CENTRAL BANK OF KENYA
TALKING NOTES
by
PROF. NJUGUNA NDUNG’U
GOVERNOR
CENTRAL BANK OF KENYA
at the
AMERICAN CHAMBER OF COMMERCE OF KENYA MONTHLY
LUNCHEON
Nairobi Hilton Hotel
20th July, 2010

Distinguished Members of the American Chamber of Commerce
and Invited Guests:
1. It is my pleasure to join you at this monthly luncheon and I thank you
for inviting me.
2. This Luncheon has an important timing: First, it comes after the visit
of the American Vice President to this country, an important visit for
Kenya. Second, it comes soon after the Minister for Finance put
forward the budget proposals and policies to achieve them. Finally, it
comes at a time when Kenyans are debating and campaigning for a
positive vote to a new constitution. I am very sure that since I am
addressing an audience comprising mainly investors, entrepreneurs
and business people who wish to live in an environment of high
economic growth and low and stable prices, I am certain that the
superior law is important. The Constitution protects and safeguards
their interests. This is how markets work – that is how development
of markets and institutions takes place.
• The government economic agenda is guided by the strategic
framework for faster development underpinned by a stable
macroeconomic environment and structural reforms aimed at
raising productivity and improving business climate. This is key
to enhancing Kenya’s competitiveness and accelerating private
sector development.
• Personally, I do believe that for growth to be achieved, it
depends on investments. Investments in turn depend on
incentive mechanisms and legal safeguards to protect them.
• I believe also in strong institutions. Strong institutions define
the appropriate incentives that encourage prudent behaviour.
• This is what the superior law - the New Constitution will do to
institutions and give confidence to markets.
3. The Kenyan economy has undergone a turbulent time from 2008
stemming from multiple shocks: the domestic political crisis; the

drought; high petroleum and food prices as well as the global
financial crisis. However, we have started to see some recovery. From
the steep decline to 1.6 percent growth in 2008 the economy
recovered to post 2.6 per cent growth in 2009. This growth was
mainly supported by a resurgence of activities in the tourism sector
and resilience in the building and construction industry. We do hope
the Greek crisis will not prolong the recession in Europe – that may
produce further knock-on effects in the Kenyan economy.
4. Economic prospects for 2010 and medium term prospects are quite
optimistic. Growth is forecast at 4-5 percent for 2010. This is a
conservative forecast as various indicators point to a higher growth
rate. Growth will be driven mainly by increased investment in key
sectors including agriculture, services, infrastructure, health and
education. After this recovery, Kenya will be in a good position to
refocus its efforts towards achieving vision 2030 goals. The
government has identified the binding constraints whose resolutions
will lower the cost of doing business substantially and propel the
growth forecast higher;
• Kenya’s growth diagnostic studies have identified a lack of
complementary factors: They include infrastructure gaps and
poor private appropriability factors that prevent the private sector
to reap full returns to their investment such as: crime, corruption
and relics of political instability. The proposed constitution once
adopted will herald institutional changes of unprecedented
proportions for this great nation.
• To ease infrastructural constraints the 2010/11 national budget
continues to allocate more funds for infrastructure. The
infrastructure budget for FY 2010/11 is equivalent to 23.3 percent
of total expenditure reflecting the critical role infrastructure is
expected to play towards reducing cost of doing business to
improve domestic production competitiveness.
• The Central Bank has developed an effective instrument for this;
the Infrastructure Bonds – they have been very successful in the

market. They have a further dimension of enhancing a savings–
investment platform for Kenyans and a strong stimulus to crowdin rather than crowd out the private sector.
5. As a central banker, I want to reiterate the importance the
Government attaches to macroeconomic stability. You might have
heard some assertions in some sections of the media that Kenya’s
debt position might be a problem in the future. Given the
developments in the Euro zone where investors have punished
countries for their fiscal position (we call this debt overhang problem
or risk – the private sector believes taxes will be increased in future to
affect resource transfers from the private sector to the Government to
pay for high debt). It is imperative that I parade the Kenyan case to
this esteemed audience. As of May 2010, Kenya’s debt level stood at
44 per cent of GDP, external debt to GDP is at 28 per cent – a level
much lower than for most countries in this region (it has moved from
60 percent in 2003 to 40 percent in 2009 and to 44 percent as at May
2010). You will agree with me that this is commendable for a country
which has not been a beneficiary of the HIPC initiative. The
overriding fiscal thrust of the Government, is to contain the stock of
debt to a sustainable level of 40 percent of GDP. Debt sustainability
analysis carried out by the Ministry of Finance, the IMF and the
World Bank have not found any significant risk posed by our debt
levels. To demonstrate this commitment of reducing the domestic
debt, the government will reduce its domestic borrowing from 5.1
percent of GDP in 2009/10 to 3.8% in 2010/11. This fiscal space, as
was demonstrated during the drought and global financial crises is
important for propelling growth even in times of crisis – the fiscal
stimulus would not have been possible – Gives room for monetary
policy to perform.
6. It is the Central Bank’s belief that the fiscal and monetary policies
currently in place will enhance investor confidence by increasing
expectations of economic recovery or reducing tail risks associated
with the exogenous shocks that have buffeted Kenya’s economy in the

recent past. In particular the government expenditure programs and
the current monetary policy stance are likely to have larger than
normal positive impacts on demand and benefits that may persist for
a significant period of time.
7. For us in the Central Bank, our pre-occupation is to align monetary
policy with the growth and development goals while at the same time
maintaining low and stable inflation – a target of 5%. In addition, a
stable and market driven exchange rate, increased efficiency in the
financial system, financial stability, and a reliable and efficient
national payment system. To give you some indication:
• Inflation was provisionally 3.2 percent for the month of June
2010. Inflation expectations as indicated in the MPC Market
Surveys are anchored at a lower level. The current exchange rate
movements of the Kenya shilling against other major currencies is
largely a response to external developments especially the
uncertainty in the Euro zone market. The exchange rate in this
case works as an automatic stabilizer via relative price movements.
• Interest rate structure that carries with it cost of investment as
well as inflation expectations have declined drastically since the
middle of 2009.
Distinguished Members, Ladies and Gentlemen
8. Let me note that the current economic environment in Kenya is based
on policies that are market leaning and offer a level playing field for
potential investors.
9. In the banking sector, our vision is to build a strong financial sector
and be the financial hub of the East African Community. The
strength and presence of Kenyan banks is now being felt in the
region, specifically within the East African Community where some of
our banks have opened branches.
10. One of the more recent reforms is the licensing of credit reference
bureaus. The credit information sharing mechanism is now fully

operational and as a result we expect to subsequently see a reduction
in costs as banks pass the resultant benefits to their customers.
12. As a Researcher, I would like at some point in future when doing my
economic analyses on the Kenyan economy, to find a very significant
“Obama Effect” on Kenya’s growth and development. That “Obama
Effect” together with a renewed political leadership able to undertake
political and social reforms supported by a Superior Law – the
Constitution - will be noticed in our econometric studies in future.
But this will only be realised if all of you in this room and elsewhere
scale-up your investments in Kenya.
Finally, Distinguished Guests, Ladies and Gentlemen, I conclude by
wishing you fruitful discussions.
Thank you