It has been a turbulent six years for the Kenyan economy, buffeted by political strife and external market currents. Njuguna Ndung’u took over as governor of the Central Bank of Kenya just before onset of the financial crisis and great recession in 2007.
Four years later the Kenyan shilling collapsed as the country hit what analysts called a “perfect storm” that battered the economy.
The revolution in Egypt removed one of the country’s biggest tea export markets, while the deepening of the eurozone crisis put pressure on horticulture sales. A drought across the region sharply reduced agricultural productivity, oil prices spiked and the country faced a deep current account deficit of around 10% of GDP.
World Bank Africa economist Wolfgang Fengler has likened the situation to flying a plane into a hurricane with one engine overheating and one not functioning. The shilling fell 25% against the dollar in the first three quarters of 2011 and inflation hit 17%.
CRACKING DOWN ON SPECULATORS
There were market factors at play too. “A lot of it was down to the behaviour of offshore counterparties, who were shorting the Kenyan shilling quite massively,” recalls Razia Khan, head of Africa research at Standard Chartered.
In October 2011, the Central Bank acted to snap the fall in the shilling, hiking interest rates by an unprecedented four percentage points, to 11%.
It was not a simple decision. Although social pressure to contain inflation was considerable, high interest rates had long been a drag on business growth.
The central bank also moved to prevent speculation on the shilling. Banks had built up dollar positions by borrowing from the CBK’s discount window and were making a killing on arbitrage. The Bank acted to limit the ability of offshore counterparties to borrow shillings for less than a year.
“For anyone looking to make a quick speculative trade, taking a position on the Kenyan shilling, it’s not really going to work out,” said Khan. “They can’t borrow the Kenyan shilling liquidity they need, unless they go for really long term tenors, which are of course that much more expensive, so it’s a reason not to short the currency.”
Maintaining that stability will be crucial in the next few years, as Kenya increases its borrowing in international markets. The country runs a small but significant current account deficit and, in June, issued a $2bn Eurobond. It has also discussed other hard currency bonds, including a yen Samurai bond.
The political risks to Kenya’s economy remain significant, but the Central Bank has maintained a steady focus on tackling inflation and keeping the currency stable, even during the 2013 elections.
FOSTERING DEVELOPMENT
The CBK is also one of a small number of African central banks that has expanded its mandate to tackle development challenges. It has striven particularly to increase lending to agriculture, Kenya’s largest source of employment and contributor to GDP.
In collaboration with international organisations, the CBK has created risk-sharing pools that six local commercial banks have been able to leverage up, to supply $300m of loans to farmers.
This kind of innovation has widespread benefits for the economy. Financial deepening will be a constant challenge for the bank, as will controlling the rapid expansion of mobile money services, which have driven financial inclusion in Kenya and are gradually being brought into the formal banking system.
EM INTERVIEW Njuguna Ndung’u will complete his eight year tenure as governor of the Central Bank of Kenya in March.
The key milestone, he says, was setting up a monetary policy committee with executive powers, rather than a mere advisory role. This has reinforced the Bank’s independence. “No other agent can influence that. The independence of the central bank is written in the constitution,” he told Emerging Markets.
Yet Kenya has struggled with inflation. Its target is 5%, with a tolerance margin of 2.5 percentage points. Inflation reached 7.1% late last year before coming down to 6.6%.
Meanwhile, economic activity has been brisk and growth is expected to rise from 5.7% last year to 6% in 2014.
The benchmark CBR interest rate has been left unchanged at 8.5% for almost a year and a half. “The best weapon to fight inflation is economic growth. It gives you opportunities for investment,” Ndung’u says.
Deepening the financial industry and market has been the other pillar of Ndung’u’s legacy. “We have completed our own financial infrastructure. We have set the scene for growth and development by bringing all the necessary institutions that will support the financial system to grow and allow it to deepen,” he says.
N’dungu hopes to improve the B1/B+ credit ratings of Kenya, which is now considered a middle income country after a recent revision of the methodology to calculate GDP.
After eight intense years at the helm, Ndungu’u says he is eager to go back to his academic career. “We don’t retire. We just change clients,” he jokes.