Intervention by Central Banks on the Economic Impact of Covid-19

Republic of Kenya- Central Bank Interventions.

 On 23rd March 2020, the Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) met and analyzed the impact of the COVID-19 to Kenya’s economy and in light of the adverse economic outlook, the MPC unveiled the following policy actions to prevent the COVID-19 health crisis from becoming a severe economic and financial crisis:

  • Lowering the Central Bank Rate (CBR) from 8.25 percent to 7.25 percent
  • Reducing the Cash Reserve Ration (CRR) from 5.25 percent to 4.25 percent
  • Releasing KES35.2 billion as additional liquidity availed to banks to directly support borrowers that are distressed as a result of COVID-19.

The implications of these measures will mitigate the adverse impact of the COVID-19 to Kenya's economy and more importantly to the financial sector. The policy actions will definitely boost liquidity in the market as well as support commercial banks with cash which they can lend to various borrowers.  Also, the policy actions will give incentives to banks to avoid increasing lending rates.

Similarly, the CBK announced various measures to mitigate the negative impact of the COVID-19 which include:

  • Commercial Banks to provide relief to borrowers on their loans due to the COVID-19 pandemic;
  • Commercial Banks to provide a one-year relief period on personal loans (include mobile money borrowers). The relief will also apply to mobile money borrowers.
  • Banks to make it possible for Micro and Small Media Enterprise (MSME’s) and corporate borrowers to contact their banks so that they can assess and restructure their loans based on special circumstances that have been caused by the COVID-19 pandemic;
  • Commercial Banks to bear the cost required to extend and restructure loans during the time of COVID-19 pandemic;
  • Banks to waive all charges for balance inquiries

Given the fact that about 28 percent of lending in Kenya comprises of personal loans, these reliefs and measures will significantly cushion Kenyans against the impact of the COVID-19. The relief will ensure liquidity in the market and keep businesses afloat during this difficult time of COVID-19 pandemic.

The CBK has also unveiled a set of emergency measures to increase the use of mobile money transfers and curb the spread of coronavirus (Covid-19). The measures which will be effective until 30th June 2020 include:

  • zero charges for the mobile transactions of up to Kshs 1,000;
  • increasing the transaction limit to Kshs 150,000 (USD1447.730;
  • the mobile money wallet limit and daily transactions limit is placed at Kshs300,000 (USD 2895.46);
  • removing monthly transactions limit, and eliminating the transfers between mobile money wallets and bank accounts.

The implication of the measures will be to encourage Kenyans to use digital channels and contactless mobile payments. These measures will not only strengthen efforts to curb the spread of the Covid-19 but also sustain the payment of transactions even during the lockdown measures.

  

Republic of Rwanda- Central Bank Interventions.

 

As Rwanda braces for a lockdown, closed borders, grounded aircraft all aimed at preventing the spread of the deadly coronavirus, there is a significant effect on the economy. The Central Bank of Rwanda has come out with various interventions aimed at not only combating the spread of the COVID 19 but also reduce the effect of doing business. It is, therefore, worthwhile to delve into the interventions and look at the impact on business.

  1. Extension of Lending Facility: More than 80% of the liquidity in local banks is generated from the domestic market. With businesses slowing down, deposits coming to banks will decline. It is anticipated that banks might get affected with short term liquidity challenges because of the pandemic. The National Bank of Rwanda has put in place a liquidity window to allow the banks to continue serving their customers.

 

To facilitate the private sector borrowers, a fund close to $52 million has been earmarked to bridge liquidity challenges and commercial banks can access this facility at the central bank rate. The stimulus whose beneficiaries include individuals, SMEs and large corporates regardless of their sector of operation, is meant to relax measures on loans and giving clients some room to breathe, given that the crisis does not go beyond six (6) months.

 

  1. Lowering Reserve Ratio: The Central Bank announced lowering the requirement ratio from 5% to 4% to allow banks more liquidity to support affected businesses. Normally, the central bank maintains a range of liquidity facilities such as intra-day liquidity facility, overnight lending facility, reverse repo for seven days and refinancing facility for seven days which ensures than tanks can lend.

 

Effective April 1, BNR is expected to lower the reserve requirement ratio from 5% to 4% to allow banks more liquidity to support affected businesses. This will increase liquidity by up to Rwf 26 billion, effectively increasing funds available for lending to the economy.

 

  1. Review of Treasury Bonds: For the next six months, BNR has offered to buy back bonds at the prevailing market rate. The regulator also reduced the waiting period if one fails to sell the bond at the secondary market from the current 30 days to 15 days. The implication is that money will flow from the Central Bank to individual banks leading to increased borrowing, hence there will be increased money circulation in the economy for the producers and consumers to use.

 

  1. Restructuring Loans: The Central Bank anticipates that customers with huge loans would face challenges in servicing those loans thus creating liquidity problems to the banks. This is why banks are allowed to engage their customers and re-negotiate terms especially to those with outstanding loans facing temporary cash flow challenges arising from the pandemic. Restructuring these debts will mean making lower repayments each month, freeing up cash for running businesses and avoiding closure, and consolidating existing debts could mean that one pays a lower interest rate overall, reducing the cost of finance to your business from outstanding loans.

 

  1. Zero charges on Mobile Money Transfers: Charges have been removed on P2P transactions (sending money from one person to another). This is in a bid to encourage the public to use “cashless means of payment”. The limit for individual transfers using mobile money wallets has been increased from Rwf 500,000 to Rwf1.500,000 for Tier I customers and from Rwf 1million to Rwf 4million for Tier II customers. Digital channels and contactless mobile payments are efforts aimed at limiting the risk of transmission of Corona Virus through handling cash and other non-virtual means of payment for the next three months and effective from March 19th, 2020. However, projects that require huge disbursements will be affected in terms of operation and rollout deadlines.

 

United Republic of Tanzania- Central Bank Interventions.

 

With 12 reported cases of COVID-19, Bank of Tanzania has not yet effected any monetary policy interventions as of 24th March 2020. It conducted a consultative session with bankers through Tanzania Bankers Association where it encouraged cashless transactions and other alternative payment channels. Further to this, the bank is set to declare interventions that will promote the stability of Tanzania’s economy amid this pandemic. Similarly, the graph below shows the trend of the value of USD to TZS over the period before and after COVID-19 pandemic.

Source: Trading Economics

With the first case reported on 16th March, the Tanzanian shilling has remained consistent in terms of its value with an average of 2302. However, at the beginning of the year, it depreciated until the end of February where it appreciated. This trend took a turn on March 16th where the first case of COVID-19 was reported in Tanzania and the currency depreciated with a slight recovery in the past 2 days. The implication of this is higher prices for imported products including consumer and producer goods. This calls for an intervention from the Bank of Tanzania so as to mitigate the negative impact of higher prices.

 

Republic of Uganda- Central Bank Interventions.

 

Bank of Uganda to provide exceptional liquidity assistance for one year to financial institutions and waive limitations on restructuring credit facilities of financial institutions that may be going into distress

This is meant to strengthen the banking institutions to remain afloat amidst this stalemate as few borrowers will be able to pay back their loan obligations. Therefore, with this intervention, the financial institutions are unlikely to go into financial distress and the business community can still continue to borrow.

Intervention in the forex market to smoothen out excess volatility arising from the global financial markets.

The central bank has given assurance that amidst this pandemic it will intervene in the foreign exchange market in a moderate way to deter the shilling from falling further. Since the pandemic, the shilling has been depreciating and by far has lost by 3.9%.

This, therefore, implies that the dollar is managed at levels that can allow the business community to continue importing hence avoiding a spike in commodity prices.

Mechanism to minimize the likelihood of sound business going into insolvency due to lack of credit.

The Central bank realizes that businesses need credit to finance their investments and remain solvent.

Therefore, this facility/mechanism assures the business community that the central bank will avail credit to finance their investments and thus avoid going into distress

 

Engaging Mobile Network Operators (MNOs) and commercial banks to:

  • Further, reduce fees on mobile money transactions and digital payment charges to limit the use of cash and bank branch visits.
  • Increase daily transaction and wallet size limits for mobile money limits

The public has been cautioned against the use of paper money as well as coins given the health risks associated with the spread of the Coronavirus.

Thus, the intervention by the central bank to reduce fees on mobile money transactions and increasing wallet-size limits encourage digital payments which then reduces the risk of infections.