njuguna ndung ’ u : kenya ’ s macroeconomic developments and key financial sector reforms address by prof njuguna ndung ’ u, governor of the central bank of kenya, at the launch of suntra investment bank unit trusts, nairobi, 7 april 2008. * * * mr. nguru wachira, chairman of suntra investment bank, mr. james murigu – managing director, distinguished guests, ladies and gentlemen. i feel honoured by your invitation to grace this important occasion because it is not only a milestone to suntra investment bank, but it is also a significant development in our capital market. kenya ’ s macroeconomic environment and future prospects ladies and gentlemen, the kenyan economy has grown steadily in the recent past with all sectors registering expansion, and therefore creating more employment and investment opportunities for many citizens. this growth has introduced new challenges to regulators particularly in the financial sector. for effective monetary policy, you also require an active and efficient financial sector. to ensure that kenyans reap the benefits of economic growth, central bank has pursued deliberate policies that have achieved relatively stable and low underlying inflation, even with supply shocks, the current inflation bout is related more to supply constraints rather than monetary overhang, stable exchange rate even with some minor volatilities, a strong balance of payments position, low and stable interest rates, and substantial inflows of both official capital and foreign direct investment. it is noteworthy that since kengen ipo was floated, many kenyans have a high appetite of investing in the stock market which has boosted activity at the nairobi stock exchange. kengen ipo showed that investment opportunities constraints the boost in investment. unfortunately this growth has not come without challenges ranging from payments, settlements, investors ’ returns to safety of investors ’ assets to the stock exchange, brokers, capital markets authority. despite these challenges it is gratifying to note the significant growth in the fixed income segment of the nairobi stock exchange and the vibrancy we have seen of the capital markets in general. this has lengthened the maturity profile of the bond market. the central bank of kenya, in consultation with market leaders forum successfully issued another 15 - year treasury bond thus enhancing the continued deepening of the local money and capital markets. a sure way to assess long - term prospects and economic confidence in future. ongoing key reforms to propel further growth and efficiency in financial markets financial sector is singled out as a key industry that would play a pivotal role in successful

their employment - to - population ratio, as shown in figure 3. for example, the march unemployment rates for males between the ages of 20 and 24 was 18. 4 per cent, more than 5 percentage points higher than for females in the same age group. the sharp reduction in the ratio of employment to population highlights our challenge – achieving a full recovery will require creating jobs for those currently unemployed and actively seeking work, those entering the labor force as the population grows, and those likely to return to the labor force once jobs become more available. employing all these workers within a reasonable period of time will require very strong economic growth. the question is, how likely is that? figure 4 shows the growth rate in each of the first three years of the last three recoveries, as well as the average rates for all three recoveries. the most recent two recoveries were quite slow to get started, but picked up steam over time. this is the pattern projected in most forecasts for this recovery. over the past three quarters, gdp has increased 3. 7 per cent. 3 however, some of the growth resulted from temporary rebalancing of inventories by businesses, as suggested by figure 5, which shows that the per cent change in real final sales was quite a bit smaller than the per cent change in gdp. the gap between them would be inventory rebuilding. most private forecasts expect growth in the next four quarters to be fast enough to begin to make more improvement in the labor market. my own expectation is consistent with this. as financial headwinds subside, and consumers and businesses gain more confidence in the recovery, expenditures that have been deferred will be made – and we should begin to see stronger economic growth. despite this forecast of an improved outlook, we will need very strong growth if we are to return to 5 per cent unemployment in a reasonable time frame. economists frequently use a rule of thumb, called okun ’ s law, to characterize the relationship between output growth and unemployment. according to okun ’ s law, if the economy grows one percentage point faster than its potential for one year, the result will be a decline in the unemployment rate of approximately one - half of a per cent. of course, i would highlight that this is a rule of thumb, and that the relationship is more complicated than this and, of course, subject to error. of course, some of this is the result of the unusual length of this recession. year over year, the