CENTRAL BANK OF KENYA
Remarks by
PROF. NJUGUNA NDUNG’U
GOVERNOR
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Kenya School of Monetary Studies, Nairobi
Tuesday, October 1, 2013

Invited Guests;
Members of the Monetary Policy Committee;
Researchers;
Distinguished Guests;
Ladies and Gentlemen:
Good morning. I am pleased to join you this morning at the official opening
of the Research Seminar on “Exchange Rate and Monetary Policy Nexus”
organized by the Research Centre at KSMS.
I am delighted that KSMS took the initiative to organize this event which
provides an important avenue to share ideas and knowledge, and for
researchers to receive input from the financial sector players on research
needs of the sector.
Ladies and Gentlemen, why the focus on the exchange rate?
As so often in recent years, I will take, as my starting point, the global crisis
of 2009-2010, and the risk reassessments that banks, investors, researchers
and decision-makers all over the world were forced to make as a result of
the crisis. Legacies of this crisis amid continued globalization is significantly
reshaping the global and regional economic and financial landscape. This
new landscape seems to be characterised by:
1. Volatile capital flows, prompted by cyclical shifts in flows of funds in
response to new risks and opportunities;
2. Greater interconnectedness, between financial institutions as well as
between the real and financial sectors;
3. Lower global economic growth, with the centre of economic gravity
shifting towards emerging and frontier markets especially in Asia,
Africa, and Latin America;
4. Currency wars with potential for emerging markets currencies
entering the accepted reserve currency range.

These impending structural changes pose a number of challenges to
emerging markets, including Kenya. From the viewpoint of monetary
authorities, there are two especially pressing policy issues that potentially
arise from these changes.
First, more volatile capital flows combined with greater financial
interconnectedness translate into a growing risk to financial stability;
Second, there are implications for management of the exchange rate policy
and the macro-economy given the increasingly large and volatile financial
flows. Under a flexible exchange rate regime, large swings in capital flows
can generate excessive exchange rate fluctuations which may in turn
undermine macroeconomic stability. These challenges are real for Kenya.
In addition to the above two challenges, the lower global growth puts
pressure on the sustainability of the export-led growth model, hence the
need to look for new markets just as emerging markets have done to move
away from traditional market enclaves.
The policy issue is then the determination of the appropriate role of
exchange rate policy, with a view to facilitating an appropriate structural
adjustment process that promotes long-run and sustainable growth.
The theme of today’s Seminar is timely as Kenya’s economy readies for
take-off. Policymakers need to find a flight path through the lingering risks.
Ladies and gentlemen, several papers that link monetary policy actions and
the exchange rate policy have been lined up for presentation today. These
include research that looks into factors that explain exchange rate
movements, the extent of real exchange rate misalignment and the
relationship between the real exchange rate and exports. We will also get
presentations on papers that develop indices that can serve as an early
warning system for currency and macro-economic crises.

As Kenya aspires to be the regional financial hub; and is indeed currently
regarded as so, one of the pillars for maintaining this regional leadership is
also being on the frontier of research information for the financial sector. A
well known fact is that a financial boom can trigger an overvaluation of a
currency if adjustments do not take place over time. The Kenya School of
Monetary Studies is well placed to provide this leadership and it is
challenged to do so. Therefore, these types of Seminars should be the norm
on an annual basis. But filtering policy conclusions that can be used for
policy direction remain the most important objective.
As I conclude, I thank the participants present, including those that have
travelled from far for this seminar. I hope the handful of issues addressed in
the contributions today will provide the basis for a rewarding discussion.
Once gain— you are all very welcome!
It is my pleasure to declare this workshop officially opened.
Thank you.