Work cut out for IMF insider at Central Bank amid shilling free fall

The Central Bank of Kenya (CBK) nominee for Governor, Patrick Ngugi, is the latest recruit from the International Monetary Fund (IMF) to be put in charge of another critical organ of Kenya’s economy. Mr Ngugi is a long serving IMF insider who beat 22 candidates to clinch the CBK top job.

A PhD holder in Economics from Yale University, Ngugi is only waiting for Parliament’s approval before marching into CBK’s most decorated office on Nairobi’s Haile Selassie Avenue. Analysts say the appointment of Ngugi to head Kenya’s most important financial institution has cemented the country’s dalliance with the Washington based institution.

His appointment is expected to advance IMF’s model of economic growth on Kenya’s economy, coming at a time when criticism of his previous employer has reached fever pitch. “There is a salient risk in having people from just one background being in charge of all sectors of the economy,” Kariithi Murimi, an economic analyst said in an interview. “The IMF always has a straight jacket approach to things. If wage cuts work anywhere then it wants that to implement that everywhere.” 

Economic crisis

Mr Murimi said there is a likelihood that since most of those advising the President on financial issues have been at the IMF, they are likely to give the same scripted advice - be it on who to appoint or how to deal with an economic crisis. “The other risk is the fact that if those looking at your CV have been at the same place, they may give the same name. We remember how the IMF dealt with structural adjustments here in Kenya where many people lost their jobs,” Murimi added.

When he takes over as CBK’s ninth governor, Ngugi is expected not to have a hard time converting top government officials to the ‘IMF school of economics’ that he has practised for two decades, given that he will find a room full of IMF converts. At the National Treasury, Ngugi will deal with Cabinet Secretary Henry Rotich who already appreciates IMF inner workings, having had a three-year stint at the institution, and Treasury Principal Secretary Kamau Thugge, a technocrat who was at the Bretton Woods institution for 21 years.

At State House, Ngugi will deal with another IMF product Joseph Kinyua, who rose through the ranks to become the Treasury PS before landing the appointment as Kenya’s chief of staff and head of public service. Treasury’s Director of Economic Affairs Geoffrey Mwau is also an economist from both the World Bank and the IMF.

Mr Ngugi’s appointment will now put management of the country’s fiscal and monetary affairs right in the hands of former IMF employees. The Jubilee administration appears to place a high premium on any candidate that has had a stint at the IMF.

Though it is one of the two most powerful financial institutions in the world, the IMF has received heavy criticism for its handling of various financial crises in middle-income countries among them Mexico (1965), Russia (1998), Brazil (1998), Turkey (1998) and Argentina (2001).

The institution has also come under fire on how it dealt with the Asian financial crisis of the late 1990s. Closer home, opinion is still divided on whether IMF’s famous ‘Structural Adjustment Programs (SAP) and other measures which cut back government spending on basic services and saw thousands rendered jobless helped the country or made it worse.

Disastrous results

This is because some economies that rejected the IMF’s way of fixing the economies and found home grown solutions are way better than Kenya. Alongside the World Bank, the IMF often attach strict conditions to their loans, which give them great control over borrower governments, at times with disastrous results on the economies they want to help.

In end, despite the policies, average incomes in Africa declined, the continent’s poverty increased while its debt crisis has worsened after failure of World Bank and IMF interventions left several African countries more dependent than ever on loans.

Coincidentally, Ngugi’s appointment on Tuesday came on the same day an IMF delegation that was camping in the country was winding up a two week mission to assess how Kenya has been using its standby credit facility. Kenya still relies on the IMF loans to boost its foreign exchange reserves - critical in stabilising the shilling. When he settles, Ngugi’s first assignment will be to stop the free fall of the  shilling.

Ngugi, who advised the IMF deputy-managing director in Washington replaces Prof Njuguna Ndung’u who retired in March. But unlike his predecessor who enjoyed sweeping powers that saw him literally supervise himself, Ngugi will have his clout at the bank clipped by a more powerful board for oversight. In Mr Mohamed Nyaoga, a seasoned lawyer, Mr Ngugi will have a powerful Board Chairman. Kenyatta has also forwarded the names of the current Deputy Governor Haron Sirma and former member of the Monetary Policy Committee Sheila M’Mbijiwe as deputies.

Mr Ngugi will also be expected to improve relationship between commercial banks and the CBK, which worsened in 2013 when the shilling touched the 107 mark trading against the dollar. This was the weakest point in 17 years. Banks accused the former governor of high handedness and referred to him as a classroom professor who relied on unpractical theories to deal with complex banking matters. Ngugi is the first governor to be appointed through a competitive process in what is likely to give him more legitimacy at the institution.

Vetting panel

Previously, the President would appoint the governor without a competitive process. Mr Njoroge and Mr Nyaoga will be the first appointees at the bank to face a parliamentary vetting panel. It is expected that the appointment will be approved by Parliament going by the past trend where the Jubilee administration has always had its way due to its muscle.

The Kenyan shilling has been losing ground against the dollar due to the global strength of the greenback, falling foreign exchange revenues and a widening current account deficit.
The institution is also mandated to contain the cost of living by controlling the amount of money in circulation.

Ngugi will be expected to find a solution to the slide of the shilling. The local unit has been trading at about Sh97 to the greenback, blamed on low forex earnings, a stronger dollar globally and the absence of the governor who has since been appointed.

Ngugi will also have to find a way of cushioning the currency from the impact of a widening current account deficit  and the task of reducing the high interest spreads  that have seen commercial banks reap billions in interest income while paying peanuts to depositors.

He will also be expected to continue the technological advancement in the banking industry started by his predecessor including mobile money transfer services, mobile banking services and agency banking has increased Kenya’s banking penetration.