CBK policy error to blame for weak shilling, MPs told

A policy blunder at the Central Bank, weak controls, and an incoherent monetary policy are to blame for the depreciation of the shilling, the Parliamentary Committee investigating the depreciation of the shilling was told Thursday.

Economist David Ndii told MPs that the 2009 fiscal stimulus package should have been scrapped in mid-2010, because all it did was to pump more money into circulation, increase demand, but it did not improve the supply of goods.

Shortage of goods in the domestic market led to a surge in imports (to fulfill the increased demand), resulting into a demand for foreign currency, hence the slide of the shilling.

“The right policy would have been to roll back the stimulus package in the 2010-2011 fiscal year. That was an error in judgment,” Prof Ndii told House team chaired by Adan Keynan (Wajir West) at the meeting in Nairobi’s Continental House.

“When you have a growth shock, accept it. The nature of our economy is that it is going up and down all the time,” said the economist.

He alluded to printing of money when he mentioned “quantitative easing”, saying that there’s a likelihood that the Central Bank printed money back in 2008, when the government was busy trying to get out of the economic low that arose after the bloody political crisis in the aftermath of the 2007 General Election.

Prof Ndii said money is usually printed to shore up bank reserves, and not to support the economy as the government had done.

“The monetary stimulus was an overkill and we didn’t actually ask ourselves why other governments were doing it,” he said regarding the global financial crisis in which many governments printed money to manage their fiscal situations.

He told MPs that there was a lapse when it came to monitoring the economic situation.

Prof Ndii said the Central Bank "should have been prudent” in its response, because from its knee-jerk reactions it was evident that the CBK “let go for too long”.

He described the obsession of the CBK with managing inflation and pushing for economic growth as “hawkish” and warned that this could be part of the problems that led to the woes of the shilling.

“What (the Central Bank) seem to be doing is to help a political cause of (improving the economic growth). The job of the Central Bank is to give warnings. It should always talk about the risk of overheating the economy. Its job is to tell people to take the foot off the gas… (the Central Bank) seems to be pre-occupied with growth,” he said.

He told MPs that the monetary policy was “incoherent” to an extent that it is “difficult for market players to figure out what drives the CBK’s decision”.  He termed the Monetary Policy as “a ritual that has very little to do with the real world.”

The economist added that speculators had seen flaws in the system and taken advantage of it.

“The thing is, the speculators speculate against your fundamentals. You will not get speculation on our currency unless you create that opportunity. We created that opportunity and maintained it for too long,” Prof Ndii said.

Erastus Mureithi (Ol Kalou) noted: “I have not heard you talk about the economics of cartels. The maize in this country is controlled by three families. Then there’s the oil cartels.”

The MP said that “something had really gone wrong in the banking industry” and sought to know exactly what happened in the industry to lead to a sudden slide of the shilling.

“It is a straight forward matter of corruption began by people in the Central Bank. I have friends in the banking industry and they tell me that it was more than speculation,” said Shakeel Shabbir (Kisumu Town West).

But Prof Ndii told the MPs that there were people in Asia, Europe and America, and other markets, whose job was to look out for vulnerabilities in the currencies of emerging markets and make money through speculating in foreign exchange trade.

“We sit here and think that this is a small technical problem that can be solved by people sitting in the Central Bank. That’s not the case,” he said. He exonerated the governor saying that he had done a “honest mistake”.

“I don’t think they (CBK) had anticipated that. This is an honest mistake.  We are at that stage where say you have started crossing a river, the currents are strong and you are asking yourself, do you go back or go forward,” he concluded.

The committee also met representatives from the Kenya Private Sector Alliance (KEPSA), who called for the competitive recruitment of the members of the CBK’s Monetary Policy Committee. It said the MPC was a kind of club, whereby, there were teachers and their students sitting in the same team to an extent that the Central Bank was no longer being “governed”.