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CBK governor Patrick Njoroge's last key meeting amid inflation, falling shilling

Outgoing Central Bank of Kenya (CBK) governor Patrick Njoroge today chairs the final monetary policy meeting (MPC) of his eight-year tenure at the helm of the banking regulator amid rising inflation and a weakened shilling.

The 62-year-old Dr Njoroge, an ex-International Monetary Fund (IMF) adviser and devotee of the conservative Roman Catholic group Opus Dei will hand over to former Treasury Principal Secretary, Kamau Thugge pending Parliamentary approval.

Dr Njoroge’s final MPC meeting comes amid concerns about the rising cost of food and other goods on the back of a weakened shilling.

Former President Uhuru Kenyatta appointed Njoroge for a second and final four-year term as Kenya’s ninth CBK governor in 2019.

The prices of key food items have remained stubborn over the past couple of months, adding pressure on cash-starved households that are still reeling from the economic hit of the Covid 19 pandemic.

Kenya’s inflation rate stood at 7.9 per cent in April after food prices eased to a 13-month low, compared with 9.2 per cent the previous month.

At its last bi-monthly meeting on March 29, the inflation-targeting MPC raised its policy lending rate by 75 basis points to 9.50 per cent - the highest in four years and nine months - in a bid to stem rising inflation and stabilise the weakened shilling.

The MPC - the highest decision-making organ of CBK - cited the persistent rise in prices of goods and services and the elevated global risks and their potential impact on the domestic economy, as some of the major reasons for tightening the supply of money.

“The MPC noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy, and concluded that there was scope for a further tightening of the monetary policy in order to anchor inflation expectations,” Dr Njoroge said in a statement after its meeting. 

“In view of these developments, the MPC decided to raise the Central Bank Rate (CBR) from 8.75 per cent to 9.50 per cent.”

Dr Njoroge is set to leave office in two months at a time when the twin challenges of high inflation and weakened shilling that he first confronted over seven years ago have resurfaced on the back of global factors.

During his two tenures, inflation largely remained under check averaging at 6.2 per cent within the government’s target band of 2.5 per cent to 7.5 per cent until a few months ago when it breached the upper limit and has remained stubbornly high. 

The Shilling has also run amok and on Friday hit an all-time low against the dollar, signalling higher inflation and the cost of imported goods. 

CBK data showed the shilling exchanged at an average of Sh138.2529 against the greenback on Friday.

Retail buyers of dollars are now paying upwards of Sh140 in banking halls as the demand for the greenback surges. 

This comes amid the revamping of the interbank foreign exchange market, which was seen as the panacea for easing access to foreign currencies. 

Access to the greenback previously proved difficult due to banks’ unwillingness to sell to each other, making it hard for smaller players to fulfil their orders from clients.   

The continued weakening of the local currency is expected to push up living costs, hurting households already reeling from high fuel, electricity and food prices.

The African Development Bank (AfDB) recently projected that the shilling would depreciate further against the US dollar this year due to additional pressure from a slowing economy and tighter global economic conditions. 

“Currency weaknesses in some of Africa’s major economies - Kenya, Nigeria, and South Africa - are expected to persist in 2023, due largely to tighter global financial conditions and weak external demand,” said AfDB in the report. 

The study said the worsening currency pressure will strain Kenya’s public coffers due to maturing debt obligations denominated in foreign currency. 

“For most of Africa’s dollar-denominated debt, currency depreciations pose a significant downside risk for debt management and sustainability in a continent where external debt stock—including bonds, syndicated loans, and bilateral borrowing - surged to $466 billion in 2022,” said the study. 

“This wave of depreciation could be contained if countries continue to strengthen their monetary policies in the face of tighter financial conditions in advanced countries, though further tightening could exacerbate the already high cost of capital and halt economic recovery.” 

The cost of servicing the public debt, which stood at Sh9.39 trillion at the end of March, is also set to rise with a weakened shilling piling pressure on the public purse. 

Any further depreciation of the shilling now threatens to pile fresh pressure on fuel prices, which have stoked public anger. 

To alleviate the economic fallout from the fall of the shilling, Kenya should build adequate forex buffers and also tap regional trade pacts to boost trade and cut reliance on foreign currency, said AfDB’s Chief Economist Professor Kevin Chika Urama. 

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