KENYA: MONETARY POLICY, THE OUTLOOK
FOR THE ECONOMY AND INVESTMENT
OPPORTUNITIES
Presentation at the summer gathering of the Adam Smith
Seminars – Schloss Spiez, Switzerland
by
Prof. Njuguna Ndung’u, CBS
Governor, Central Bank of Kenya
1st July, 2014
Outline
1.
Background
2.
Monetary Policy Conditions
3.
Financial Sector Developments
4.
Growth Performance and Outlook
5.
Strategic Choices and Investment
Opportunities in Kenya
2
1. Background
1.





2.
3.
Kenya is strategically located in East Africa as an investment
destination:
Its geographical location gives access to the Indian Ocean coastline
and to a rich hinterland.
It is a communications and financial hub for the region.
Many international firms have already observed these advantages
and located their Africa Offices in Kenya – these include banks as
well as business enterprises.
Kenyan firms have expanded outside the country’s borders – Kenya
is a top supplier of foreign direct investment in the region.
Kenya serves 5 land-locked and relatively resource-rich countries in
the region.
The country has a track record of prudent macroeconomic policy and
management which has enhanced market confidence in the economy.
A vibrant and stable financial sector predicated on innovations and
supportive regulatory environment is supporting growth.
3
2. Monetary Policy Conditions
1.
2.
3.


4.
5.
6.
The monetary policy framework is based on a monetary aggregate framework. It has
evolved from use of Reserve Money as the operating target to the current aggregates of
Net Domestic Assets and Net International Reserves of the CBK due to the changing
economic and financial conditions – an intermediate step towards Inflation Targeting.
Financial innovations and vulnerability to supply-side shocks continue to require a dynamic
approach to the monetary policy framework.
The Central Bank Rate (CBR) signals the monetary policy stance and forms the base for all
monetary policy operations. Monetary policy has worked in Kenya as demonstrated by:
A decisive hike in the CBR in 2011 contained inflationary pressure, stabilised the market
and the exchange rate. Inflationary credit growth was also curtailed.
The revised monetary policy framework in 2011 led to interest rates convergence. The
Open Market Operations moderated interbank rate fluctuations.
Kenya has a floating exchange rate regime – monetary policy formulation incorporates the
implications of the open accounts in the balance of payments and their likely impact on
money supply.
Measures required to ease the vulnerability of inflation to food and fuel supply shocks.
The monetary policy measures have delivered the desired price stability. The CBR anchored
inflationary expectations – overall inflation is within the target range.
4
2. Monetary Policy Conditions…
The Macroeconomic Environment has remained Stable
•
•
•
Source: Kenya National Bureau of Statistics and CBK
A spike in food and
fuel prices caused
significant
inflation
pressure in 2011.
But the monetary
policy
measures
adopted supported
by stable food and
international oil prices
have seen a decline
and
subsequent
stability in inflation.
The stability in the
non-food-non-fuel
inflation reflects the
success
of
the
monetary
policy
measures adopted.
5
2. Monetary Policy Conditions…
The Exchange Rate has Stabilised and the Current
Account Deficit of the Balance of Payments is Easing
•
•
•
Source: Central Bank of Kenya
Exchange rate stability is supported
by resilient Diaspora remittances
inflows, increased purchases of
equity by foreign investors, inflows
from foreign direct investment in
infrastructure and energy sectors.
The CBK level of usable foreign
exchange reserves increased to
USD6,334 million (equivalent to
4.37 months of import cover) at the
end of April 2014 – these will be
boosted further after issuance of
the Sovereign Bond in June 2014.
Exchange rate stability is also
supported by an easing current
account deficit after the rollout of
large
infrastructure
projects
between 2009 and 2012 when
imports of heavy machinery for
infrastructural development were
made.
6
2. Monetary Policy Conditions…
Following an Inflation Shock in 2011, Monetary Policy
has taken the Driving Seat
Decisive
Policy rate
hike
Interest rate convergence
New monetary
framework
Source: Central Bank of Kenya
7
2. Monetary Policy Conditions…
Monetary Policy Curbed Excessive Credit Growth in 2011
Source: Central Bank of Kenya
8
2. Monetary Policy Conditions…
Monetary Operations Work as in Emerging Markets
Reverse
Repo
Rates
Overnight
Window = CBR + K
CBR + X
Tightening bias
CBR
Accommodating bias
Repo
Rates




Interbank rate
CBR - X
Central bank influences liquidity conditions via the operating bands on the
CBR (Currently X is at 2.5 percent)
Interbank rate consistent with central bank policy rate
Interest rates consistent with the inflation objective
The overnight window is CBR + K and K = 6% - punitive enough to allow
interbank market redistribute credit
9
3. Financial Sector Developments
1.
2.
3.
4.
5.
The banking sector is playing a key role in mobilisation of funds to
finance projects envisaged in the country’s Vision 2030 development
plan.
The outreach of financial services targeting the Small and Medium
Enterprises – key drivers of the country’s growth.
The 2013 Financial Access Survey shows that access to financial
services in Kenya has increased – formal access, at 67 percent of
the total population, now stands amongst the highest in Africa.
Expansion of Kenyan banks in the region continues to provide new
business opportunities and diversification of the markets.
Kenya has become a regional hub for financial services – Kenyan
Banks have subsidiaries in the East African Community region and
other countries in Sub-Saharan Africa with branch network outside of
Kenya currently standing at 288 branches for 11 Kenyan banks.
10
3. Financial Sector Developments…
Mobile phone money transfer services that were introduced in 2007
continue to record tremendous growth – mobile phone money
transactions were valued at an average of Ksh.6.2 billion per day (4.4
percent of annual GDP) in February 2014. The growth has been
phenomenal. It has become an important platform for financial
services.
Various measures have been introduced to lower the cost of doing
business in the banking sector:
6.
7.





Introduction of value capping and cheque truncation to enhance efficiency in payments
and clearing systems – currently one day after delivery of the cheque to the bank.
Roll-out of East African Payment Systems has facilitated faster cross-border transfers
in the region and enhanced trade.
Agency banking has propelled the levels of formal financial inclusion at minimal costs.
Credit information sharing has expanded access to credit by tackling information
asymmetry and lack of physical collateral which had previously given rise to default
risks.
Establishment of Currency Centres has reduced cash-in-transit costs and related risks.
11
3. Financial Sector Developments…
A Regional Comparison Shows Enhanced Financial Access in Kenya
South Africa '13
79
Kenya '13
11
67
Tanzania '13
8
58
Rwanda '12
Uganda '09
28
42
Namibia '11
30
65
Botswana '09
4
59
Nigeria '12
Mozambique '09
13
0
40
19
23
13
55
14
63
14
73
9
10
33
17
26
Burundi '12
31
8
43
Zambia '09
26
30
28
Malawi '08
25
16
42
10
78
20
30
Formal (banked)
40
%
50
60
Informal
70
80
90
100
Excluded
Source: Financial Access Surveys in respective countries
There has been an increase in the formal banking system in Kenya since 2006 while massively
moving out of informal banking modalities.
 In Sub-Saharan Africa, Kenya now boasts of being second in the region in financial inclusion in
terms of the low proportion of the unbanked population.

12
3. Financial Sector Developments…
Financial Inclusion Developments since 2006
Source: Financial Access Surveys since 2006
 67 percent of Kenyans can access financial services
 Only about 7.8 percent are served by informal financial
 25 percent of the population are still excluded
services
13
4. Growth Performance and Outlook
1.
2.
3.




Kenya’s economy grew by 4.7 percent in 2013 from 4.6 percent growth in 2012 mainly
reflecting a strong performance of the financial intermediation sector and a stable
macroeconomic environment. The financial intermediation sector grew by 7.2 percent in
2013 from 6.5 percent in 2012.
The growth outlook for 2014 remains positive with the economy projected to grow by 5.8
percent in 2014 and 6.4 percent in 2015 on account of the strengthening global economy
which is expected to boost exports; the stable macroeconomic environment; increased public
investment in infrastructure; structural reforms; expenditure rationalisation programmes; and
increased foreign direct investment in infrastructure and energy sectors.
Confidence in the economy remains high:
The latest sovereign rating by Fitch Rating agency conducted in February 2014 placed
Kenya at “B+ with a stable outlook” while that by Moody's undertaken in May 2014
placed Kenya at “B1 with stable outlook”.
The latest World Bank Country Policy and Institutional Assessment rating of 3.9 places
Kenya as one of the top two countries in SSA.
Prudent fiscal management has safeguarded Kenya’s debt position – the total public
debt in NPV terms is estimated at 40 percent of GDP which is within a sustainable
range.
Entry into the international capital markets has boosted Kenya’s rating and raised hope
of a strong roll-out of public investments – the debut sovereign bond subscriptions were
USD8.8 billion for an offered amount of USD2.0 billion at yields of 5.875% for the 5years and 6.875% for the 10-years. This is perhaps the best pricing so far in Africa for
the bonds.
14
5. Strategic Choices and Investment
Options
1.
2.




The addition of Ethiopia brings to 5 the number of land-locked, relatively resource
rich countries that will be served by Kenya through the Lamu Port Southern SudanEthiopia Transport (LAPSSET) Corridor Project – these countries will require efficient
ports, transit airports, road networks and efficient rail networks. This adds to the
widening EAC market for Kenyan firms.
But this calls for speed and prioritization in:
Finalization of infrastructure investment roll-out – including strategic regional
financing of these infrastructure projects.
Improving the efficiency of the existing infrastructure facilities; Mombasa Port
and transit airports.
Investing heavily in a transit international airport – Nairobi, like Dubai is
becoming a world centre. Kenya should be the natural transit country by air, sea
and serving the neighbouring land-locked countries; rail and road network.
These projects, ports and transit airports can be repackaged for private sector
equity contribution or public-private-partnerships (PPP) through FDI – this should
therefore not lead to an over accumulation of public debt.
15
5. Strategic Choices and Investment
Options…
3.




4.
5.



Nairobi is developing as a financial hub for the region – this should be
accelerated by formation of;
Nairobi International Financial Centre (NIFC)
Multicurrency Clearing House for the Eastern African region
Economic Zones and Cities – like Konza IT City; Isiolo Transit, Mombasa
and Kisumu Economic Zones.
Need to move mobile phone banking to a mass market beyond
transfers, payments and Micro-saving – like mobile market.
Strategic engagement with the BRICs economies and PPP will be necessary
to provide funding for these mega projects – rather than accumulate
public debt.
In the long-term:
Regional initiatives will promote trade and employment in the EAC
region:
Exploitation of the recently discovered oil fields with concomitant
infrastructural development will enhance growth.
A large market for Eastern Africa region will support growth.
16
THANK YOU
17