Njuguna Ndung'u: Talking notes on the state of Kenya's economy
Talking notes by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the
American Chamber of Commerce of Kenya monthly luncheon, Nairobi, 20 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 crowd-in 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.
11. 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.