Economy is on right track, CBK governor Thugge assures

Cost of living has dropped, shilling has stabilised and debt burden is easing.

In Summary
  • The economy is projected to grow by 5.7% in 2024.
  • Overall inflation is expected to decline further in the coming months. 
Central Bank governor Kamau Thugge during an interview at his office on April 12 2024
Central Bank governor Kamau Thugge during an interview at his office on April 12 2024

When Kamau Thugge took over from Patrick Njoroge as the country's chief banker in July last year, inflation was at 7.9 per cent, with the cost of basic commodities like maize flour and fuel super high. 

The shilling was quickly sliding against major international currencies and the country's forex reserves below the statutory four-month import cover. 

Within a month of taking over, Thugge called a special Monetary Policy Committee meeting and hiked the benchmark rate to 10.5 per cent from 9.5 per cent, the highest rate since July 2016.

He also revealed that the local currency had been overvalued for several years, a position that had been denied by the previous regime despite several warnings from the International Monetary Fund and local monetary analysts.

The Star sat down with Thugge, a seasoned economist with more than 30 years experience and an ardent believer in letting the numbers paint the picture of Kenya's breathtaking economic transformation under the Kenya Kwanza administration. Excerpts:

Kindly, walk us through some of the measures the CBK has taken to ease the cost of living.

Like most economies, Kenya witnessed significant inflationary and exchange rate pressures in 2022, largely attributed to drought conditions in the country and materialisation of global risks, particularly the Russia-Ukraine war.

Overall, inflation rose sharply to peak at 9.6 per cent in October 2022, following a sharp rise in food and fuel prices. The CBK tightened monetary policy by raising the Central Bank Rate (CBR), cumulatively by 600 basis points since May 2022 to 13 per cent.

Our actions were aimed at addressing the pressures in the exchange rate, mitigating the second-round effects and ensuring inflation expectations were well anchored.

The monetary policy measures have lowered inflation, addressed exchange rate pressures and anchored inflationary expectations. Overall, inflation has declined gradually to stand at 5.7 per cent in March 2024, while the exchange rate has stabilised.

The CBK’s monetary policy measures have been complemented by fiscal measures implemented by the government to moderate the prices of specific commodities through zero-rating some food imports including maize, wheat, rice and sugar and enhancing food production through subsidy on fertiliser prices.  

Overall inflation is expected to continue declining towards the 5.0 per cent mid-point of the target range in the near term, supported by lower food and fuel prices and pass-through effects of the recent exchange rate appreciation.

The country is currently witnessing relatively stable rainfall, easing food inflation. Early this month, the MPC predicted inflation to moderate further in the near term. What informs this confidence?

Overall inflation is expected to decline further in the coming months, reflecting the impact of monetary policy measures adopted by the CBK, which continue to filter through the economy.

Easing food prices are attributed to favourable weather conditions and lower international food prices. Furthermore, the recent appreciation of the exchange rate resulted in lower electricity tariffs and downward adjustment in pump prices and lower imported inflation.

The impact of government measures to zero-rate key food imports, particularly sugar, and to enhance food production through subsidy on fertiliser prices.


Central Bank governor Kamau Thugge during an interview at his office on April 12 2024
Central Bank governor Kamau Thugge during an interview at his office on April 12 2024

The geopolitical landscape is currently quite chaotic, with the Israel-Palestine war causing trouble in the Red Sea waterway. Does this pose a threat to the positive outlook?

The CBK is closely monitoring developments in the Middle East as these pose significant risks to inflation through higher oil prices and increases in prices of imported goods.  

The conflict in the Middle East started on October 7, 2023. It spilled over to the Red Sea in November 2023 as Houthis attacked ships around the Bab-el-Mandab Strait transit. As a result, freight costs through the Suez Canal increased significantly.

The number of ships and volume of trade transiting the route declined notably. Suez Canal accounts for approximately 20 per cent of global containerised trade. The Cape of Good Hope has emerged as an alternative route, albeit longer and more expensive.

Analyses by the CBK show that global freight charges have increased in recent periods following the conflict around the Red Sea.

Last month, the OPEC+ extended their voluntary oil output cuts of 2.2 million barrels per day into the second quarter. What does this unpredictable global oil supply mean to Kenya's economy?

The upward trend in oil prices since January 2024 reflects higher shipping costs arising from the Israel-Palestinian conflict amid increased Houthi rebel attacks on oil tankers/ships in the Red Sea near Yemen.

The OPEC+ and allied producers have also extended the voluntary oil production cuts of 2.2 million barrels per day into the second quarter of 2024. Increased supply from non-OPEC+ producers, particularly the US, Brazil, Canada and Norway, has moderated the effects of supply cuts.

There is also improved demand partly due to rising global demand exerting some upward pressure on oil prices.

The CBK is closely monitoring developments in international oil prices since they have a direct impact on domestic pump prices, with spillover effects on other components of inflation.

MPC retained the base lending rate at 13 per cent in the latest review after a sustained increase, citing easing inflation. Are we likely to see a cut shortly to aid affordable credit to the private sector? 

Monetary policy decisions are data-driven. With inflation declining towards the 5.0 per cent midpoint of the target range, and exchange rate pressures abating, there are prospects of monetary policy easing in the coming months, but this is predicated on continued moderation of risks to the price stability objective of the CBK.

The MPC will continue to closely monitor the impact of its policy measures as well as developments in the global and domestic economy and stands ready to take further action as necessary in line with its price stability.

The shilling is bullish, having gained over 30 units in just two months from a low of 165. What can you attribute this to?

The Kenya shilling opened the year 2024 trading at 157.82 and by the close of April 11, 2024, had appreciated by 17.4 per cent to the 130.35 level.

The shilling appreciation partly reflects a change of sentiment following the successful Eurobond issuance by Kenya and the accompanying liability management of the maturing $2.0 billion June 2024 Eurobond.

The stronger shilling also reflects the impact of monetary policy measures.

The MPC has raised the CBR by a total of 600bp since May 2022. Of this rise in the CBR, a 250bp raise was done between December 2023 and February 2024 to anchor inflation expectations and address the depreciation of the Kenya shilling.

The improved investor environment in the country is attracting offshore investments, especially in the domestic bond market. The recently issued infrastructure bond attracted huge interest from offshore investors while earlier issuances continue to elicit offshore investors in the secondary market.

The recent reforms to reinvigorate the interbank foreign exchange market have deepened this critical market and eliminated any backlogs in accessing foreign exchange. Most investors prefer to invest in countries where they can easily take out their investments at any time.

Kenya managed to execute a buyback for the inaugural Eurobond due June 2024. Are we likely to see a reverse currency trend thereafter as money market analysts predict?

The CBK pursues a flexible exchange rate policy: allowing the exchange rate to move freely in the forex market and intervening only to minimise volatility. 

The recent monetary policy measures, coupled with reforms to the foreign exchange market, are expected to sustain stability in the foreign exchange market.

In March 2023, CBK issued the Kenya Foreign Exchange Code (the FX Code) to commercial banks. The FX Code sets out standards for commercial banks and aims to strengthen and promote the integrity and effective functioning of the wholesale foreign exchange market in Kenya.

It borrows heavily from the FX Global Code and best practices adopted in leading jurisdictions.

To streamline and improve operations in the FX interbank market, the CBK introduced an Electronic Matching System (EMS) in the FX interbank market to increase efficiency, accountability and transparency in a market that was trading manually before.

The apex bank also issued circulars to review the indicative spread of 20 cents in the interbank market and reduce swap limits for foreign counterparties from one year to six months to increase liquidity in the foreign exchange market.

We removed the tenor limits for resident counterparties. Counterparties operating within the EAC are now being treated as local counterparties.

This has also reduced the minimum amount that can be traded in the interbank market from $500,000 to $100,000.

Anything else you would like Kenyans to know about our economy?

Despite a multitude of global shocks and increased uncertainties, Kenya’s economic growth has remained strong and is expected to remain above the global and sub-Saharan Africa averages in 2023 and 2024, pointing to the resilience and diversified nature of the economy.

The economy is estimated to have expanded by 5.6 per cent in 2023 and is projected to grow by 5.7 per cent in 2024, mainly supported by the rebound in the agriculture sector attributed to favourable weather conditions.

Other factors include the resilience of the services sector and the implementation of government measures to boost economic activity across priority sectors in line with the Bottom-up Economic Transformation Agenda (Beta) and improved global growth outlook.

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