Credit freeze hits building, construction sector hard
Masons and their apprentices work at a construction site. The building and construction sector has taken the largest hit from the plunge in private sector credit growth due to high interest rates.
The building and construction sector has taken the largest hit from the plunge in private sector credit growth due to high interest rates and stringent loan terms.
Private sector credit growth to the sector contracted by 16.7 per cent in October compared to 13 per cent at the same time last year, according to data from the Central Bank of Kenya (CBK).
The deterioration of lending to building and construction contrasts with reduced economic output for the sector which contracted by 2.9 per cent in the second quarter, reversing a 2.7 per cent growth rate in 2023, according to the Kenya National Bureau of Statistics (KNBS).
Indicators in the sector revealed the contraction of economic activity in building and construction through the three months to June 2024.
“For instance, cement consumption declined by 7.8 per cent to stand at 2.05 million tonnes from 2.2 million tonnes previously. Similarly, the quantity of imported bitumen decreased by 8.1 per cent to 15.5 million tonnes 16.9 million tonnes in the prior year,” the KNBS stated in its second-quarter gross domestic product (GDP) report.
Credit flow to the manufacturing sector has also suffered, slumping by 11.6 per cent in October from a double-digit growth rate at the same time last year.
The sector’s real GDP growth in the second quarter, however, accelerated to 3.2 per cent from a slower 1.5 per cent growth rate supported largely by improved agro-processing.
The food manufacturing subsector registered significant growth in the quarter, including the increased production of soft drinks, sugar, and milk. Other broad economic sectors have managed to post modest credit growth despite private sector credit growth falling to zero in October 2024.
Transport and communication, for instance, registered an eight per cent growth in private sector credit in October, albeit lower than the 16.2 per cent rate posted at the same time last year.
Credit forwarded to support the purchase of consumer durables grew by 3.3 per cent from 10.8 per cent over the same period.
The CBK noted the decline in private sector credit will limit economic output as loans to businesses and households are crucial in supporting economic activity.
“Growth in credit to key sectors of the economy decelerated with implications on economic growth,” the CBK indicated last week.
The decline in private sector lending in part reflects the exchange rate valuation effects on foreign currency-denominated loans following the appreciation of the Kenya shilling.
The CBK has undertaken three consecutive cuts to its benchmark interest rate to rekindle lending to the private sector.
