The International Monetary Fund (IMF) has approved Kenya's request for a six- month extension of a Sh150 billion ($1.5 billion) standby credit facility that was due to expire Wednesday.
Kenya has in return promised to repeal the law that caps interest rates within the extended six-month window, setting consumers up for a possible steep rise in the cost of loans.
Availability of credit facility is also tied to the Treasury's fulfilment of the promise it made to cut back on the fiscal deficit through a raft of budget consolidation measures, including cutbacks in public spending.
"On March 12, the executive board of the IMF approved Kenyan authorities' request for a 6-month extension of the country's stand-by arrangement to allow additional time to complete the outstanding reviews," the Fund said in a statement, adding that the reviews are expected to be completed by September 2018.
The IMF said completion of the reviews will enable Kenyan authorities to have access to funds available under the precautionary SBA.
Kenya made a request for extension of the loan to IMF officials who came visiting in Nairobi early this month.
IMF approved the $1.5 billion credit line on March 14, 2016 for a period of 24 months, as precautionary facility that Kenya could draw should the economy be in distress.
The Washington-based institution recently revealed that the credit had been suspended mid last year before the March 14 expiry date, because of Kenya's failure to meet the agreed fiscal deficit reduction targets.
This meant Kenya lost access to the funds meant to offer the economy a foreign exchange buffer against unforeseen external shocks.
Treasury secretary Henry Rotich and Central Bank of Kenya governor Patrick Njoroge have made public their support for a review of the rate capping law, citing a slowdown in private sector credit growth.
"In support of this request, the authorities have committed to policies that will enable them to achieve the programme objectives, including reducing the fiscal deficit and substantially modifying interest controls," the IMF statement reads.
Borrowers, who paid sky-high credit costs before rate cap came into force in September 2016, will be watching keenly to see how the Treasury navigates the dicey issue either with a partial review or complete overhaul.
The rate cap law, which caps interest rates at four percentage points above the central bank's benchmark rate, came in response to the high cost of credit that saw banks make huge profits.
The lenders reacted to the law by shifting to lending to government, arguing that they were unable to price in risk for customers, especially SMEs which tend to carry a higher default rate.
