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Cheserem says Ndung'u has failed economy

By | December 7th 2011

By David Ochami

Central Bank Governor Prof Njuguna Ndung’u is directly to blame for the weakening of the Kenya shilling and the accompanying ills it has visited on the economy.

Micah Cheserem, chair of the Commission on Revenue Allocation

Making the stunning pronouncement, Mr Micah Cheserem, who chairs the Commission on Revenue Allocation (CRA) said Prof Ndung’u bears the greatest blame for the high cost of goods and services that are making life a living hell for most


He said CBK refused to lean on its own very experienced staff, with disastrous consequences for the shilling.

"CBK has very capable economists. It is most surprising that they allowed a very expansionary regime of money supply to persist for so long," said Cheserem.

In a scathing and rare (most former CBK governors refrain from commenting on their successors’ managerial styles) public attack yet on Prof Ndung’u’s tenure, Cheserem said in future all CBK governors should be recruited through a competitive process.

This, he said, would ensure they could be trusted to regulate the banking industry.

The CRA chairman said the regulator sparked more speculation within the money markets through its official statements that "CBK was not going to intervene to save the shilling from depreciation."

He said "foreigners and some locals" took advantage of low interest rates to invest in Treasury Bills, but "opted to invest their funds (US dollars) in overseas money markets to earn positive interest rates."

Borrowing costly

Interest rates have since appreciated sharply making borrowing from banks extremely costly, after CBK’s Monetary Policy Committee (MPC) raised its lending rate to the institutions.

Central Bank governor Prof Ndung’u

Cheserem, himself a former CBK governor, said the massive repatriation of US dollars from Kenya’s money markets under Prof Ndung’u’s watch was a major trigger for the shilling’s recent spectacular collapse.

Addressing a Select Committee of Parliament investigating the shilling’s free fall, chaired by Wajir West MP Aden Keynan, Cheserem said the steady decline of the East African Community’s strongest currency happened because Prof Ndung’u ignored "alarm bells", and issued statements that sparked volatility in the money market when the crisis intensified three months ago.

Competitive process

"Future appointments to the positions of Governor and Deputy Governor should be through [a] competitive process with a panel interviewing the candidates..." according to Cheserem who recommended that, in pursuit of accountability, CBK officials should appear before Parliament "on a regular basis...to explain the performance on their two core mandates of price stability and the financial stability of the banking system."

Besides, Cheserem, recommended that the CBK’s Monetary Policy Committee explain to Parliament the viability of its plan to mop up excess liquidity in the economy.

Cheserem also opposed the proposed investment by the Government into De La Rue, the money-minting firm, and suggested that the MPC, created after his departure from the CBK, should exclude officials or experts from outside the bank.

Red flag

Currently, the MPC includes officials from the Capital Markets Authority among others.

Cheserem dismissed Prof Ndung’u’s statement blaming the financial crisis in the West for the shilling’s woes saying "they (CBK) should explain the rapid fall [of the shilling" because it either failed to detect, or ignored signs of trouble, yet continued to borrow cheap funds from the money market.

The CRA chairman said Kenya is paying the price for CBK’s insatiable appetite for cheap credit, made worse by structural problems within the Kenyan economy and depletion of the Government’s current account.

He said the sharp drop in the 91 and 182-day Treasury Bill rate last year should have raised the red flag for CBK on the dangers of excessive money supply arising from a phenomenon he described as an "expansionary regime".

By opting to buy dollars "at a time when there was already a shortage of foreign exchange", and repatriation of the American currency from the Kenyan market, CBK deepened speculation in the money market, said the former governor.



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