CBK governor faired badly in 2011

Published on 24/12/2011

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By Morris Aron

The year ended badly for the Central Bank Governor Prof Njuguna Ndung’u.

For a person revered for his grasp of macro-economic issues, the last month of the year must have

Reuters survey that put Prof Ndung’u (pictured) as the worst performing Central Bank governor came as a last nail in the coffin. [Photo: File/Standard]

been very tormenting indeed after all the blame for the weakening of the shilling was squarely heaped on him.

At a recent function to discuss the economy by a panel of economists from the World Bank, Ndung’u and the monetary policy committee were faulted for late intervention measures to tame inflation and address foreign exchange volatility.

Experts from World Bank said while economic fundamentals called for intervention measures to tame volatility at the foreign exchange market and address inflation way back in April, the MPC which he chairs, took its own sweet time only choosing to react ‘too much too late’.

"As per the economic indicators, signals for the need for intervention started showing in April," said Wolfgang Fengler, chief economist at World Bank Kenya office.

The Monetary Policy Committee last month increased the Central Bank Rate (CBR) — the rate at which banks borrow from the CBK as a lender of last resort — by 150 basis points, up from 16.5 per cent to 18 per cent, saying the move was necessary to curb inflation and deter exchange rate volatility risks.

Tight liquidity

The MPC also adjusted the Cash Reserve Ratio (CRR) — the minimum amount of deposits and notes that banks must hold and not lend out — by 50 basis points to 5.25 per. The new rates took effect from December 15

The move has seen interest rates rise to a high of 28 per cent, meaning a basic freeze in borrowing owing to the high loan cost.

The move comes as a surprise to many analysts’ expectations with many saying that the adjustments would result in ‘excessively tight liquidity’ and stifle economic growth.

The shilling hit an all time high of Sh107 to the dollar, while inflation rose for 14 consecutive months to a high of 19.72 per cent against CBK’s target of five per cent.

Just as CBK was planning a re-bound against the accusations that it was slow to respond to the changing economic fundamentals, a Reuters survey that put Ndung’u as the worst performing Central Bank governor came as a last nail in the coffin.

The governor was voted Africa’s least effective regulator for failure to spot and act against rising inflation and the fall of the shilling against major currencies.

In addition, CBK’s critics reckon that too much money in the economy fed the increase in prices of goods, pushing up inflation rate.

Following the late intervention measures to tame inflation and high foreign exchange volatility, a growing number of analysts have pointed that this period has been the lowest moment of 2011.

According to AlyKhan Satchu, the lowest points of the year have been the sharp slide in the NSE 20 share index, the extraordinary volatility of the shilling, the brutal spike in borrowing costs and the sharp deceleration of the growth of the economy.

"The vicious inflationary burst dims Vision 2030’s 10 per cent Gross Domestic Product take off," explained Satchu.

"I think the teal economy has been converted into a laboratory experiment and that it is simply not resilient enough to sustain high rate structure for a period of time."

"The Government has to show a seriousness of purpose. It immediately needs to resize its footprint."

Other areas that urgently require a redress, according to Satchu includes the downsizing of the recurrent expenditure bill and put in place measures to address food production and insecurity.

Nikhil Hira, an audit consultant with Deloitte, also adopts a similar stand.

Hira, however, has issues with the way things are going with the Value Added Tax Bill, where stakeholder input has been minimal meaning that if the Bill is signed into law, then basic commodities will become taxable — a development that is bound to affect the poor and dampen economic growth prospects.

According to XN Iraki, economic lecturer at the University of Nairobi, the upbeat this year was positive economic growth recorded despite problems that the country faced —incursions into Somali, strikes and droughts.

"This shows how resilient our economy is," said Dr Iraki.

Going forward, however, Dr Iraki says that the current interest rates are unsustainable and that the laws of supply and demand would soon come into play.

"Banks and other lenders will have to lower the rates once they find the demand for loans, which is a major source of their income goes down. By March, I expect rates to start going down."

Experts agree that high interest as a way of taming inflation slows down the economy and creates unemployment.

The only silver lining on the economy, experts argue, is that the country should eye proper implementation of the devolved system, which takes effect next year.

"If implemented successfully, the devolved system poses the best growth prospects for Kenya," said Mr Fengler.