njuguna ndung ’ u : exchange rate and monetary policy nexus remarks by prof njuguna ndung ’ u, governor of the central bank of kenya, at the official opening of the 1st annual research seminar on “ exchange rate and monetary policy nexus ”, organized by the kenya school of monetary studies, nairobi, 1 october 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 macroeconomy 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

weather impacts. it provides additional – and important – security which also supports our kenyan economy. a great benefit for the development of micro insurance is the deepening of penetration per capita. currently most micro insurance schemes are run as small pilot type arrangements and continue to face a number of regulatory and operational challenges. i am informed that a policy framework paper has now been developed by the micro insurance working group set up by the insurance regulatory authority and the same has been forwarded to the ministry of finance for further attention. in this regard, the minister during his budget speech recognized micro insurance as a standalone class of insurance, giving it the prominence that is deserves. ladies and gentlemen, insurance penetration in kenya is 3 % – high by african standards, but with a long way to go still. i appeal to leaders and operators in the sector to harness the growth opportunities and to think forward, to think innovatively. for example, the recent discovery of oil and gas in kenya has marked a significant opportunity for this sector. we bis central bankers ’ speeches have had the chance to see how other african countries have tackled the discovery of important natural resources, and the onus is now firmly on us to learn from their successes, and from their mistakes. we know, for example, that there is long way to go to prepare our country for the technical intelligence required to provide security around the multitude of issues that accompany a discovery of this kind. i request the insurance and reinsurance market to test out the structures in place for oil and gas insurance. we need to be prepared as an industry and as a country in order that we safeguard against future potential issues resulting from the mining of our natural resources. in this regard mr. chairman, i wish to applaud continental reinsurance ’ s steps in progressing product innovation and development including oil and gas, and look forward to learning from your experience. lastly, ladies and gentlemen, i urge the insurance industry to position itself for the economic integration in the east african union. as you are already aware, the common market protocol of the east african community ( eac ) creates a big market full of opportunities. this is the way to go in terms of integration and expansion within the eac and beyond. indeed today ’ s occasion is a realization of that spirit as we congratulate continental re ( a nigerian company ) on their authorization to transact fully reinsurance business in kenya. this trend is the beginning of what i predict will be the future of the insurance and reinsurance market in