1. IMF Africa Regional Economic Outlook 2010
Some Discussion Points by
Njuguna Ndung’u
Governor,
Central Bank of Kenya
October 25, 2010

2. Overall Thrust of the Report
General Agreement with the main findings of the report that
Sub Saharan African (SSA) countries growth performance likely to bounce back to pre-crisis level of above 5 percent in 2010/11.
SSA Economies withstood this crisis better than previous crises because of better macroeconomic management pre-2008 i.e. steady growth, low inflation, good debt management: Kenya’s case…
Future SSA growth (in 2011 and 2012) still contingent on recovery in advanced countries
The policies implemented by most SSA countries to mitigate the negative shocks of global financial crisis were the correct ones e.g.
Running down the foreign reserves
Allowing exchange rate to depreciate to offset the impact of external shocks (automatic stabilizer)
Fiscal stimulus to stabilize growth
Accommodative monetary policy - lowering policy rates and providing liquidity to banks
But above all did not cut development spending – so did not sacrifice long-run capacity for growth
But, African countries can be classified as: 1) Coastal Resource Rich 2) Coastal Resource Poor 3) Land-locked Resource Poor 4) Land-locked Resource Rich – Each with different growth experience and resilience. We can parade policy outcome/mapping and perhaps tell the policy/resource story more forcefully. 2

3. Effects of the Crisis Still Being Felt in SSA
Demand and prices of Commodity Exports still lower than Pre-crisis level
Commodity exports that had been one of the main drivers of growth in many SSA countries dropped
Crisis had led to lower demand for African Exports
Key commodity prices have fallen to 2007 levels or even lower
The crisis has taken a heavy toll on countries that are highly dependent on natural resources (e.g. copper, oil, timber and diamonds)
The fall in copper and diamond prices has resulted in a significant drop of export receipts for Zambia and Botswana, respectively

4. Commodity Prices have not Recovered
Downward Slide in Commodity Prices (source AfDB) 4

5. Kenya’s Experience
Through weakening of local currencies, declining reserves and stock exchanges
Depreciation as a result of non-resident outflows from equity and bond markets (“Flight to Safety”).
The market-determined or flexible exchange rate acted as an automatic stabilizer during this crisis in most African economies
Weakening of Stock Exchanges as a result of
Outflow of non-resident funds and unfavorable investor sentiments: about global recession and negative impact on domestic economies
Drawdown of foreign exchange reserves
The law requires 4 months of import cover [EAC convergence criteria requires 6 months import cover]
Kenya went to as low as 2.7 months of import cover
But this is what forex reserves are for, accumulate in good times and cushion against shocks and drawdown in bad times 5

6. Economic Performance: Kenyan Economy’s Vulnerability to Shocks
Period
Quarter on Quarter Growth
Remarks
2008Q1
1.3
Political violence shock
2008Q2
2.4
Recovery quarter
2008Q3
2.7
2008 Q4
-0.1
Drought – Agric growth -5.7%
2009Q1
5.6
Agric growth -1.4%, hotel +158%
2009Q2
0.9
Drought - Agric growth -4.4
2009Q3
0.5
Drought - Agric growth -3.5
2009Q4
3.6
Agric growth -1.2
2010Q1
4.8
Agric growth +6.5
2010Q2
5.4
Agric growth +5.8%
Source: KNBS
Economic performance vulnerable to internal and external shocks in 2008, 2009
Performance of primary sector (agriculture or commodity exports critical to most African economies)
2010 when Agriculture recovers, the economy does well
Agriculture, manufacturing , Construction and Electricity driving growth in 2010 6

7. Monetary Policy Stance
The CBK pursued an accommodative monetary policy stance to help cushion the economy from the negative effects of the Global Financial Crisis. Measures taken so far
Reduction of Cash Reserve Ratio from 6% to 4.5% thus releasing an equivalent of Ksh.12.5bn for lending to the economy
Consecutive reduction of CBR from 8.75% to 6.00% to signal to banks to lower lending rates
Allowing a reduction in foreign exchange reserves to less than 3 months import cover to take pressure off the depreciation pressure of the Kenya shilling vis-à-vis the hard currencies [Had the CBK not allowed this, the inflationary effect of the shilling’s depreciation would have been worse - in terms of intermediate imports, oil prices etc]

8. Results of Monetary Policy
Kenya; Policy Rates Coordinating Short Term Rates during the Crisis Period

9. Fiscal Policy Action
Fiscal Stimulus (ESP - KES22b) in budget of 2009/10 mainly to finance wage goods and infrastructural projects
to Solve the problem of Unemployment (both Youth and General unemployment in Kenya)
Development budgets protected against cuts
unlike the 1980s and 1990s when short-run shocks were used as an excuse to cut Development Budgets this sacrificed long-term growth

10. Fiscal Policy Action - Results
The capacity for growth has not been sacrificed: Kenya is moving to towards its growth trajectory – in 2010 it is predicted to be 5%
Infrastructure continues to attract a larger proportion of the budget, this year 11%: to continue to expand the production potential of the economy – further capacity for growth
The domestic resource mobilisation through the infrastructural bond program has had tremendous success so far
Inflation has not been sacrificed, still low and stable: monetary policy has worked, but we now have a structural transformation that will shape future monetary policy
The SMEs binding constraint: access to finance will be solved through a revolving fund by the Ministry of Finance and commercial banks

11. Outlook: Policy Action for the EAC
Safeguard hard won macro-stability when the economies begin to recover
However, Kenyan economy still operating below full potential and inflation is still very low.
Scope to raise the capacity for growth – thru’ public investments that are complimentary to private investment
There is scope for use of the fiscal space to finance development projects in infrastructure
There is still monetary space to use the CBR and other institutional structural reforms to signal further lending rate cuts to spur investment

12. Lessons from the Report
Policy decisions (both fiscal and monetary) undertaken to mitigate the effects of the internal and external shocks were right and have been vindicated
As the recovery gathers more momentum, Kenya should change gear towards medium term financial and debt sustainability. Thus building another fiscal space to cushion future shocks
But also the future strong recovery requires a focus on global and regional outlook. Regional infrastructure will create stronger stimulus for growth capacity and resolve binding constraints especially for manufacturing sector supplying the region

13. Kenya Has a Different Take
The New Constitution
Legal framework that will support strong institutions that define the rules of the game
Strong institutions will support market development
Strong incentives will encourage prudent behaviour in the market
Debt sustainability ex-post – to be in tandem with increasing capacity for future growth
Future Investments in public and private sector can be driven by: Sovereign Bond and Foreign Direct Investments; Public Private Partnership for domestic resource mobilization.