, NAIROBI, Kenya, Aug 8 – As Western economies begin to flash red, the Kenyan shilling continues to plunge, opening at an all-time low of Sh93 to the dollar and closing above 93.40 on Monday.
Central Bank Governor Njuguna Ndung’u cited supply-side inflation as a major contributor to the tumbling shilling and said it was necessary to implement formidable solutions that would protect the supply side of the economy.
“We have a transitory problem in terms of supply side constraints and that is what is fuelling domestic prices and domestic inflation. When you have inflation differential it feeds into the exchange rate depreciation,” he said.
He added that institutions supporting the supply side of the economy have been a disappointment in their laxity to bring food into the market.
“If there is no food in the market there is little CBK can do. Bring the food into the market and the price will solve itself. In the meantime we have to tighten monetary policy, so that we don’t ratify supply shocks. So when food comes back into the market, we anticipate that prices will decline to pre-crisis levels,” he added.
Prof Ndungu said as long as risks to growth such as rising fuel prices and power rationing persist, a decline in the inflation rate, now at almost 16 percent, is unlikely.
With 40 percent of imports into Kenya, traded in dollars, Prof Ndung’u said it would be difficult to move away from the US currency, though diversifying into other currencies for forex reserves would not be ruled out if it were to help the Kenyan economy remain viable.
“We should start reformulating our policies in terms of taking advantage of the crisis. One by diversifying ourselves and secondly, build fiscal space that will help us bounce back in times of crisis,” he said.
Meanwhile, the Central Bank of Kenya (CBK) and the Bank of Mauritius signed a Memorandum of Understanding (MoU), on Monday, in efforts to enhance cooperation in the sharing of supervisory information between the two institutions.
The partnership took two years to materialise and Prof Ndung’u said it will help define and guide the two institutions’ working relationships against the back drop of a global crisis.
“The global financial crisis reinforced in us the importance of effective dialogue and even cooperation between supervisors. One of the biggest lessons learned from the financial crisis has been the need for better regulation of financial institutions,” he said.
As one of Africa’s fully monetised countries, Mauritius has an economy worth $11 billion, and is a renowned international financial centre for its offshore financial services, which Prof Ndung’u said will help increase the competitiveness of Kenya’s market.
Already, I&M Bank has established a presence in Mauritius, with other banks also considering to explore opportunities in the country. Similarly, banks from Mauritius have direct and indirect commercial relations with Kenyan institutions.
Bank of Mauritius Governor Rundeersing Bheenick said the MoU is a move towards more South-South cooperation and investment as well as an opportunity to broaden the reach of the Regional Economic Payment and Settlement System (REPSS) beyond the COMESA.
“We hope we’ll be able to enlarge the reach of REPSS. We are now talking of the Tripartite Forum so that COMESA, SADC and the East African Community go on a path of convergence so that we can build a progressively larger economic area, until we realize the dream of an African Union.”