Kenya sees decline in diaspora remittances due to COVID-19

In Kenya, the economic landscape is set for a significant shift as the country grapples with the effects of the COVID-19 pandemic. The central bank's decision to remove over a million borrowers with unpaid loans below 1,000 Kenyan shillings from credit reference bureaus is a major development that could have far-reaching implications. Additionally, the decline in diaspora remittances, a key pillar supporting the Kenyan economy, is expected to hit record lows due to the lockdowns in Europe. CNBC Africa's Arnold Kuisera recently spoke to Felix Otieno, an Investment Analyst at Cytonn, to shed light on these crucial matters. One of the most critical points discussed in the interview was the impact of declining diaspora remittances on the Kenyan economy. Otieno highlighted that remittances have been a vital source of foreign exchange reserves for Kenya, particularly for the central bank. With the anticipated drop in remittances, the Kenyan shilling is expected to weaken further against the US dollar. This depreciation could have significant implications for the country's economy in the short term. Otieno also delved into the central bank's monetary policy response to the current economic challenges. He mentioned the bank's initial plan to buy back dollars to bolster forex reserves but noted that high demand for the dollar compelled the bank to sell dollars back to the market instead. This move could lead to a more expensive dollar, impacting Kenya's economy. Additionally, Otieno touched upon the government's discussions with foreign lenders for debt relief, highlighting the potential economic consequences if the situation is not managed effectively. The interview also addressed the recent delisting of over a million defaulting borrowers from credit reference bureaus, a move made by the central bank. The decision primarily targeted unregulated digital lenders in Kenya, preventing them from listing individuals with loans below 1,000 Kenyan shillings. While this move may not significantly affect major players like KCB and CBA, it could impact smaller lenders, leading to a halt in lending activities. Otieno emphasized that this development aims to regulate the lending space and prevent misuse of credit information sharing platforms. Furthermore, Otieno discussed the injection of liquidity in the market by allowing previously delisted borrowers to access credit again. This move is expected to benefit businesses, especially those struggling to survive in the current challenging economic climate. With many businesses in need of working capital, increased liquidity could offer a lifeline to sectors facing financial strain. In a significant investment development, the IFC, a division of the World Bank, recently invested 1.5 billion Kenyan shillings in Naivas, a major retailer in Kenya. This investment represents a minority stake in Naivas and comes at a time when the Kenyan retail sector is fiercely competitive. Following the exit of South African retailers from the market, Naivas is strategically positioning itself to compete against industry giants like Carrefour and Tuskys. The IFC's investment is not only a vote of confidence in Naivas but also an opportunity for the retailer to grow and expand amidst challenging market conditions. The economic landscape in Kenya is undergoing significant changes, with the dual impact of declining diaspora remittances and efforts by the central bank to regulate the lending environment. As the country navigates these challenges, policymakers and businesses alike will need to adapt swiftly to mitigate the economic impact and foster sustainable growth in the post-COVID era.