household and economy to bounce back? This is with reference to the 1.7 million jobs that were lost during the COVID-19 era in Kenya?

Governor Dr. Patrick Njoroge

It is important to know that in our countries and Kenya in particular, very few people have sufficient reserves in terms of savings to accommodate such shocks. As a matter of fact, the single most important shock that drives people back into poverty is health, meaning a health shock, a family member getting sick. The number I remember is something like 60% of the shocks that drive people back into poverty are actually health related. This was before the pandemic, so now I can say, “actually the pandemic pushed most people down towards poverty.” Those that were just on the cusp of poverty have been pushed into extreme poverty, and everyone else has been brought down.

“The impact of this is going to be much more long-term. It is an issue we as policymakers have to deal with. If you think of it, from the perspective of the SDGs, the Sustainable Development Goals, this shock has really pushed people back, has set us back several years in terms of achieving the SDGs.”

The impact of this is going to be much more long-term. It is an issue we as policymakers have to deal with. If you think of it, from the perspective of the SDGs, the Sustainable Development Goals, this shock has really pushed people back, has set us back several years in terms of achieving the SDGs.

Interviewer

To my fourth question, despite the pandemic, you are an ardent supporter of FinTech solutions as far as the banking sector is concerned. You have continued to make tremendous progress in terms of encouraging SME sector growth, access to finance, and innovation. Could you tell us more about the latest efforts in this space and how they will boost economic recovery?

Governor Dr. Patrick Njoroge

Okay. To begin with, talking about FinTech, I think you need to appreciate that Kenya is really the cradle of FinTech. So we did FinTech before FinTech was invented. And I think that is important to appreciate. So, when you say that I am excited about it, I’m excited about it because it’s also our product in that sense, but I think more importantly, because of the possibilities.

FinTech provides us with the best opportunity to alter our economic arrangements in the financial sector to best have shared growth for the benefit of most people. So that’s why I’m excited about it. It is about the possibilities that are there.

I should also add, it’s not just about the banking sector, it’s about the financial sector more generally. Now it has started in the banking area, the revolution started more in the payment space and has extended into the banking sector, but it is much wider. For instance, because of this FinTech revolution, we’ve moved from financial inclusion of 26% in 2006-2007 to 83% in 2019, 83%. We are now doing a survey to see where we are, and I’m pretty sure it will be in the 90’s. So in a sense, you can say it has really allowed our population to have access to FinTech solutions.

The second item which is important to appreciate is that it’s no longer about access. We should be thinking more about use, and that’s why I go back to the issue of the span of the set of products in the ecosystem, expanding the FinTech ecosystem.

First, I would say in expanding the ecosystem, you have what I would call financial sector services. Maybe for you and me, we have them available, but they’re not available to everybody. So, in this area, you are thinking of democratizing financial services, think about, for instance, savings products that are available to you and to me, they are not available to everybody. FinTech solutions can actually help provide right-size savings products for families.

And I talked about health. So it is important to think about insurance as well. You’re thinking of not micro-insurance but actually nano-insurance. Think about, for instance, insurance to people who are in the SME world or in the informal sector, think of that mother or that food seller who doesn’t have insurance: the food seller, therefore, cannot take her child to the hospital when the child is sick, because being away for one day means one day of lost income. And here’s where you can have some nano-insurance, insuring this lady for three days, so covering her income for three days, so that she can actually have the opportunity to take her child to a hospital and therefore provide better healthcare.

So, the point here is that the possibilities are almost infinite, and our job is to make sure that those possibilities remain and are actually effective. We need to make sure that the FinTech firms are providing products that are actual solutions to problems and also that they protect the consumers and they’re priced correctly. So, there’s a lot of work to be done, but I think here’s where you see the potential, and you can see that the outcomes will be great.

Interviewer

To my fifth question, the Central Bank of Kenya is a fiscal agent and principal advisor to the National Treasury. What is your take on debt de-leveraging and lowering of refinancing risk as far as Kenya’s total debt to GDP is concerned?

Governor Dr. Patrick Njoroge

You’re right that debt levels have risen sharply in recent times. And I think that is something that has to be understood in the right context. I don’t think it is an issue of just the debt ratios, debt to GDP, but rather other indicators in terms of export capacity (debt service to exports, debt service to government revenues). But I think again, the critical factor there is actually the deficit, which is the single driver of debt dynamics. That is something that relates to the fiscal consolidation program that has been put in place in Kenya. And in the last fiscal year, which ended in June, the target deficit was 8.7% of GDP, and the outcome was 7.8% of GDP. I think it is a remarkable achievement.

I have made the point that debt is something that is an outcome, it’s not something that you start with. It’s an outcome of many things and, in particular, the balance between revenues and expenditures in the budget. So in one word, it is principally driven by the fiscal deficit. Now there are other ways that it can go up: if you have guaranteed loans for state-owned enterprises and those go belly up, and therefore, that is actually taken up by the government, et cetera. Aside from those, mainly, it’s really driven by the expenditures and the balance between expenditures and revenues.

The point here is that in order to reverse it, we also have to do it the same way. We have to maintain a healthier balance between the revenues and expenditures–meaning pushing up revenues, as I explained earlier. There’s a lot of scope to push up revenues, if you think about the decline of ordinary revenue to GDP that we have seen over the recent years, and you could even say the efficiency of particular taxes. So there’s a lot of scope for that.

And then, of course, on expenditures, part of it is the effectiveness of expenditure. Do you get true value for money? Is that Shilling doing one shilling of work? Or is it doing 50% of the work? And particularly in the context of development expenditures or capital expenditures, infrastructure, large expenditures, are you getting value for money in those things? So I think there’s a lot more, it cannot be boiled down to one question.

Unfortunately, everybody wants to boil down solutions to one answer or a sound bite. I’m sorry, there are no sound bites here. There’s a lot of work that is needed, hard slogging, in terms of reduction in debt (in the first instance, reduction in the deficit that we have been having). As I said, there’s a consolidation path that will lower our deficit to about 3%, just north of 3% in four years. And the issue is the credibility of that path, can we stick to it? And that’s really the matter; of course, there’ll be shocks.

I think the most interesting thing is even despite the COVID-19 shock, our target deficit for the last fiscal year was 8.7%, we actually brought it down to 7.8%, and so there’ll be progress, we hope that can be maintained. I think the issue here is to work with the government to ensure that that happens.

There’s also the last item which is, there’s a lot of discussion about refinancing, and I think it is not just in Kenya, there are other countries that are thinking about this, particularly on external expenditures, external borrowing. Some of these were at very high terms, unusual, or should I say high interest rates, and today in the environment of low interest rates and much more liquidity in the Euro and Dollar, it is opportune for some of the sovereigns to go back into the market and refinance, repay some of their expensive loans with fresh money. Now that also depends on the contracts that were there, so there isn’t a one-size-fits-all, it has to be done on a case-by-case basis. So that’s really in sum what needs to be done.

Interviewer

To my sixth and final question: in 2020, the Central Bank of Kenya, in conjunction with the Kenya Bankers Association, instituted some mitigation measures meant to cushion Kenyans against the adverse effects of COVID-19. What impact did this have on the economy and the banking sector at large, and do you foresee a situation where this could be introduced again in the near future?

Governor Dr. Patrick Njoroge

Okay. I think what you’re referring to is the restructuring of performing loans that we instituted in March of 2020: the loans that were performing on March 2nd, 2020, banks agreed to discuss with their borrowers and see the situation and the impact that COVID was having on the borrowers and cash flow, and agree on some restructuring. Remember, these are private contracts, so they have to negotiate between themselves. The Central Bank could not step in and take over or dictate what the private contracts should end up being. But the idea was, yes, the borrower should be able to have that conversation with the banks. And I think there was a significant benefit from this. Clearly, if a loan was performing and there was no sort of restructuring, what would happen with time, because of the hardship that the borrower is facing, you would end up having an NPL (a non-performing loan). So, there wasn’t a one-size-fits-all, but I think with those discussions, about 57% of those loans were restructured.

So, in some sense, it was beneficial, not only to the individual borrower, but to the economy as a whole. Today our non-performing loans did not rise substantially. If indeed we hadn’t done that, the outcomes in that would be a lot worse. So, I think it has to be understood that the banks this time around were sensible and understood that it was better to actually protect their balance sheet as opposed to protecting their profits and losses (P&L).

P&L is more in the context of interest, income, et cetera, which they lost. They lost some by restructuring, but at least they maintained a good customer on their balance sheet. So, I think that was the outcome that we would have wanted, right from the beginning. I would add that this wasn’t something that we took lightly. And obviously there are risks, you have to balance some of these risks, but I think it’s there for everybody to see that the outcomes were really beneficial to everybody.

Interviewer

Thank you so much, Governor. We have come to the end of the interview. The Milken Institute and I thank you once again for your time; please keep up the great work and stay safe.

Governor Dr. Patrick Njoroge

Thank you, Anthony. Same to you, all the best. Thank you.