/ 20 March 2012

Kenya’s central bank chief weathers Parliament

Kenya's Central Bank Chief Weathers Parliament

Kenya’s central bank chief marched out of a hotel last month, barely pausing for questions as the markets buzzed with rumours a parliamentary committee was set to call for his removal over a year’s-worth of market chaos.

Sure enough, that day the committee investigating how the local currency lurched from one record low to another, sending inflation through the roof, recommended Njuguna Ndung’u step aside pending an investigation.

He remains in place having survived a close full parliamentary vote in this East African nation, one of the few on the continent to attract mainstream overseas investors.

The committee vote nonetheless marked a low for Ndung’u, who having successfully steered Kenya’s monetary policy during a time of economic boom then had to preside over soaring inflation and a seemingly bottomless dive in the shilling.

So sharp was the move that it became a trending topic on Twitter, a position usually reserved for the likes of Justin Bieber and Lady Gaga rather than an East African currency.

So poor was his performance viewed by market players that he was listed bottom in a Reuters poll of African central bankers, a finding that infuriated him and was widely reported at home.

It has not always been this way.

In his first year at the helm of the Central Bank of Kenya, 2007, the economy grew 7%, its fastest growth rate for years, while year-on-year inflation accelerated as well to stand at 12% in December.

Nationwide violence
Ndung’u then embarked on a series of interest rate cuts to stimulate growth after the shock of nationwide violence after a disputed presidential vote, drought and surging food prices.

He promoted the financial sector’s growth and encouraged further innovation, such as the mobile phone money transfer services that have since boomed in Kenya.

Regarded by many peers as a top class economist, Ndung’u was therefore re-appointed to a second term at the helm of the central bank in Kenya in February 2011 — a move seen as a plus for stability.

Then the rot set in. The euro zone debt crisis, high food and oil prices and the bank’s cheap demand-forming credit created a heady cocktail that sent inflation soaring and pummelled the shilling.

“His baptism came late,” said Robert Shaw, a Nairobi-based independent economist who predicted Ndung’u’s ride would be far tougher in his second term.

A market-confounding rate cut in January 2011, at a time inflationary risks pointed to the upside, was the first in a series of policy moves during the first nine months of last year which undermined investor confidence in Ndung’u.

Ndung’u was unwavering in his reluctance to hike rates aggressively. In mid August, with the shilling down 15% against the dollar and inflation at 15.5%, he said he was satisfied the bank’s tightening of monetary policy through a revised discount window rate was working.

Then came the mocking Twitter campaign. The hash tag #thingsstrongerthanthekenyashilling went viral, with answers given globally such as “wet toilet paper” and “Arsenal’s defence”.

Record lows
The shilling fell to 104.15 on the day of the Twitter campaign, one of a string of record lows versus the dollar.

Two days after this, the prime minister’s office formed a team of key officials to try to restore confidence in the ailing currency, saying the central bank’s efforts had not been sufficient.

A month later, the shilling sank to a record low of 107 per greenback, while inflation kept rising, peaking at 19.7% in November.

Ndung’u accused some commercial banks of driving the currency south with speculative trades. Sending in auditors, Ndung’u blamed some banks for exporting dollars and undermining the shilling through swaps, while banks maintained they were funding transactions, which could not be speculative from a foreign exchange point of view.

“Essentially there were some flaws … his inability to recognise when he has made a mistake, [and] his inability to message the market … all of which he failed to recognise were important issues,” said Aly Khan Satchu, an independent analyst.

For his part, Ndung’u points to his achievements.

“Kenya can now boast of having a fully-fledged financial infrastructure,” he said. “Kenyan banks have flourished and covered the region, they will continue posting their surplus because of the wider market they have covered.

“We have strengthened supervision and provision of bad debts, our banks are stable and strong,” he said, noting that the financial sector grew by 8.8% last year while the whole economy grew by 5.6%.

Depreciation of the currency
He also has supporters who argue that much of what happened last year was nothing to do with Kenya and Ndung’u.

“There are many factors that contributed to the depreciation of the currency that cannot be blamed on an individual but rather on our economy and globalisation,” said Mwangi Kimenyi, a former colleague and senior fellow of global economy at The Brookings Institution in Washington.

Ndung’u also presided over various, eventually successful specialist bond issues.

Meanwhile, his authorisation of telecom firms to provide money transfer services — in the face of stiff opposition by banks — has had a huge impact.

M-Pesa, or mobile money in Swahili, has been the pioneering service and more than half of all mobile phone-based transactions around the world daily take place on it.

Some calm has returned to Kenya after the central bank bit the bullet and lifted its key rate 11 percentage points to 18% in the final quarter of 2011. The markets were stunned: government borrowing rates leapt and the shilling rallied.

But the controversy about Ndung’u has not gone far.

Ndung’u did not take kindly to being hauled in front of Parliament’s committee. Some members said they were lectured like students on economic principles.

In the end, the full parliament this month voted 46 against 37 to clear Ndung’u of any blame over the market mayhem, meaning he gets to keep his job.

But it’s not the kind of endorsement that’s likely to trigger a Twitter campaign in his favour. — Reuters