CBK governor must take painful steps to stabilise the sliding shilling

What you need to know:

  • It has been a baptism of fire for Dr Patrick Njoroge.
  • Dr Njoroge and his committee will be under immense pressure to increase interest rates.

It has been a baptism of fire for the new governor of the Central Bank of Kenya, Dr Patrick Njoroge.

As I was writing this column, the Monetary Policy Committee was yet to pronounce its stand on the fate of the shilling.

Our Monetary Policy Committee operates more or less like an exclusive priesthood: they are neither appointed through a competitive process nor vetted by Parliament.

Technically, they are supposed to report to Parliament, but the committee has not done so since it came into existence in 2008.

In other countries you can tell which member of the monetary policy committee is a hawk or a dove in terms of their monetary policy stances. Here we do not know them. Decisions are made by a vote, with the governor having to cast a ballot whenever there is a deadlock.

The case for reforming the Monetary Policy Committee and how its members are appointed is a subject for another day. The biggest issue of the moment is the volatility of the shilling.

Indeed, Dr Njoroge and the committee are stuck between a rock and a hard place. If they increase interest rates by a big margin, they risk precipitating upward pressures on the cost of credit in the whole economy.

If they do not, the steep fall of the shilling may persist, with  negative implications to  macro-economic stability.

Still, Dr Njoroge and his committee will be under immense pressure to increase interest rates.

ASSUMPTIONS

The school of thought that supports a major hike in the policy rate is based on the following assumptions. First, that international investors are preparing to pile into Africa.

Secondly, that ordinarily the first port of call for these owners of short-term money would have been Nigeria. However, the investors are right now unhappy with Nigeria because the governor of the Central Bank has been trying to manage the naira. Indeed, Nigeria is currently witnessing  a huge gap between prices in the black and official forex markets for the naira.

If the Central Bank of Kenya moves quickly right now by jerking up interest rates by a big margin, investors will bring all their dollars to Kenya and the local currency will immediately stabilise.

There is a second school of thought that believes the reason the shilling has not stabilised despite the Central Bank of Kenya having pumped millions of dollars into the marketplace is because it has not been selling big amounts.

“The biggest single sale they have done so far was for $100 million,” a  treasurer with a leading commercial bank told me on Monday.

He continued: “It does not make economic sense for the Central Bank to  continue sitting  on huge reserves  when  the local currency is experiencing excessive volatility.”

There is yet another view: “What is going to move investors back to Kenya in a significant way is a major upward movement on yields on Treasury bills and bonds,”, said another bank official.

He added that it was time The Central Bank realised that adjustments to the rate policy takes too long to transmit to Treasury bill and bond rates — the two instruments which international investors target.

The proposal, therefore, is that the Central Bank should start taking outlier bids at the weekly Treasury bill auctions. In other words, the Central Bank must start accepting expensive money during weekly auctions.

ENDURING LESSONS

Clearly, opinion is divided on the correct tactic. However, there are enduring lessons. First, until we address our huge appetite for imports and start reinvigorating the export sector, no amount of tinkering with the monetary policy will stabilise the shilling on a sustainable basis.

Secondly, one of the reasons the shilling is in trouble is because we have followed a development path that has left the local currency at the mercy of international speculators and vultures circling Africa for over-inflated assets.

Thirdly, hot money flows and diaspora money have for a long time masked the fact that we have been running an unsustainable current account deficit.

In the medium term, the cost of servicing the large external debts portfolio we are running — especially the financing costs for the standard gauge railway and  debt servicing of the euro bond may — prove problematic for the economy.